The Place of Science in Modern Civilisation, and Other Essays

by Thorstein Veblen

So as regards Mr. Clark's doctrine of Capital. It does not differ substantially from the doctrines which are gaining currency at the hands of such writers as Mr. Fisher or Mr. Fetter; although there are certain formal distinctions peculiar to Mr. Clark's exposition of the "Capital Concept." But these peculiarities are peculiarities of the method of arriving at the concept rather than peculiarities substantial to the concept itself. The main discussion of the nature of capital is contained in chapter ii. (Varieties of Economic Goods). The conception of capital here set forth is of fundamental consequence to the system, partly because of the important place assigned capital in this system of theory, partly because of the importance which the conception of capital must have in any theory that is to deal with problems of the current (capitalistic) situation. Several classes of capital-goods are enumerated, but it appears that in Mr. Clark's apprehension—at variance with Mr. Fisher's view—persons are not to be included among the items of capital. It is also clear from the run of the argument, though not explicitly stated, that only material, tangible, mechanically definable articles of wealth go to make up capital. In current usage, in the business community, "capital" is a pecuniary concept, of course, and is not definable in mechanical terms; but Mr. Clark, true to the hedonistic taxonomy, sticks by the test of mechanical demarcation and draws the lines of his category on physical grounds; whereby it happens that any pecuniary conception of capital is out of the question. Intangible assets, or immaterial wealth, have no place in the theory; and Mr. Clark is exceptionally subtle and consistent in avoiding such modern notions. One gets the impression that such a notion as intangible assets is conceived to be too chimerical to merit attention, even by way of protest or refutation.

Here, as elsewhere in Mr. Clark's writings, much is made of the doctrine that the two facts of "capital" and "capital-goods" are conceptually distinct, though substantially identical. The two terms cover virtually the same facts as would be covered by the terms "pecuniary capital" and "industrial equipment." They are for all ordinary purposes coincident with Mr. Fisher's terms, "capital value" and "capital," although Mr. Clark might enter a technical protest against identifying his categories with those employed by Mr. Fisher.[9] "Capital is this permanent fund of productive goods, the identity of whose component elements is forever changing. Capital-goods are the shifting component parts of this permanent aggregate" (p. 29). Mr. Clark admits (pp. 29-33) that capital is colloquially spoken and thought of in terms of value, but he insists that in point of substantial fact the working concept of capital is (should be) that of "a fund of productive goods," considered as an "abiding entity." The phrase itself, "a fund of productive goods," is a curiously confusing mixture of pecuniary and mechanical terms, though the pecuniary expression, "a fund," is probably to be taken in this connection as a permissible metaphor.

This conception of capital, as a physically "abiding entity" constituted by the succession of productive goods that make up the industrial equipment, breaks down in Mr. Clark's own use of it when he comes (pp. 37-38) to speak of the mobility of capital; that is to say, so soon as he makes use of it. A single illustration of this will have to suffice, though there are several points in his argument where the frailty of the conception is patent enough. "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" (p. 38),—illustrated on the preceding page by a shifting of investment from a whaling-ship to a cotton-mill. In all this it is plain that the "transfer of capital" contemplated is a shifting of investment, and that it is, as indeed Mr. Clark indicates, not a matter of the mechanical shifting of physical bodies from one industry to the other. To speak of a transfer of "capital" which does not involve a transfer of "capital-goods" is a contradiction of the main position, that "capital" is made up of "capital-goods." The continuum in which the "abiding entity" of capital resides is a continuity of ownership, not a physical fact. The continuity, in fact, is of an immaterial nature, a matter of legal rights, of contract, of purchase and sale. Just why this patent state of the case is overlooked, as it somewhat elaborately is, is not easily seen. But it is plain that, if the concept of capital were elaborated from observation of current business practice, it would be found that "capital" is a pecuniary fact, not a mechanical one; that it is an outcome of a valuation, depending immediately on the state of mind of the valuers; and that the specific marks of capital, by which it is distinguishable from other facts, are of an immaterial character. This would, of course, lead, directly, to the admission of intangible assets; and this, in turn, would upset the law of the "natural" remuneration of labor and capital to which Mr. Clark's argument looks forward from the start. It would also bring in the "unnatural" phenomena of monopoly as a normal outgrowth of business enterprise.

There is a further logical discrepancy avoided by resorting to the alleged facts of primitive industry, when there was no capital, for the elements out of which to construct a capital concept, instead of going to the current business situation. In a hedonistic-utilitarian scheme of economic doctrine, such as Mr. Clark's, only physically productive agencies can be admitted as efficient factors in production or as legitimate claimants to a share in distribution. Hence capital, one of the prime factors in production and the central claimant in the current scheme of distribution, must be defined in physical terms and delimited by mechanical distinctions. This is necessary for reasons which appear in the succeeding chapter, on The Measure of Consumers' Wealth.

