The Wealth That Is Called Capital
Epigraphs to Book II
Definitions are the basis of systematic reasoning.
The mixture of those things by speech which are by nature divided is the mother of all error.
Bacon made us sensible of the emptiness of the Aristotelian philosophy; Smith, in like manner, caused us to perceive the fallaciousness of all the previous systems of political economy; but the latter no more raised the superstructure of this science, than the former created logic.... We are, however, not yet in possession of an established text-book on the science of political economy, in which the fruits of an enlarged and accurate observation are referred to general principles that can be admitted by every reflecting mind; a work in which these results are so complete and well arranged as to afford to each other mutual support, and that many everywhere and at all times be studied with advantage.
-- J.B. Say, 1803
We may cite as examples of such inchoate but yet incomplete discoveries the great Wealth of Nations by Adam Smith -- a work which still stands out, and will ever stand out, as that of a pioneer, and the only book on political economy which displays its genius to every kind of intelligent reader. But among the specialists and the schools, this work of genius which swayed all Europe in its day, is laid upon the shelf as an antiquated affair, superseded by the smaller and duller men who have pulled his system to pieces and are offering us the fragments as a science most of whose first principles are still under dispute.
-- Professor (Greek) J.P. Mahaffy, "The Present Position of Egyptology," "Nineteenth Century," August, 1894.
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The Science of Political Economy
Book II, The Nature of Wealth
The Wealth That Is Called Capital
Showing What the Wealth Called Capital Really Is
Capital is a part of wealth used indirectly to satisfy desire -- Simple illustration of fruit -- Wealth permits storage of labor -- The bull and the man -- Exertion and its higher powers -- Personal qualities cannot really be wealth or capital -- The taboo and its modern form -- Common opinion of wealth and capital
As we have seen, all wealth is not devoted in consumption to the satisfaction of desire. Much of it is devoted to the production of other forms of wealth. That part of wealth so devoted to the production of other wealth is what is properly called capital.
Capital is not a different thing from wealth. It is but a part of wealth, differing from other wealth only in its use, which is not directly to satisfy desire, but indirectly to satisfy desire, by associating in the production of other wealth.
I have spoken of wealth as the concrete result, the tangible embodiment, by change wrought in material things, of labor exerted towards the satisfaction of desire, without as yet having reached or completely reached the point of satisfaction, consumption.
Now, if this concrete result of labor, wealth, be used, not in directly satisfying desire by consumption, but for the purpose of obtaining more wealth, it becomes in that use what we term capital. It is wealth devoted not to the final use of wealth, the satisfaction of desires, but turned aside, as it were, to pass through another stage, by which more wealth may be secured and the final possibilities of satisfaction increased.
To return to the simplest illustration given in the chapter treating of wealth: The man who, finding a fruit-tree, plucks and eats, spends his labor in the most direct and primitive form, that of satisfying desire. His desire is for the moment satisfied, but the labor he has exerted is all spent; no result remains which will help to the future satisfaction of desire.
But if not content with the satisfaction of present desire he carries off some of the fruit to where he may in the future more conveniently obtain it, he has in this gathered fruit a concrete result of the expenditure of labor. His labor expended in the gathering and removal of the fruit which he retains has been as it were stored up, as energy may be stored up by bending a bow or raising a stone, to be utilized again at a future time. This stored-up labor, concretely in this case -- this gathered and transported fruit, is wealth, and will retain this character of wealth or stored-up labor, until it is (1) consumed, by being applied to the gratification of desire; or (2) destroyed, as by decay, the ravages of insects or animals, or some other change which takes away its potency of aiding in the satisfaction of desire.
But the man who has thus obtained the possession of wealth by gathering fruit and carrying it to a more convenient place may utilize its potency of ministering to desire in different ways. Let us suppose him to divide this wealth, this gathered fruit, into three portions. One portion he will eat as he feels desire; another portion he will give to some other man in exchange for some other form of wealth; and the third portion he will plant in order that in the future he may more readily and more abundantly satisfy his desire for such fruit.
All three of these portions are alike wealth. But the first portion is merely wealth; its use is the final use of all wealth -- the satisfaction of desire. But the second and third portions are not simply wealth -- they are capital; their use is in obtaining more or other wealth, which in its turn may be used for the satisfaction of desire.
In other words, all capital is wealth; but all wealth is not capital. Capital is wealth applied to the production of more or other wealth. It is stored labor, not applied by one further step to the ultimate end and aim of all labor, the satisfaction of desire; but in the production of more wealth to the further storage of labor.
