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B5.135 Stock valuation—general principles

In The Wealth of Nations, Adam Smith described fixed capital as that which an owner turns to profit by keeping it in their possession, and circulating capital as that from which they make a profit, by parting with it, and letting it change masters. It is in that sense that circulating capital is said to 'circulate'¹.

A farmer's land, buildings and plant clearly represent their fixed capital, permanently retained. Their produce, whether it consists of crops, wool, fruit or milk equally clearly represents circulating capital, because it is produced to be sold at a profit. Farm animals can fall into either category: they may be 'retained' in the form of a pedigree herd (or flock) to produce milk, wool or offspring; or they may be reared and sold, in which case, they may be said to 'circulate'.

The problem of valuing