The Wealth of Nations

F THE PROFITS OF STOCK.

The rise and fall in the profits of stock depend upon the same causes with
the rise and fall in the wages of labour, the increasing or declining
state of the wealth of the society; but those causes affect the one and
the other very differently.

The increase of stock, which raises wages, tends to lower profit. When the
stocks of many rich merchants are turned into the same trade, their mutual
competition naturally tends to lower its profit; and when there is a like
increase of stock in all the different trades carried on in the same
society, the same competition must produce the same effect in them all.

It is not easy, it has already been observed, to ascertain what are the
average wages of labour, even in a particular place, and at a particular
time. We can, even in this case, seldom determine more than what are the
most usual wages. But even this can seldom be done with regard to the
profits of stock. Profit is so very fluctuating, that the person who
carries on a particular trade, cannot always tell you himself what is the
average of his annual profit. It is affected, not only by every variation
of price in the commodities which he deals in, but by the good or bad
fortune both of his rivals and of his customers, and by a thousand other
accidents, to which goods, when carried either by sea or by land, or even
when stored in a warehouse, are liable. It varies, therefore, not only
from year to year, but from day to day, and almost from hour to hour. To
ascertain what is the average profit of all the different trades carried
on in a great kingdom, must be much more difficult; and to judge of what
it may have been formerly, or in remote periods of time, with any degree
of precision, must be altogether impossible.

But though it may be impossible to determine, with any degree of
precision, what are or were the average profits of stock, either in the
present or in ancient times, some notion may be formed of them from the
interest of money. It may be laid down as a maxim, that wherever a great
deal can be made by the use of money, a great deal will commonly be given
for the use of it; and that, wherever little can be made by it, less will
commonly he given for it. Accordingly, therefore, as the usual market rate
of interest varies in any country, we may be assured that the ordinary
profits of stock must vary with it, must sink as it sinks, and rise as it
rises. The progress of interest, therefore, may lead us to form some
notion of the progress of profit.

By the 37th of Henry VIII. all interest above ten per cent. was declared
unlawful. More, it seems, had sometimes been taken before that. In the
reign of Edward VI. religious zeal prohibited all interest. This
prohibition, however, like all others of the same kind, is said to have
produced no effect, and probably rather increased than diminished the evil
of usury. The statute of Henry VIII. was revived by the 13th of Elizabeth,
cap. 8. and ten per cent. continued to be the legal rate of interest till
the 21st of James I. when it was restricted to eight per cent. It was
reduced to six per cent. soon after the Restoration, and by the 12th of
Queen Anne, to five per cent. All these different statutory regulations
seem to have been made with great propriety. They seem to have followed,
and not to have gone before, the market rate of interest, or the rate at
which people of good credit usually borrowed. Since the time of Queen
Anne, five per cent. seems to have been rather above than below the market
rate. Before the late war, the government borrowed at three per cent.; and
people of good credit in the capital, and in many other parts of the
kingdom, at three and a-half, four, and four and a-half per cent.

Since the time of Henry VIII. the wealth and revenue of the country have
been continually advancing, and in the course of their progress, their
pace seems rather to have been gradually accelerated than retarded. They
seem not only to have been going on, but to have been going on faster and
faster. The wages of labour have been continually increasing during the
same period, and, in the greater part of the different branches of trade
and manufactures, the profits of stock have been diminishing.

It generally requires a greater stock to carry on any sort of trade in a
great town than in a country village. The great stocks employed in every
branch of trade, and the number of rich competitors, generally reduce the
rate of profit in the former below what it is in the latter. But the wages
of labour are generally higher in a great town than in a country village.
In a thriving town, the people who have great stocks to employ, frequently
cannot get the number of workmen they want, and therefore bid against one
another, in order to get as many as they can, which raises the wages of
labour, and lowers the profits of stock. In the remote parts of the
country, there is frequently not stock sufficient to employ all the
people, who therefore bid against one another, in order to get employment,
which lowers the wages of labour, and raises the profits of stock.