By the storage of labor, which is involved in the production of wealth, it becomes possible for man to change the time in which a given exertion shall be utilized in the satisfaction of desire, thus greatly increasing the sum of satisfactions which given exertion may procure. And by the using of wealth as capital, which is the calling of past exertion to the service of present exertion, he is enabled to concentrate exertion upon a given point, at a given time, and to call in, as it were by the way, forces of nature which far transcend in their power those which nature has put at his use in the human frame.
To illustrate: Nature gives to the bull in his massive skull and sharp horns a weapon of offense by which almost the whole strength of his frame may be concentrated upon one or two narrow points, thus utilizing the maximum of force upon the minimum of resistance. She has given to man no such weapon, for his clenched fist, the nearest approach to the horns of the bull his bodily resources furnish, is a far inferior weapon. But by turning his labor into capital in the shape of a spear he is enabled on occasion to concentrate nearly the whole force of his body upon an even narrower point than can the bull; and by turning labor into capital in the form of a bow or crossbow or sling, he may exert in one instant the force that can be accumulated during longer intervals of time; and finally, as the result of many transmutations of labor into capital, he can exert in the rifle chemical forces more potent than any of the forces of which the energies of his own body give him command.
Wealth, in short, is labor, which is raised to a higher or second power, by being stored in concrete forms which give it a certain measure of permanence, and thus permit of its utilization to satisfy desire in other times or other places. Capital is stored labor raised to a still higher or third power by being used to aid labor in the production of fresh wealth or of larger direct satisfactions of desire.
It is likewise to be observed that capital being a form of wealth -- that is to say, wealth used for the purpose of aiding labor in the production of more wealth or greater satisfactions -- nothing can be capital that is not wealth, and the term capital is subject to all the restrictions and limitations that apply to the term wealth. Personal qualities such as knowledge, skill, industry, are qualities of labor and can never be properly treated as capital. While in common speech it may be permissible to speak in a metaphorical sense of such qualities as capital, meaning thereby that they are susceptible of yielding to their possessors advantages akin to the advantages given by capital, yet to transfer this metaphorical use of speech to economic reasoning is, as many ponderous treatises will testify, provocative of fundamental confusion.
And so, while the possession of slaves, of special privileges, of public debts, of mortgages, or promissory notes, or other things of the kind I have spoken of in treating of spurious wealth, may in the hands of the individual possessor be equivalent to the possession of capital, they can constitute no part of real capital. All the public debts of the world do not add in the slightest degree to the capital of the world -- are incapable of aiding by one iota in the production of wealth; while the greater part of what figures in our official reports as capital invested in railroads, etc., is in reality nothing but the inflation of expectation. Capital in the economic sense is a tangible, material thing -- matter changed in place, form or condition, so as to fit it for human uses, and applied to aiding labor in the production of wealth or direct satisfactions.
To recur to our first simple illustration: A high chief of the Hawaiian Islands in the old heathen days might, on discovering a tree laden with fruit, have eaten his fill and then laid the tree under taboo. He might thus have obtained for himself something of the same advantages that he would have obtained by carrying some of the fruit to a more convenient place, for the inhibition upon others might have led some of them, in return for the privilege of taking it, to consent to bring him some. But the result would not have been the same to the community as a whole. His Laziness could have obtained the fruits of labor, but only by virtually taking the labor of others.
And so the son of an Hawaiian missionary, who in the legal ownership of land holds the Christian equivalent of the old heathen power of taboo, may in return for the privilege of permitting others to apply labor to his land compel them to bring him wealth or capital. The possession of this power so far as he himself is concerned is equivalent to the possession of wealth or capital, but not so to the community. It implies no addition to the sum of production or to the power of future production. It implies merely a power of affecting the distribution of what may already by other agencies be produced.
