Principles of Economics

APPENDIX E
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§ 1. It was observed in Book II. chapter IV. that economists have no choice but to follow well-established customs as regards the use of the term capital in ordinary business,
i.e. trade-capital. The disadvantages of this use are however great and obvious. For instance it compels us to regard as capital the yachts, but not the carriage, belonging to a yacht builder. If therefore he had been hiring a carriage by the year, and instead of continuing to do so, sold a yacht to a carriage builder who had been hiring it, and bought a carriage for his own use; the result would be that the total stock of capital in the country would be diminished by a yacht and a carriage. And this, though nothing had been destroyed; and though there remained the same products of saving, themselves productive of as great benefits to the individuals concerned and to the community as before, and probably even of greater benefits.

Nor can we avail ourselves here of the notion that capital is distinguished from other forms of wealth by its superior power of giving employment to labour. For in fact, when yachts and carriages are in the hands of dealers and are thus counted as capital, less employment is given to labour by a given amount of yachting or carriage driving than when the yachts or carriages are in private hands and are not counted as capital. The employment of labour would not be increased but lessened by the substitution of professional cookshops and bakeries (where all the appliances are reckoned as capital) for private kitchens (where nothing is reckoned as capital). Under a professional employer, the workers may possibly have more personal freedom: but they almost certainly have less material comfort, and lower wages in proportion to the work they do than under the laxer régime of a private employer.

But these disadvantages have been generally overlooked; and several causes have combined to give vogue to this use of the term. One of these causes is that the relations between private employers and their employees seldom enter into the strategical and tactical movements of the conflicts between employers and employed; or, as is commonly said, between capital and labour. This point has been emphasized by Karl Marx and his followers. They have avowedly made the definition of capital turn on it; they assert that only that is capital which is a means of production owned by one person (or group of persons) and used to produce things for the benefit of another, generally by means of the hired labour of a third; in such wise that the first has the opportunity of plundering or exploiting the others.

Secondly this use of the term Capital is convenient in the money market as well as in the labour market. Trade-capital is habitually connected with loans. No one hesitates to borrow in order to increase the trade-capital at his command, when he can see a good opening for its use: and for doing this he can pledge his own trade-capital more easily and more regularly in the ordinary course of business transactions, than he could his furniture or his private carriage. Lastly, a man makes up the accounts of his trade-capital carefully; he allows for depreciation as a matter of course: and thus he keeps his stock intact. Of course a man who has been hiring a carriage by the year, can buy it with the produce of the sale of railway stock that yields very much less interest than he has paid as hire. If he lets the annual income accumulate till the carriage is worn out, it will more than suffice to buy him a new one: and thus his total stock of capital will have been increased by the change. But there is a chance that he will not do this: whereas, so long as the carriage was owned by the dealer, he provided for replacing it in the ordinary course of his business.

§ 2. Let us pass to definitions of capital from the social point of view. It has already been indicated that the only strictly logical position is that which has been adopted by most writers on mathematical versions of economics, and which regards “social capital” and “social wealth” as coextensive; though this course deprives them of a useful term. But whatever definition a writer takes at starting, he finds that the various elements which he includes in it, enter in different ways into the successive problems with which he has to deal. If therefore his definition pretended to precision, he is compelled to supplement it by an explanation of the bearing of each several element of capital on the point at issue; and this explanation is in substance very much like those of other writers. Thus ultimately there is a general convergence; and readers are brought to very much the same conclusion by whatever route they travel; though it may indeed require a little trouble to discern the unity in substance, underlying differences in form and in words. The divergence at starting turns out to be a less evil than it seemed.

Further, in spite of these differences in words there is a continuity of tone in the definition of capital by the economists of several generations and many countries. It is true that some have laid greater stress on the “productivity” of capital, some on its “prospectiveness”; and that neither of these terms is perfectly precise, or points to any hard and fast line of division. But though these defects are fatal to precise classification, that is a matter of secondary importance. Things relating to man’s actions never can be classified with precision on any scientific principle. Exact lists may be made of things which are to be placed in certain classes for the guidance of the police officer, or the collector of import duties: but such lists are frankly artificial. It is the spirit and not the letter of economic tradition, which we should be most careful to preserve. And, as was suggested at the end of Book II. chapter IV., no intelligent writer has ever left out of account either the side of prospectiveness or that of productiveness: but some have enlarged more on the one side and others on the other; while on either side difficulty has been found in drawing a definite line of demarcation.