In Scotland, though the legal rate of interest is the same as in England,
the market rate is rather higher. People of the best credit there seldom
borrow under five per cent. Even private bankers in Edinburgh give four
per cent. upon their promissory-notes, of which payment, either in whole
or in part may be demanded at pleasure. Private bankers in London give no
interest for the money which is deposited with them. There are few trades
which cannot be carried on with a smaller stock in Scotland than in
England. The common rate of profit, therefore, must be somewhat greater.
The wages of labour, it has already been observed, are lower in Scotland
than in England. The country, too, is not only much poorer, but the steps
by which it advances to a better condition, for it is evidently advancing,
seem to be much slower and more tardy. The legal rate of interest in
France has not during the course of the present century, been always
regulated by the market rate {See Denisart, Article Taux des Interests,
tom. iii, p.13}. In 1720, interest was reduced from the twentieth to the
fiftieth penny, or from five to two per cent. In 1724, it was raised to
the thirtieth penny, or to three and a third per cent. In 1725, it was
again raised to the twentieth penny, or to five per cent. In 1766, during
the administration of Mr Laverdy, it was reduced to the twenty-fifth
penny, or to four per cent. The Abbé Terray raised it afterwards to the
old rate of five per cent. The supposed purpose of many of those violent
reductions of interest was to prepare the way for reducing that of the
public debts; a purpose which has sometimes been executed. France is,
perhaps, in the present times, not so rich a country as England; and
though the legal rate of interest has in France frequently been lower than
in England, the market rate has generally been higher; for there, as in
other countries, they have several very safe and easy methods of evading
the law. The profits of trade, I have been assured by British merchants
who had traded in both countries, are higher in France than in England;
and it is no doubt upon this account, that many British subjects chuse
rather to employ their capitals in a country where trade is in disgrace,
than in one where it is highly respected. The wages of labour are lower in
France than in England. When you go from Scotland to England, the
difference which you may remark between the dress and countenance of the
common people in the one country and in the other, sufficiently indicates
the difference in their condition. The contrast is still greater when you
return from France. France, though no doubt a richer country than
Scotland, seems not to be going forward so fast. It is a common and even a
popular opinion in the country, that it is going backwards; an opinion
which I apprehend, is ill-founded, even with regard to France, but which
nobody can possibly entertain with regard to Scotland, who sees the
country now, and who saw it twenty or thirty years ago.

The province of Holland, on the other hand, in proportion to the extent of
its territory and the number of its people, is a richer country than
England. The government there borrow at two per cent. and private people
of good credit at three. The wages of labour are said to be higher in
Holland than in England, and the Dutch, it is well known, trade upon lower
profits than any people in Europe. The trade of Holland, it has been
pretended by some people, is decaying, and it may perhaps be true that
some particular branches of it are so; but these symptoms seem to indicate
sufficiently that there is no general decay. When profit diminishes,
merchants are very apt to complain that trade decays, though the
diminution of profit is the natural effect of its prosperity, or of a
greater stock being employed in it than before. During the late war, the
Dutch gained the whole carrying trade of France, of which they still
retain a very large share. The great property which they possess both in
French and English funds, about forty millions, it is said in the latter
(in which, I suspect, however, there is a considerable exaggeration ), the
great sums which they lend to private people, in countries where the rate
of interest is higher than in their own, are circumstances which no doubt
demonstrate the redundancy of their stock, or that it has increased beyond
what they can employ with tolerable profit in the proper business of their
own country; but they do not demonstrate that that business has decreased.
As the capital of a private man, though acquired by a particular trade,
may increase beyond what he can employ in it, and yet that trade continue
to increase too, so may likewise the capital of a great nation.

