Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

The Business Man's View of Capital.—It is as such an abiding entity that a business man regards capital. He describes it nearly always as a sum of money. Thus the capital of a manufacturer is "a million dollars" because a stock of instruments worth that amount is kept intact in his possession. It is not allowed to waste away, however much the constituent parts of it may shift. The waste and renewal which business entails leave the equivalent of the million dollars always on hand, though never in the literal shape of money. A stock of shifting goods always worth a million dollars is, by a figure of speech, described as a million dollars "invested in the goods."[2]

The Chief Attribute of Capital.—A chief attribute of capital, properly so called, is permanence. If a man's productive fund does not last, he is impoverished. The farmer keeps on hand a more or less constant supply of the implements he has to use. He takes a part of the proceeds of the sale of his crops, puts it into the shape of implements and materials, and in this way keeps an amount of them on hand as the auxiliary capital of agriculture. Particular goods are not constant, but the sum of money or quantum of wealth "invested" in the moving procession of them is so. At any one instant the capital is composed of particular instruments which can be sought out and identified, but at no two instants are the goods the same.

The Reasons for describing Capital as a Sum of Money.—This fact explains the general practice of describing capital in terms of money. The manufacturer just referred to will speak of his capital as "a million dollars" and consider that sum as a "permanent investment" because he knows that while the goods that now represent that value will soon pass from him, the "dollars"—that is, the value which is equivalent to the dollars—will abide. There is, moreover, no failure on his part to discriminate between his capital and literal money, for he knows in what his productive fund consists, and is fully aware that only the minutest part of it is in the shape of actual currency.

Instruments of production compose the fund, but the dollars serve to describe it. They indicate the amount and the abiding quality of it, since they describe what he has invested or embodied in the shifting things and can, by a fair sale, get out of them.

Why Abstract Terms are used in popularly describing Capital.—In certain connections money is, in unintelligent thinking, confused with real capital in ways that we should guard against. In avoiding such errors we need to be even more careful that we do not miss the truth that is at the basis of the common mode of describing capital. A permanent fund that is spoken of as a million dollars invested in a business does not suggest to any one a literal pile of a million silver or paper dollars or of a hundred thousand gold eagles. It suggests what is actually in the business, a procession of things each of which comes into the man's possession and then leaves him, and helps him to keep the constant stock of goods that at any time is a potential million of dollars. A permanent body of any kind, if it is made up of shifting tissues, is commonly described by the use of an abstract term. A waterfall, made as it is of rapidly changing drops of water, is spoken of as a "water power," since the power is the abiding thing. An endless series of living human beings is described as "humanity," since that remains through all personal changes. An endless series of workingmen is described as "labor," and we study the "wages of labor," the "relations of labor to capital," etc., because these are permanent relations. Men come and go, but labor continues and is the source of a permanent income. It is actually the fact that in speaking of the "labor problem" or the "relation of capital and labor" we usually think of "labor in the abstract," as we might term it; but this is very far from implying that we consider a series of generations of actual workingmen as an abstraction. We may, using terms in a like way, speak of the problem of interest as concerning "capital in the abstract"; but this is far from meaning that we consider an endless series of material instruments of industry an abstraction. We describe these real things by the use of an abstract term, just as we describe a thousand other realities. A "fund," a "value," a "permanent quantum of wealth," is capital; but with the abstract notion the mind always merges the thought of the concrete entity. It is the tools of industry that, in their endless march, come into and go out of the industrial field that we think of even when we use the abstract term. This term, however, saves us from the danger of thinking merely of particular tools that we can identify and trace to their final destruction when we form the concept of capital.

