IV. Secondary Categories
In Economic analysis Wealth takes on two aspects. They are distinguishable by secondary classifications. One is Wealth in the possession of consumers; the other is Wealth in process of utilization by Labor for the production of further Wealth. For the former no technical Economic term is in use; for the latter the technical Economic term is Capital.
1—Capital
Capital is a highly important technical term in Economics. It must not be confused, therefore, with the same word as loosely used in business accounts, where, like the term for its parent category, Wealth, it mingles such essentially different things as Wealth and Land—Artificial Products and Natural Resources. And, as observed in a preceding paragraph, not only such different things as Wealth and Land, but in some circumstances Labor also.
Such undiscriminating uses of the term Capital are doubtless defensible enough in business accountings; for in private business anything may be thought of as business “capital” if it can be summarized in terms of Money. But for Economics as a comprehensive social science, the dumping into the same basic category of such radically different things as Labor, Land and Wealth—Man, Natural Resources and Artificial Objects—is indefensible and miraculously confusing.
Limited strictly to distinguishing Wealth consumed in the process of producing more Wealth—Artificial Objects devoted to further production of Artificial Objects,—the term Capital is a convenient subclassification of some kinds of Wealth. To appreciate that characterization one need but think, for instance, of any sort of productive machinery. Is it not an Artificial Object? Is it not produced by Labor? Is it not produced from and upon Land? Is it not used by Labor upon Land for further production of Artificial Objects? And are not those observations true also of seed gathered and saved for planting? of minerals mined for metal? of metal to be transformed into productive machinery? of food material turned into food at a restaurant? Are they not true of every kind of intermediate product—from Machinery (which, though finished as machinery, is only an intermediate factor in the process of producing Wealth for ultimate consumption), back to the rawest of artificial raw materials and forward through all gradations to the food on a dinner table, the clothing on a diner’s body, the floor under his feet and the roof over his head?
One obsession regarding Capital, even when the term is used with Economic accuracy, is that it consists of saved Wealth. There is no such process, in any literal sense, as saving Wealth—Artificial Objects—except for ripening or reproduction purposes. Even for those purposes the saving is in the nature of using, its object being the production of more Wealth rather than preserving this Wealth. Any saving of Wealth in the Economic sense, consists in utilizing it in the Productive Process.
Are art objects exceptional? Not such as are relatively reproducible. Only “uniques” are exceptions, if indeed they may be regarded as within the boundaries of Economics. Saved over long periods, hundreds upon hundreds of years in some instances, these would seem to be out of the field of contemporary Economics. What gives them their extraordinary value? The same kind of non-Economic sentiment, on a higher plane, perhaps, that gives extraordinary value to heirlooms. Such products are not Wealth in the Economic sense any more than sacred tombstones are. Though produced by Man from and upon Natural Resources, they cannot be satisfactorily reproduced. They are closer to the nonproducible Natural Resource category than to the reproducible Wealth category.
That titles to Wealth may be saved is true enough. But in no extensive sense can Wealth itself be saved. Unless consumed in the production of more Wealth, or in the satisfaction of human desire, Wealth goes to waste.
Titles to Wealth, except such as are specific like the title to a particular house, are titles not to existing Wealth but to future Wealth. A title to a house, being specific, testifies to property rights in a particular structure which is in process of consumption. A title to its site is not a title to Wealth, but to Land, which, however, may be exchanged for Wealth. Such general titles as Money obligations declare, are titles to anything upon the market when demanded, including Wealth that may have been produced years after the total consumption of everything for which the Money title was originally exchanged. One’s “savings” in the form of Money or credits are not Wealth produced but titles to Wealth not yet delivered to him, and perhaps yet to be produced.
Only in the sense of withholding for use or of using or permitting its use in further Production of Wealth, is Wealth actually saved; and such saving is part of the Productive Process. It is a dedication of that portion of produced Wealth to service in the production of further Wealth. Wealth so dedicated is Capital.
A familiar example is seed saved for sowing. Also seed sown for growing. And seed in the barn awaiting the sowing season, that too is Capital. Seed in the field sprouting and growing and producing grain for the coming harvest, is likewise Capital. The ripened grain ready for harvest is Capital in turn, for it, too, is Wealth to be utilized in the production of more Wealth—bread or seed or both.
And so of mechanisms, which grow not as seeds do but only as the hand of the mechanic coaxes them into shape. When, for example, a machine which aids in the flouring of grain is produced, he who owns the machine owns Capital. He has saved it by putting purchasing power into a productive implement instead of putting it into ultimate products for his own consumption. Owning the machine, he owns bread-producing Capital. Using it, he consumes it in the production of bread.
A coffeemill, for further illustration, is a machine produced by Labor from and upon Land, which, when Labor uses it for grinding coffee (another product of Labor from and upon Land) brings the latter product nearer in serviceability to the ultimate consumer.