This fact that part of what is really wealth is capital, and that what is not wealth is not capital, is so clear that it is really recognized in ordinary speech if we pay attention to the core, or original meaning of the words. As I say in Progress and Poverty, when speaking of capital (Book I, Chapter II, "The Meaning of the Terms"):
If the articles of actual wealth existing at a given time in a given community were presented in situ to a dozen intelligent men who had never read a line of political economy, it is doubtful if they would differ in respect to a single item, as to whether it should be accounted capital or not. Money which its owner holds for use in his business or in speculation would be accounted capital; money set aside for household or personal expenses would not. That part of a farmer's crop held for sale or for seed, or to feed his help in part payment of wages, would be accounted capital; that held for the use of his own family would not be. The horses and carriage of a hackman would be classed as capital; but an equipage kept for the pleasure of its owner would not. So, no one would think of counting as capital the false hair on the head of a woman, the cigar in the mouth of a smoker, or the toy with which a child is playing; but the stock of a hair-dealer, of a tobacconist, or the keeper of a toy-store, would be unhesitatingly set down as capital. A coat which a tailor had made for sale would be accounted capital; but not the coat he had made for himself. Food in the possession of a hotel-keeper or a restaurateur would be accounted capital; but not the food in the pantry of a housewife, or in the lunch-basket of a workman. Pig-iron in the hands of the smelter, or founder, or dealer, would be accounted capital; but not the pig-iron used as ballast in the hold of a yacht. The bellows of a blacksmith, the looms of a factory, would be capital; but not the sewing-machine of a woman who does only her own work; a building let for hire, or used for business or productive purposes; but not a homestead. In short, I think we should find that now, as when Dr. Adam Smith wrote, "that part of a man's stock which he expects to yield him a revenue is called his capital." And, omitting his unfortunate slip as to personal qualities, and qualifying somewhat his enumeration of money, it is doubtful if we could better list the different articles of capital than did Adam Smith in the passage which in the previous part of this chapter I have condensed.
Now, if, after having thus separated the wealth that is capital from the wealth that is not capital, we look for the distinction between the two classes, we shall not find it to be as to the character, capabilities, or final destination of the things themselves, as has been vainly attempted to draw it, but it seems to me that we shall find it to be as to whether they are or are not in the possession of the consumer.* Such articles of wealth as in themselves, in their uses, or in their products, are yet to be exchanged are capital; such articles of wealth as are in the hands of the consumer are not capital. Hence, if we define capital as wealth in course of exchange, understanding exchange to include, not merely the passing from hand to hand, but also such transmutations as occur when the reproductive or transforming forces of nature are utilized for the increase of wealth, we shall, I think, comprehend all the things that the general idea of capital properly includes, and shut out all it does not. Under this definition, it seems to me, for instance, will fall all such tools as are really capital. For it is as to whether its services or uses are to be exchanged or not which makes a tool an article of capital; or merely an article of wealth. Thus the lathe of a manufacturer used in making things which are to be exchanged is capital; while the lathe kept by a gentleman is not. Thus wealth used in the construction of a railroad, a public telegraph line, a stage-coach, a theater, a hotel, etc., may be said to be placed in the course of exchange. The exchange is not effected all at once, but little by little, with an indefinite number of people. Yet there is an exchange, and the "consumers" of the railroad, the telegraph line, the stage-coach, theater or hotel, are not the owners, but the persons who from time to time use them.
Nor is this definition inconsistent with the idea that capital is that part of wealth devoted to production. It is too narrow an understanding of production which confines it merely to the making of things. Production includes not merely the making of things, but the bringing of them to the consumer. The merchant or storekeeper is thus as truly a producer as is the manufacturer or farmer, and his stock or capital is as much devoted to production as is theirs. But it is not worth while now to dwell upon the functions of capital, which we shall be better able to determine hereafter. Nor is the definition of capital I have suggested of any importance. I am not writing a text-book, but only attempting to discover the laws which control a great social problem, and if the reader has been led to form a clear idea of what things are meant when we speak of capital my purpose is served.
But before closing this digression let me call attention to what is often forgotten -- namely, that the terms "wealth," "capital," "wages," and the like, as used in political economy, are abstract terms and that nothing can be generally affirmed or denied of them that cannot be affirmed or denied of the whole class of things they represent. The failure to bear this in mind has led to much confusion of thought, and permits fallacies, otherwise transparent, to pass for obvious truths. Wealth being an abstract term, the idea of wealth, it must be remembered, involves the idea of exchangeability. The possession of wealth to a certain amount is potentially the possession of any or all species of wealth to that equivalent in exchange. And consequently, so of capital.
* Money may be said to be in the hands of the consumer when devoted to the procurement of gratification, as, though not in itself devoted to consumption, it represents wealth which is; and thus what in the previous paragraph I have given as the common classification would be covered by this distinction, and would be substantially correct. In speaking of money, in this connection, I am, of course, speaking of coin, for although paper money may perform all the functions of coin it is not wealth, and cannot therefore be capital. -- [Progress and Poverty, Book I, Chapter II.]
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