“But the returns of the foreign trade of consumption are very seldom so quick as those of the home trade.  The returns of the home trade generally come in before the end of the year, and sometimes three or four times in the year.  The returns of the foreign trade of consumption seldom come in before the end of the year, and sometimes not till after two or three years.  A capital, therefore, employed in the home trade, will sometimes make twelve operations, or be sent out and returned twelve times, before a capital employed in the foreign trade of consumption has made one.  If the capitals are equal, therefore, the one will give four and twenty times more encouragement and support to the industry of the country than the other."[322]

If this position of Adam Smith’s be tenable, it cannot be true, that the purchase of foreign commodities encourages British industry as much as the purchase of British commodities.  In order to have a clear idea of his reasoning it will be useful to repeat some of the leading principles which regulate and explain the nature of capital. 1.  Capital is usually defined to be the accumulated stock of the produce of labour.  A definition which, if not completely satisfactory, is sufficiently correct for our present purpose. 2. Capital is essential to production. 3. Capital employed in production is wholly consumed in the process of production.  “Capital,” as Mill, and in fact as every political economist says, “is all consumed; though not by the capitalist.  Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such, by by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product.  The remainder is paid to labourers, who consume it for their daily wants; or if they, in their turn, save any part, this also is not generally speaking, hoarded, but (through savings banks, benefit clubs, or some other channel) re-employed as capital, and consumed."[323] These principles open the way to the understanding of what Adam Smith means by the replacing of capital.

Capital is consumed in production, and must be replaced.  How is it replaced?  By the new product. It reappears in the new product; in the production of which it was consumed.  Moreover it reappears with a profit to the capitalist, who has employed it for the purposes of production.  Let us hear well in mind that the capital consumed in production is consumed, not by the capitalist himself, but in the purchase of various things necessary for production, and in wages.  All this capital which is employed and consumed in production, is the net spendable income of the producing nation.  And it is spent in food, raiment, lodging, and other necessaries; and of course in luxuries too; and when it is spent, or “consumed,” as the word is, the nation, so far from being the poorer, has grown richer; because the capital consumed has reappeared, or, as Adam Smith says, has been replaced by the new product, and, in the usual course, with an increase in the form of profit.