For a complex illustration, consider a railway passenger car. It is Wealth because it is an Artificial Object produced by Labor from and upon Land. But does it fall into that subdivision of Wealth which is distinguished as Capital—Wealth used for the production of more Wealth? As to its owners it is Capital, for they are using it to increase their share of Wealth in process of production; but as to the aggregate of social Wealth, its passengers, if not using it for productive purposes, are consuming Wealth unproductively. To the extent that the passengers are not on productive missions, but are gratifying their own wants, a passenger-car is in Economic contemplation Wealth in process of ultimate consumption to satisfy wants; to the extent that its passengers are on productive missions it is Wealth devoted to the Production of more Wealth, and therefore in the subcategory which is distinguished as Capital. The fact that part of its use is for Production and another for enjoyment does not disturb the principle which distinguishes Capital from Wealth in process of ultimate consumption for the satisfaction of wants.
Capital is Wealth in forms that are consumed in the further or better production of Wealth toward final forms for ultimate consumption. To save such Wealth in the sense of preventing its consumption would be to waste it; but to permit its consumption in the Productive Process is to give it serviceability.
So with all other details of the Productive Process, from natural raw materials to and including delivery to ultimate consumers. Capital is produced by Labor from and upon Land and in forms of Wealth—either Artificial materials or Artificial contrivances—which, being adapted and devoted to further Production of Wealth, are part of Labor’s artificial materials or mechanism or both—Wealth produced for augmenting Productive power. In Economic phrasing, Wealth used in the Production of Wealth is Capital.
2—Trade
Another prominent sub-classification of secondary facts involved in the Productive Process is inseparably associated with Capital. This subordinate category is Trade, to which our attention was directed in the second stage of our delving down from the surface of Economics to its Basic Facts.
Trade is an essential part of the Productive Process in Economics. It is inseparable from Labor specialization. If some Labor be devoted to the Production of one kind of Artificial Objects, one kind of Wealth—food, for instance—the producers of such Wealth must satisfy their desires by trading with other kinds of Labor specialists—clothing producers, for instance—for what the latter make and the former do not make. Evidently, then, the more minutely Labor takes on specialized activities, the more extensive and intensive must Trade become. And when, as in our civilization, Labor is so minutely specialized that nobody can satisfy his Economic desires by his own productive activities directly, Trade is an indispensable part of the Productive Process.
In form it is an interchange of commodities; but in essence it is, as already explained, an interchange of Labor functions—of human services.
Springing out of a manifestation of natural law which is rightly distinguished in Economics as “division of labor,” and thus inspiring and facilitating specialization in the Production of Wealth, Trade is a natural phenomenon. Within manifest limits and without extra exertion two producers can produce more than twice as much as one, four more than twice as much as two, and so on, subject only to the limitations of Natural Resources. By exchanging products they therefore naturally multiply their productive powers.
For a crude illustration, is it not plain that two frontiersmen working cooperatively can build a habitation for each quicker and better than either could build one for himself? Or two messengers, each charged with one errand a mile away in one direction from a central point and another a mile away in the opposite direction, can they not do the four errands twice as quickly and easily, even if not more than twice, if they divide their functions? By such division each messenger would walk one mile out and one back, two for each and four in all, delivering four messages; whereas, without such division, each would travel two miles out (one in each direction) and two miles back, four for each and eight in all. In addition to the saving of time and energy, each will have saved productive capabilities too subtle for specific enumeration.
The principle of those illustrations applies to the whole Productive Process. By division of Labor, that is to say, by Labor specialization, Economic accomplishment is multiplied beyond all the possibilities of isolated individual production.
But division of Labor would be useless were it not for Trade. Each of those frontiersmen must trade his share in the other’s habitation for the other’s share in his habitation; each of those messengers must exchange his claim to compensation for delivering one of the other’s two messages for the other’s claim to compensation for delivering one of his. This, then, is the sum and substance of Trade in Economics—adjustments of compensation for specialized Production through division of Labor.
The effect is magical. By division of Labor and Trade the single individual becomes a vital part of a comprehensive human organism, of a greater man, of the Social or Economic Man—a Man of almost infinite Economic powers.
Those two kinds of Economic energy, making and trading, permeate the multitudinous phenomena of that Productive Process in the course of which Man draws forth Artificial Objects from and upon Natural Resources, for the satisfaction of human desires; or, to use the technical Economic terms, in the course of which Labor produces Wealth from and upon Land.
3—Utility, Value, Money, Price, Banks
In connection with division of Labor and Trade we are brought into contact with the phenomena of Economic Utility and Economic Value.