Let us then look at the notion of capital as a store of things, the result of human efforts and sacrifices, devoted mainly to securing benefits in the future rather than in the present. The notion itself is definite, but it does not lead to a definite classification; just as the notion of length is definite, but yet does not enable us to divide off long walls from short walls save by an arbitrary rule. The savage shows some prospectiveness when he puts together branches of trees to protect him for a night; he shows more when he makes a tent of poles and skins, and yet more when he builds a wooden hut: the civilized man shows increasing prospectiveness when he substitutes solid houses of brick or stone for wooden shanties. A line could be drawn anywhere to mark off those things the production of which shows a great desire for future satisfactions rather than present: but it would be artificial and unstable. Those who have sought one, have found themselves on an inclined plane: and have not reached a stable resting-place till they have included all accumulated wealth as capital.

This logical result was faced by many French economists; who, following in the lines laid down by the Physiocrats, used the term Capital very much in the sense in which Adam Smith and his immediate followers used the word Stock, to include all accumulated wealth (
valeurs accumulées);
i.e. all the result of the excess of production over consumption. And although in recent years they have shown a decided tendency to use the term in the narrower English sense, there is at the same time a considerable movement on the part of some of the profoundest thinkers in Germany and England in the direction of the older and broader French definition. Especially has this been remarkable in writers who, like Turgot, have been inclined towards mathematical modes of thought; among whom Hermann, Jevons, Walras, and Professors Pareto and Fisher are conspicuous. The writings of Professor Fisher contain a masterly argument, rich in fertile suggestion, in favour of a comprehensive use of the term. Regarded from the abstract and mathematical point of view, his position is incontestable. But he seems to take too little account of the necessity for keeping realistic discussions in touch with the language of the market-place; and to ignore Bagehot’s caution against trying “to express various meanings on complex things with a scanty vocabulary of fastened uses
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§ 3. Most of the attempts to define capital rigidly, whether in England or other countries, have turned mainly on its productivity, to the comparative neglect of its prospectivity. They have regarded social capital as a means for acquisition (
Erwerbskapital) or as a stock of the requisites of production (
Productions-mittel Vorrath). But this general notion has been treated in different ways.

According to the older English traditions capital consists of those things which
aid or support labour in production: or, as has been said more recently, it consists of those things without which production could not be carried on with equal efficiency, but which are not free gifts of nature. It is from this point of view that the distinction already noticed between consumption capital and auxiliary capital, has been made.

This view of capital has been suggested by the affairs of the labour market; but it has never been perfectly consistent. For it has been made to include as capital everything which employers directly or indirectly provide in payment for the work of their employees—
wage capital or
remuneratory capital, as it is called; but yet not to include any of the things needed for their own support, or that of architects, engineers, and other professional men. But to be consistent it should have included the necessaries for efficiency of all classes of workers; and it should have excluded the luxuries of the manual labour classes as well as of other workers. If, however, it had been pushed to this logical conclusion, it would have played a less prominent part in the discussion of the relations of employers and employed
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In some countries however, and especially in Germany and Austria, there has been some tendency to confine capital (from the social point of view) to auxiliary or instrumental capital. It is argued that in order to keep clear the contrast between production and consumption, nothing which enters directly into consumption should be regarded as a means to production. But there appears no good reason why a thing should not be regarded in a twofold capacity
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It is further argued that those things which render their services to man not directly, but through the part which they play in preparing other things for his use, form a compact class; because their value is derived from that of the things which they help to produce. There is much to be said for having a name for this group. But there is room for doubt whether capital is a good name for it; and also for doubt whether the group is as compact as it appears at first sight.

Thus we may define instrumental goods so as to include tramways and other things which derive their value from the personal services which they render; or we may follow the example of the old use of the phrase productive labour, and insist that those things only are properly to be regarded as instrumental goods the work of which is directly embodied in a material product. The former definition brings this use of the term rather close to that discussed in the last section and shares with it the demerit of vagueness. The latter is a little more definite: but seems to make an artificial distinction where nature has made none, and to be as unsuitable for scientific purposes as the old definitions of productive labour.

To conclude:—From the abstract point of view the French definition, advocated by Professor Fisher and others, holds the field without a rival. A man’s coat is a stored up product of past efforts and sacrifices destined as a means to provide him with future gratifications, just as much as a factory is: while both yield immediate shelter from the weather. And if we are seeking a definition that will keep realistic economics in touch with the market-place, then careful account needs to be taken of the aggregate volume of those things which are regarded as capital in the market-place and do not fall within the limits assigned to “intermediate” products. In case of doubt, that course is to be preferred which is most in accordance with tradition. These were the considerations which led to the adoption of the twofold definition of capital, from the business and the social point of view, given above
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