In our North American and West Indian colonies, not only the wages of
labour, but the interest of money, and consequently the profits of stock,
are higher than in England. In the different colonies, both the legal and
the market rate of interest run from six to eight percent. High wages of
labour and high profits of stock, however, are things, perhaps, which
scarce ever go together, except in the peculiar circumstances of new
colonies. A new colony must always, for some time, be more understocked in
proportion to the extent of its territory, and more underpeopled in
proportion to the extent of its stock, than the greater part of other
countries. They have more land than they have stock to cultivate. What
they have, therefore, is applied to the cultivation only of what is most
fertile and most favourably situated, the land near the sea-shore, and
along the banks of navigable rivers. Such land, too, is frequently
purchased at a price below the value even of its natural produce. Stock
employed in the purchase and improvement of such lands, must yield a very
large profit, and, consequently, afford to pay a very large interest. Its
rapid accumulation in so profitable an employment enables the planter to
increase the number of his hands faster than he can find them in a new
settlement. Those whom he can find, therefore, are very liberally
rewarded. As the colony increases, the profits of stock gradually
diminish. When the most fertile and best situated lands have been all
occupied, less profit can be made by the cultivation of what is inferior
both in soil and situation, and less interest can be afforded for the
stock which is so employed. In the greater part of our colonies,
accordingly, both the legal and the market rate of interest have been
considerably reduced during the course of the present century. As riches,
improvement, and population, have increased, interest has declined. The
wages of labour do not sink with the profits of stock. The demand for
labour increases with the increase of stock, whatever be its profits; and
after these are diminished, stock may not only continue to increase, but
to increase much faster than before. It is with industrious nations, who
are advancing in the acquisition of riches, as with industrious
individuals. A great stock, though with small profits, generally increases
faster than a small stock with great profits. Money, says the proverb,
makes money. When you have got a little, it is often easy to get more. The
great difficulty is to get that little. The connection between the
increase of stock and that of industry, or of the demand for useful
labour, has partly been explained already, but will be explained more
fully hereafter, in treating of the accumulation of stock.

The acquisition of new territory, or of new branches of trade, may
sometimes raise the profits of stock, and with them the interest of money,
even in a country which is fast advancing in the acquisition of riches.
The stock of the country, not being sufficient for the whole accession of
business which such acquisitions present to the different people among
whom it is divided, is applied to those particular branches only which
afford the greatest profit. Part of what had before been employed in other
trades, is necessarily withdrawn from them, and turned into some of the
new and more profitable ones. In all those old trades, therefore, the
competition comes to be less than before. The market comes to be less
fully supplied with many different sorts of goods. Their price necessarily
rises more or less, and yields a greater profit to those who deal in them,
who can, therefore, afford to borrow at a higher interest. For some time
after the conclusion of the late war, not only private people of the best
credit, but some of the greatest companies in London, commonly borrowed at
five per cent. who, before that, had not been used to pay more than four,
and four and a half per cent. The great accession both of territory and
trade by our acquisitions in North America and the West Indies, will
sufficiently account for this, without supposing any diminution in the
capital stock of the society. So great an accession of new business to be
carried on by the old stock, must necessarily have diminished the quantity
employed in a great number of particular branches, in which the
competition being less, the profits must have been greater. I shall
hereafter have occasion to mention the reasons which dispose me to believe
that the capital stock of Great Britain was not diminished, even by the
enormous expense of the late war.

The diminution of the capital stock of the society, or of the funds
destined for the maintenance of industry, however, as it lowers the wages
of labour, so it raises the profits of stock, and consequently the
interest of money. By the wages of labour being lowered, the owners of
what stock remains in the society can bring their goods at less expense to
market than before; and less stock being employed in supplying the market
than before, they can sell them dearer. Their goods cost them less, and
they get more for them. Their profits, therefore, being augmented at both
ends, can well afford a large interest. The great fortunes so suddenly and
so easily acquired in Bengal and the other British settlements in the East
Indies, may satisfy us, that as the wages of labour are very low, so the
profits of stock are very high in those ruined countries. The interest of
money is proportionably so. In Bengal, money is frequently lent to the
farmers at forty, fifty, and sixty per cent. and the succeeding crop is
mortgaged for the payment. As the profits which can afford such an
interest must eat up almost the whole rent of the landlord, so such
enormous usury must in its turn eat up the greater part of those profits.
Before the fall of the Roman republic, a usury of the same kind seems to
have been common in the provinces, under the ruinous administration of
their proconsuls. The virtuous Brutus lent money in Cyprus at
eight-and-forty per cent. as we learn from the letters of Cicero.