Utility is an absolute term indicative of essential desirability. Value is a relative term indicative of the relative Utility of commodities; or, more precisely, of the degree of desirability of one variety of Labor or Land or form of Wealth in comparison with other varieties. One variety of Labor or of Land or of Wealth may be twice as desirable as another, unit for unit, in which case one unit of the former will exchange in Trade for two units of the latter. Thus the relative Utility of a Commodity is indicated in Trade by its Value.
For measuring Value in all its variations from least to greatest and comparing these in the Productive Process, the Economic instrumentality is Money, that surface layer of Economics through which we passed in our exploration down to the Basic Facts; and the synonym for Value in terms of Money is Price.
By way of illustrating Utility, Value and Price, one may say of a quantity of Wealth in the specific form of wheat, that it has Utility because it can be productively advanced to food or be used as seed for the production of more wheat and so of more food; that it has Value because its desirability is a subject of comparison with the desirability of other desirable things in Trade; and that it commands Price because it can pass from owner to owner through Trade in terms of Money. Or of Land in the specific form of a building-site, one may say that it has Utility, for it will afford natural support for the foundations of a dwelling or a store or a factory or a railroad right-of-way, and command the natural light and the air within its boundaries; that it has Value because it can be exchanged for other Land or for Artificial Objects; and that it has Price because Money or credit in Money terms may be had for it upon transfer in Trade.
Yet a commodity may have the highest degree of Utility without having Value or commanding a Price; or it may have great Value and command a high Price though of little Utility.
Let us observe here a difference in meaning, often ignored by advanced students, between the terms “utility” and desirableness. Thoughtfully considered, “utility” defines an absolute quality, whereas “desirableness” indicates a varying relationship. This obvious difference is often confused by such terms as “total utility” for Utility, and “marginal utility” for degrees of desirableness. For an example, the “total utility” of water is great, because by natural law man cannot live without water. Yet an abundant supply of water may reduce its “marginal utility” to zero. On the other hand, the “total utility” of diamonds is slight, whereas their “marginal utility,” due on the one hand to their scarcity and on the other to human vanity, is great. Such distinctions as “total utility” and “marginal utility” are nothing but subclassifications of Utility. They serve no better purpose for fundamental Economic study than the distinction which “utility” and “desirability” express without as much risk of confusing thought. Water, for example, is none the less useful because it is abundant, even though its abundance seems to lessen the desire for it relatively to desire for scarcer things. As to water, nothing is really lessened but desire relatively to supply. Nor does the scarcity of diamonds add an iota to their Utility. It adds only to the relative demand for them and therefore only to their Value in Trade.
To repeat, then, the assertion made above, a commodity may have the highest degree of Utility without having Value or commanding a Price; or, it may have great Value and command a high Price though of little Utility.
For further illustration of Value and Utility thus defined, nothing has greater Utility—greater “total” Utility, if that professorial term be preferred—than the sun; but the sun has no Value except as its Utility is controlled by ownership of Land favorably situated with reference to it; for it cannot be exchanged in Trade for anything else. Nor has it Price, for Money cannot buy it. Though it may be bought and sold to some degree indirectly through the buying and selling of Land which controls the sun’s utility to that degree, this value is not sun-value but Land Value.
Yet all commodities—whether in the Wealth class, as a house or food; or the Land class, as a natural building-site, or an ore deposit, or soil fertility, or the sun to the degree that its light and heat are owned through ownership of Land—have Utility, Value and Price. The last of the three is expressed in terms of Money.
Money is the common medium of Trade. Where and when Money is in use, he who wishes to trade a hat for shoes need not hunt for somebody who has shoes but wants a hat instead; all he need do is first to find some one who has shoes and wants Money. And since persons who want Money (which as a common medium of Trade is in effect everything in the channels of Trade) are so many in comparison with those who at a given time want shoes, Money infinitely diminishes the difficulties of trading commodities.
Money is also a common denominator of Value, as we have already observed. Without it each of us would be obliged to express the Value of each exchangeable object in the complicated terms of all other exchangeable objects. We should have to say, for example, that a hat has the Value of a pair of shoes or of a chair or of an umbrella and so on; that a pair of shoes has the Value of a hat or of a chair or of an umbrella, and so on; that a chair has the Value of an umbrella or of a pair of shoes or of a hat and so on; and that an umbrella has the Value of a hat or a pair of shoes or of a chair and so on. And then we should have to complicate the comparisons with specifications of quality. But Money terms obviate the necessity for such vague and multifarious Value comparisons as are here merely hinted at. They enable us to say that a hat, a pair of shoes, a chair, an umbrella are each of the Value of five dollars, or a pound sterling, or so many francs, according to the names and fidelity to financial standards of Money pieces in the places where we engage in Trade, and according also to the quality of the commodities specified.
It should, however, be here repeated and emphasized, that Money pieces in whatever form, be it coin or scrip, are themselves of slight practical importance in the ramifications of Trade. Not tangible Money, but the Money terms which measure and express the relative Values of commodities—these play the great part.