On the same page (38), and elsewhere, it is remarked that "business disasters" destroy capital in part. The destruction in question is a matter of values; that is to say, a lowering of valuation, not in any appreciable degree a destruction of material goods. Taken as a physical aggregate, capital does not appreciably decrease through business disasters, but, taken as a fact of ownership and counted in standard units of value, it decreases; there is a destruction of values and a shifting of ownership, a loss of ownership perhaps; but these are pecuniary phenomena, of an immaterial character, and so do not directly affect the material aggregate of the industrial equipment. Similarly, the discussion (pp. 301-314) of how changes of method, as, e.g., labor-saving devices, "liberate capital," and at times "destroy" capital, is intelligible only on the admission that "capital" here is a matter of values owned by investors and is not employed as a synonym for industrial appliances. The appliances in question are neither liberated nor destroyed in the changes contemplated. And it will not do to say that the aggregate of "productive goods" suffers a diminution by a substitution of devices which increases its aggregate productiveness, as is implied, e.g., by the passage on page 307,[10] if Mr. Clark's definition of capital is strictly adhered to. This very singular passage (pp. 306-311, under the captions, Hardships entailed on Capitalists by Progress, and the Offset for Capital destroyed by Changes of Method) implies that the aggregate of appliances of production is decreased by a change which increases the aggregate of these articles in that respect (productivity) by virtue of which they are counted in the aggregate. The argument will hold good if "productive goods" are rated by bulk, weight, number, or some such irrelevant test, instead of by their productivity or by their consequent capitalised value. On such a showing it should be proper to say that the polishing of plowshares before they are sent out from the factory diminishes the amount of capital embodied in plowshares by as much as the weight or bulk of the waste material removed from the shares in polishing them.

Several things may be said of the facts discussed in this passage. There is, presumably, a decrease, in bulk, weight, or number, of the appliances that make up the industrial equipment at the time when such a technological change as is contemplated takes place. This change, presumably, increases the productive efficiency of the equipment as a whole, and so may be said without hesitation to increase the equipment as a factor of production, while it may decrease it, considered as a mechanical magnitude. The owners of the obsolete or obsolescent appliances presumably suffer a diminution of their capital, whether they discard the obsolete appliances or not. The owners of the new appliances, or rather those who own and are able to capitalise the new technological expedients, presumably gain a corresponding advantage, which may take the form of an increase of the effective capitalisation of their outfit, as would then be shown by an increased market value of their plant. The largest theoretical outcome of the supposed changes, for an economist not bound by Mr. Clark's conception of capital, should be the generalisation that industrial capital—capital considered as a productive agent—is substantially a capitalisation of technological expedients, and that a given capital invested in industrial equipment is measured by the portion of technological expedients whose usufruct the investment appropriates. It would accordingly appear that the substantial core of all capital is immaterial wealth, and that the material objects which are formally the subject of the capitalist's ownership are, by comparison, a transient and adventitious matter. But if such a view were accepted, even with extreme reservations, Mr. Clark's scheme of the "natural" distribution of incomes between capital and labor would "go up in the air," as the colloquial phrase has it. It would be extremely difficult to determine what share of the value of the joint product of capital and labor should, under a rule of "natural" equity, go to the capitalist as an equitable return for his monopolisation of a given portion of the intangible assets of the community at large.[11] The returns actually accruing to him under competitive conditions would be a measure of the differential advantage held by him by virtue of his having become legally seized of the material contrivances by which the technological achievements of the community are put into effect.

Yet, if in this way capital were apprehended as "an historical category," as Rodbertus would say, there is at least the comfort in it all that it should leave a free field for Mr. Clark's measures of repression as applied to the discretionary management of capital by the makers of trusts. And yet, again, this comforting reflection is coupled with the ugly accompaniment that by the same move the field would be left equally free of moral obstructions to the extreme proposals of the socialists. A safe and sane course for the quietist in these premises should apparently be to discard the equivocal doctrines of the passage (pp. 306-311) from which this train of questions arises, and hold fast to the received dogma, however unworkable, that "capital" is a congeries of physical objects with no ramifications or complications of an immaterial kind, and to avoid all recourse to the concept of value, or price, in discussing matters of modern business.

The center of interest and of theoretical force and validity in Mr. Clark's work is his law of "natural" distribution. Upon this law hangs very much of the rest, if not substantially the whole structure of theory. To this law of distribution the earlier portions of the theoretical development look forward, and this the succeeding portions of the treatise take as their point of departure. The law of "natural" distribution says that any productive agent "naturally" gets what it produces. Under ideally free competitive conditions—such as prevail in the "static" state, and to which the current situation approximates—each unit of each productive factor unavoidably gets the amount of wealth which it creates,—its "virtual product," as it is sometimes expressed. This law rests, for its theoretical validity, on the doctrine of "final productivity," set forth in full in the Distribution of Wealth, and more concisely in the Essentials[12]—"one of those universal principles which govern economic life in all its stages of evolution."[13]

In combination with a given amount of capital, it is held, each succeeding unit of added labor adds a less than proportionate increment to the product. The total product created by the labor so engaged is at the same time the distributive share received by such labor as wages; and it equals the increment of product added by the "final" unit of labor, multiplied by the number of such units engaged. The law of "natural" interest is the same as this law of wages, with a change of terms. The product of each unit of labor or capital being measured by the product of the "final" unit, each gets the amount of its own product.

In all of this the argument runs in terms of value; but it is Mr. Clark's view, backed by an elaborate exposition of the grounds of his contention,[14] that the use of these terms of value is merely a matter of convenience for the argument, and that the conclusions so reached—the equality so established between productivity and remuneration—may be converted to terms of goods, or "effective utility," without abating their validity.