In a country which had acquired that full complement of riches which the
nature of its soil and climate, and its situation with respect to other
countries, allowed it to acquire, which could, therefore, advance no
further, and which was not going backwards, both the wages of labour and
the profits of stock would probably be very low. In a country fully
peopled in proportion to what either its territory could maintain, or its
stock employ, the competition for employment would necessarily be so great
as to reduce the wages of labour to what was barely sufficient to keep up
the number of labourers, and the country being already fully peopled, that
number could never be augmented. In a country fully stocked in proportion
to all the business it had to transact, as great a quantity of stock would
be employed in every particular branch as the nature and extent of the
trade would admit. The competition, therefore, would everywhere be as
great, and, consequently, the ordinary profit as low as possible.

But, perhaps, no country has ever yet arrived at this degree of opulence.
China seems to have been long stationary, and had, probably, long ago
acquired that full complement of riches which is consistent with the
nature of its laws and institutions. But this complement may be much
inferior to what, with other laws and institutions, the nature of its
soil, climate, and situation, might admit of. A country which neglects or
despises foreign commerce, and which admits the vessel of foreign nations
into one or two of its ports only, cannot transact the same quantity of
business which it might do with different laws and institutions. In a
country, too, where, though the rich, or the owners of large capitals,
enjoy a good deal of security, the poor, or the owners of small capitals,
enjoy scarce any, but are liable, under the pretence of justice, to be
pillaged and plundered at any time by the inferior mandarins, the quantity
of stock employed in all the different branches of business transacted
within it, can never be equal to what the nature and extent of that
business might admit. In every different branch, the oppression of the
poor must establish the monopoly of the rich, who, by engrossing the whole
trade to themselves, will be able to make very large profits. Twelve per
cent. accordingly, is said to be the common interest of money in China,
and the ordinary profits of stock must be sufficient to afford this large
interest.

A defect in the law may sometimes raise the rate of interest considerably
above what the condition of the country, as to wealth or poverty, would
require. When the law does not enforce the performance of contracts, it
puts all borrowers nearly upon the same footing with bankrupts, or people
of doubtful credit, in better regulated countries. The uncertainty of
recovering his money makes the lender exact the same usurious interest
which is usually required from bankrupts. Among the barbarous nations who
overran the western provinces of the Roman empire, the performance of
contracts was left for many ages to the faith of the contracting parties.
The courts of justice of their kings seldom intermeddled in it. The high
rate of interest which took place in those ancient times, may, perhaps, be
partly accounted for from this cause.

When the law prohibits interest altogether, it does not prevent it. Many
people must borrow, and nobody will lend without such a consideration for
the use of their money as is suitable, not only to what can be made by the
use of it, but to the difficulty and danger of evading the law. The high
rate of interest among all Mahometan nations is accounted for by M.
Montesquieu, not from their poverty, but partly from this, and partly from
the difficulty of recovering the money.

The lowest ordinary rate of profit must always be something more than what
is sufficient to compensate the occasional losses to which every
employment of stock is exposed. It is this surplus only which is neat or
clear profit. What is called gross profit, comprehends frequently not only
this surplus, but what is retained for compensating such extraordinary
losses. The interest which the borrower can afford to pay is in proportion
to the clear profit only. The lowest ordinary rate of interest must, in
the same manner, be something more than sufficient to compensate the
occasional losses to which lending, even with tolerable prudence, is
exposed. Were it not, mere charity or friendship could be the only motives
for lending.