In adjustments of Trade outside the pocketmoney class of transactions, Money pieces do not serve to the extent of five per cent. Nearly all those adjustments are effected by means of Money terms in books of account and through the medium of checks and drafts and notes and bills of exchange. These are in effect orders upon banks (one of the forms of Labor) for the transfer of credits recorded in their books of account.
Banking is an improvement upon Money pieces in Trade, very much as Money pieces are an improvement upon crude barter. It lifts the Money-piece customs of Trade to book-keeping levels. If everybody were a bank depositor, and every bank were connected with every other by a perfected clearinghouse system, all necessity for Money pieces, except for “pocket cash,” would vanish. In that event the check and the promissory note and the bill of exchange, operating as orders to the book-keepers of banks and clearinghouses, would effect transfers of debits and credits the world over so that all Trade would be barter systematized—plain barter freed from the obstructions incident to barter in primitive Economic circumstances. Except for the use of “pocket cash,” Money pieces of every kind, whether metal or paper, would be like children’s toys to grown-ups.
4—Balances of Trade
Out of worldwide Trade, which, like Trade in narrower circles is effected by means of Money terms in books of account and through the medium of drafts by creditors upon debtors, a subclassification has evolved in Economics of the business-customs type. This subclassification alludes to a situation in Trade between the people in the aggregate of one country and those of the other countries of the world, in which the balance for that country is at any given time on the credit side. Its exports exceed its imports. This situation is known in the business circles of creditor countries as a “favorable balance of trade.”
The suggestion that such balances are favorable is doubtless true with reference to banking and some other business relationships. Business must be better with banking, apparently at least, when the buying and the selling of drafts on the people of foreign countries is brisk than when it is dull. It must be better, also, with exporters who draw the drafts and sell them. The drawing and the selling of drafts against foreign balances is surely a more profitable occupation when there is an excess of exports to draw against than when the balance of trade is the other way. It must be even more satisfactory in those connections when the excess of exports is continuous.
But as matter of comprehensive Economics, in which not only bankers and exporters but also all the other Wealth-producers of a country are concerned, it cannot be true that a perpetual credit balance of international trade is a favorable balance. In international trading, as in trading between individuals (which, by the way, international trading in the last analysis is), the aggregate of exports and of imports must counter-balance. Otherwise the producers of the exports, considered as a whole, must be engaged in foreign trade at a loss. They give more Value than they get. Surely, trading at a loss is not favorable trading.
Would a farmer prosper if every year he sold a thousand dollars’ worth of his products and got back only eight hundred dollars’ worth of other products? Wouldn’t that depend upon how much credit to him had piled up in account-books as a result? If none, wouldn’t he have exchanged his products at the rate of $10 for $8? How long would a farmer prosper if he considered that kind of balance of trade as favorable?
Precisely so with international trading. The only difference is that in the farmer illustration we have a solitary individual, whereas in international trade we have many individuals grouped in national wholes. In comprehensive Economics that difference is no difference at all.
A credit balance between national communities is simply the difference in Value remaining after all international trading to a given date has been entered in the books of account. If that balance be on the credit side of one of the nations, the creditor individuals of the creditor nation may draw against it. To them it is a favorable balance, in book-keeping terms. But if it is never to be paid off with imports, which seems to be the aspiration of those who applaud so-called “favorable balance of trade” theories, is it not in truth an unfavorable balance?
If the reply be that the balance will be paid in gold, what difference does that make in any comprehensive Economic sense? Gold itself is a product of Labor applied to and upon Land. To import it in payment of international balances would be precisely the same, Economically, as importing other products of Labor.
Some private businesses may prosper through “favorable” balances of trade, but Business everywhere and as a whole, Business in the comprehensive sense of the science of Economics, must find “favorable” balances of that unbalanced kind extremely unfavorable to the people of every nation as a whole and to most producers individually.
International balances of trade are but aggregates of individual balances. The favorableness or unfavorableness of either kind depends upon difficulties of collection. If, for illustration, an individual has a credit balance in his account at a bank, it is a favorable balance provided he may “check it out” at will in payment for products or services; but to the extent that obstacles to his “checking out” are put in his way, the balance has an unfavorable aspect. If the obstacles be prohibitive—a 100 per cent stamp tax, for illustration,—the credit balance would be decidedly unfavorable. It would be unfavorable in less degree only as the stamp-tax was reduced from 100 per cent, down to 50 per cent or 25 per cent or 1 per cent. The depositor would have sold more value than he could buy; that is, he would have “exported” from his products more than he could “import” from the products of others.
A like conclusion is inevitable in the aggregate of world trading. To the extent that exports of Wealth are not offset by imports of Wealth, to that extent every trading balance is unfavorable. The Economic benefit of credit balances of all kinds, whether individually or in community totals, depends upon ease of collection.