THE ANALYSIS OF CAPITAL ACCUMULATION

Smith's discussion of the problem of value and distribution set out the conceptual core of his analysis. To be completed, his model required an account of the mechanisms of economic change and of the factors governing the allocation of the labour force between productive and unproductive employments.

Smith's treatment of the process of capital accumulation turned on a distinction between the gross and net (or in his terminology 'neat') revenue of society. This notion, which was to occupy an important place in classical thought, involves concepts rather different from those now in common use. As Smith described the point:

The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labour; the neat revenue, what remains free to them after deducting the expense of maintaining; first, their fixed; and, secondly, their circulating capital....36

Though his development of these concepts was not altogether clear, he appears to have had in mind a subdivision of annual output into two components. The first referred to the portion of current output that would be claimed if production was to be maintained at the same level in the following year. The second component - the net revenue - was intended to isolate that portion of current output which could be made available to augment production in the future.

One attribute of Smith's definitions is especially noteworthy: unlike the net-gross distinctions used nowadays, deductions for maintenance were not restricted to capital consumption or depreciation allowances. Instead, maintenance requirements for the whole society were to be deducted from the gross revenue; i.e.

How then was the size of the net revenue established? In Smith's analysis, the greater part of the answer was to be found in the distribution of income between the various orders

and, most particularly, in the shares accruing to capitalists and landowners. Wage earners, after all, were unlikely to be paid enough to permit much, if any, 'surplus' in excess of their 'maintenance' requirements. Landlords and capitalists, on the other hand, might well have larger funds at their disposal than would be necessary to finance replacements and to sustain their conventional levels of living. The 'surplus' might, of course, be allocated to the enlargement of their consumption. But the outcome for society would be happier if these 'surplus' funds were saved. In this manner, the net revenue could be converted into forms that would later enlarge production, a point Smith emphasized when asserting that 'capitals are increased by parsimony, and diminished by prodigality and misconduct'.38

Strictly speaking, members of both the classes receiving ‘net revenue' might use their resources in ways that supported economic expansion. In Smith's view, however, landlords displayed a distressing tendency to indulge in high living and to engage unproductive hands. For practical purposes, capitalists were the principal agents through which the net revenue could be converted into accumulation. The size of the profit share could thus be regarded as the basic determinant of the pace of accumulation and, in turn, of the rate of economic expansion.

While saving was a vital prerequisite for economic growth, Smith was at pains to point out that saving, as he viewed it, would not lead to withdrawals of funds from the expenditure stream.

The analysis of capital accumulation rounded out Smith's account of the main structural conditions important to an understanding of an economy's capability for growth. Capital accumulation, crucial though it was as a regulator of the pace of economic expansion, could not be analysed in isolation from the distribution of income between the main orders of society. Similarly, his theory of value was now integrated into the scheme as a whole. The main issue in the analysis of growth could thus be viewed in terms of the manner in which the recipients of profits and rents exercised their 'command over labour'.

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