In a country which had acquired its full complement of riches, where, in
every particular branch of business, there was the greatest quantity of
stock that could be employed in it, as the ordinary rate of clear profit
would be very small, so the usual market rate of interest which could be
afforded out of it would be so low as to render it impossible for any but
the very wealthiest people to live upon the interest of their money. All
people of small or middling fortunes would be obliged to superintend
themselves the employment of their own stocks. It would be necessary that
almost every man should be a man of business, or engage in some sort of
trade. The province of Holland seems to be approaching near to this state.
It is there unfashionable not to be a man of business. Necessity makes it
usual for almost every man to be so, and custom everywhere regulates
fashion. As it is ridiculous not to dress, so is it, in some measure, not
to be employed like other people. As a man of a civil profession seems
awkward in a camp or a garrison, and is even in some danger of being
despised there, so does an idle man among men of business.

The highest ordinary rate of profit may be such as, in the price of the
greater part of commodities, eats up the whole of what should go to the
rent of the land, and leaves only what is sufficient to pay the labour of
preparing and bringing them to market, according to the lowest rate at
which labour can anywhere be paid, the bare subsistence of the labourer.
The workman must always have been fed in some way or other while he was
about the work, but the landlord may not always have been paid. The
profits of the trade which the servants of the East India Company carry on
in Bengal may not, perhaps, be very far from this rate.

The proportion which the usual market rate of interest ought to bear to
the ordinary rate of clear profit, necessarily varies as profit rises or
falls. Double interest is in Great Britain reckoned what the merchants
call a good, moderate, reasonable profit; terms which, I apprehend, mean
no more than a common and usual profit. In a country where the ordinary
rate of clear profit is eight or ten per cent. it may be reasonable that
one half of it should go to interest, wherever business is carried on with
borrowed money. The stock is at the risk of the borrower, who, as it were,
insures it to the lender; and four or five per cent. may, in the greater
part of trades, be both a sufficient profit upon the risk of this
insurance, and a sufficient recompence for the trouble of employing the
stock. But the proportion between interest and clear profit might not be
the same in countries where the ordinary rate of profit was either a good
deal lower, or a good deal higher. If it were a good deal lower, one half
of it, perhaps, could not be afforded for interest; and more might be
afforded if it were a good deal higher.

In countries which are fast advancing to riches, the low rate of profit
may, in the price of many commodities, compensate the high wages of
labour, and enable those countries to sell as cheap as their less thriving
neighbours, among whom the wages of labour may be lower.

In reality, high profits tend much more to raise the price of work than
high wages. If, in the linen manufacture, for example, the wages of the
different working people, the flax-dressers, the spinners, the weavers,
etc. should all of them be advanced twopence a-day, it would be necessary
to heighten the price of a piece of linen only by a number of twopences
equal to the number of people that had been employed about it, multiplied
by the number of days during which they had been so employed. That part of
the price of the commodity which resolved itself into the wages, would,
through all the different stages of the manufacture, rise only in
arithmetical proportion to this rise of wages. But if the profits of all
the different employers of those working people should be raised five per
cent. that part of the price of the commodity which resolved itself into
profit would, through all the different stages of the manufacture, rise in
geometrical proportion to this rise of profit. The employer of the flax
dressers would, in selling his flax, require an additional five per cent.
upon the whole value of the materials and wages which he advanced to his
workmen. The employer of the spinners would require an additional five per
cent. both upon the advanced price of the flax, and upon the wages of the
spinners. And the employer of the weavers would require alike five per
cent. both upon the advanced price of the linen-yarn, and upon the wages
of the weavers. In raising the price of commodities, the rise of wages
operates in the same manner as simple interest does in the accumulation of
debt. The rise of profit operates like compound interest. Our merchants
and master manufacturers complain much of the bad effects of high wages in
raising the price, and thereby lessening the sale of their goods, both at
home and abroad. They say nothing concerning the bad effects of high
profits; they are silent with regard to the pernicious effects of their
own gains; they complain only of those of other people.