The Importance of discriminating between the Concept of Capital Goods and that of Capital.—Very great is the importance of keeping sharply distinct the two concepts of productive wealth of which one is described by the term capital goods and the other by the term capital. In the one case we think of a particular thing which we identify, keep in mind, and watch as it goes through its transformations, does its final work, and perishes. The brilliant studies of Professor Böhm-Bawerk are based on the idea that such a tracing of the biography of a particular instrument is the true way to solve the problem of interest. Yet the very term interest itself suggests the existence of what we have defined as permanent capital—an abiding fund or sum of wealth that every year yields as an income a certain percentage of itself. The "hundred dollars" yields five dollars; that is, the fund yields a twentieth of the amount which, amid all the changes of its constituent parts, it continues to embody. It is true, indeed, that a study of all capital goods which have existed or will exist, with due attention to their relations to each other, would reveal the fact that they maintain such an endless procession as has been here described, and it would thus bring before the mind such a concept of capital as the business man has and describes by the monetary form of expression. By making a synthetic study of capital goods in general, and not separate studies of particular goods as they come and go, we can obtain a grand resultant of the action of all of them, which is nothing less than permanent capital doing its continuous work. Such a comprehensive study of capital goods, if it is carried far enough, becomes a study of the abiding entity, capital. Allowing ourselves, however, to put the abiding entity out of sight and merely to trace the origin, growth, and productive action of separate instruments of production would be disastrous. The undying body in which the particular things are tissues absolutely needs to come into view. The very mention of a problem of interest—of the percentage of itself that a fund of a given amount can annually earn—puts before us at once the permanent entity, capital, and the problems relating to it.[3]

Labor as a Permanent Entity.—The term labor is sometimes used to describe a permanent aggregation of laborers no one of whom lives and works through more than a brief period. Labor is thus analogous to capital and laborers to capital goods. A permanent working force is composed of perishable beings as a permanent producing fund is composed of perishable goods. Both are commonly described by the use of abstract terms, but both are in reality concrete things; and actually to reduce either to a mere abstraction would be to put a material entity out of existence. We instinctively speak of a value—a given number of dollars—in describing a man's capital, but it is dollars "invested in" productive instruments; and we instinctively speak of labor when we mean an abiding force of workingmen. Neither capital nor labor is like an immaterial soul that can live apart from its body. Each consists of a permanent body with a shifting composition. A permanent sum, on the one hand, a permanent amount of working energy, on the other, are always present, but they are in goods and men respectively. Each may well be described by the use of an abstract term, and in practical life it commonly is so; but it is a concrete reality.

Peculiarity of Land as a Capital Good.—One reservation needs to be made when we call capital goods perishable. If we include land under this term, we must make it an exception to the rule of destructibility. It is the only thing that does not go out of existence in the using. It is not a produced good at all and does not stand, like other goods, in an intermediate position between labor and the gratification that labor is intended to produce. Work did not create it and using will not end it. It will be called, in our study, a capital good, for it is a form of wealth which produces other wealth. It enters into the permanent productive fund that society is using.

Differences between Land and Other Capital Goods Important in Economic Dynamics.—It is in a later part of the study which deals with economic changes—the part which we shall call Economic Dynamics—that the differences between land and artificially made goods become prominent, and these differences will receive due emphasis in their proper place. In studying the law which would govern economic society if no essential economic changes were taking place,—in reducing society, as it were, to a static state,—we find that there is a certain set of characteristics which land shares with those capital goods which are the products of human industry. In static studies it is best to group the productive instruments which men make with the one unmade good which nature furnishes and to recognize that together they embody the permanent fund of productive wealth.[4]

Mobility an Attribute of Capital.—Even in a static society capital would be permanent, while particular capital goods would be perishable. In dynamic studies another quality of capital, as distinguished from capital goods, comes into the foreground, namely, mobility. It is the power to move without loss from one industry to another. Goods cannot be thus moved with any freedom. A loom cannot be taken out of a woolen mill and made to do duty in a carpenter's shop, nor can a circular saw be made available in weaving. When the loom wears out and needs replacement, it is in the owner's power to procure either another loom or a circular saw, and if he chooses the latter alternative, he causes capital to move into the woodworking business. A whaling ship would not be useful as a cotton mill; but much capital that was once invested in the whale fishery of New England has since found its way into manufacturing. The transfer can often be made without waste. If the earnings of an instrument have sufficed to replace it with another that is like it, they may suffice for producing an instrument that is unlike it. Waste, if it occurs, results from a failure of the original instrument to earn the fund for replacement. Capital which thus abides but passes from one employment to another is a body the identity and the character of whose component parts change. The transfer of capital from one industry to another is a dynamic phenomenon which is later to be considered. What is here important is the fact that it is in the main accomplished without entailing transfers of capital goods. An instrument wears itself out in one industry, and instead of being succeeded by a like instrument in the same industry, it is succeeded by one of a different kind which is used in a different branch of production. Goods have not moved from one branch to another, but capital has done so.