Capital (economic factor)

From Hobson's Choice

Equipment used in the production of goods. One of the factors of production.

1 Definition
2 Classical Theory of Capital Formation
3 Marxist Theory of Capital
4 Notes
5 External Links

Definition

Adam Smith refered to the factor of production as "capital stock"; "capital" was used to designate finance capital. He also made a distinction between "circulating capital" and "fixed capital": circulating capital included inventories and pools of raw materials, while fixed capital included tools and fixtures.^[1]

There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer. First, it may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession, or continues in the same shape. The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. [...] Such capitals, therefore, may very properly be called circulating capitals. Secondly, it may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in suchlike things as yield a revenue or profit without changing masters, or circulating any further. Such capitals, therefore, may very properly be called fixed capitals.
Smith, Wealth of Nations (1776), "Of the Nature, Accumulation, and Employment of Stock"

After Smith, there remained considerable ambiguity about what capital was. Ricardo generally promoted the isotropic tendencies of classical economics, and urged that all forms of capital―including finance capital―be treated the same.

In the last section we have supposed that of two equal capitals in two different occupations, the proportions of fixed and circulating capitals were unequal, now let us suppose them to be in the same proportion but of unequal durability. In proportion as fixed capital is less durable, it approaches to the nature of circulating capital.
Ricardo, On the Principles of Political Economy (1817), "On Value, § V]"

This approach has persisted, and the distinction between capital and finance capital is a very nuanced one. In the early part of the 19th century, there was a further debate over whether some consumer goods counted as part of the national stock of capital. Generally speaking, the English economists tended to include some consumer goods, provided they were held by laborers. The assumption was that this was part of the production cycle, when the capitalist paid for the factors of production (including wage labor), but before production was sold as a commodity. Hobson, in a survey of the major writers, notes that only James Mill restricted capital to exclude all consumer goods (which is what is done now). Ricardo strongly implied that a worker's clothing and food were capital; John Ramsey McCulloch explicitly stated that he felt anything that contributed to support was capital (which would mean one consumed only the services that inhered in an object of value. J.S. Mill refers to food "destined" (Principles of Political Economy, I.ii.§3) for workers as capital, but ceasing to be capital when it is already appropriated to the consumption of productive laborers." Henry Fawcett wrote:

If a man has so much wheat, it is wealth which may at any moment be employed as capital; but this wheat is not made capital by being hoarded; it becomes capital when it feeds the labourers, and it cannot feed the labourers unless it is consumed.
Fawcett, Manual of Political Economy, (1907) Bk. I.iv. p.29

Hence, circulating capital was not really capital, until it was consumed! Price, p.103 and Sidgwick, p.131 also grant that capital includes goods available to the laborer for consumption.^[2] However, by the time of Alfred Marshall, such consumer goods were capital only if the employer were in the habit of clothing, feeding, and rooming his employees:

[...] the language of the market-place commonly regards a man's capital as that part of his wealth which he devotes to acquiring an income in the form of money; or, more generally, to acquisition (Erwerbung) by means of trade. It may be convenient sometimes to speak of this as his trade capital; which may be defined to consist of those external goods which a person uses in his trade, either holding them to be sold for money or applying them to produce things that are to be sold for money. Among its conspicuous elements are such things as the factory and the business plant of a manufacturer; that is, his machinery, his raw material, any food, clothing, and house-room that he may hold for the use of his employees, and the goodwill of his business.
Marshall, Principles of Political Economy, 8th edition, II.iv.§ 1, (1920)

However, economists continued to lump capital with entrepreneurship; Ricardo lumps capital with it, and both are remunerated in profit. Wicksteed argued that the distinction between land and capital was arbitrary, and never mentions a fourth factor. Pigou likewise proposed that all factors of production besides labor could be treated amorphously. Likewise, Jevons, J.S. Mill, and the others speak of capital embodying entrepreneurship.

For a discussion of this curious omission, see entrepreneurship

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Classical Theory of Capital Formation

Classical and neoclassical economics has a theory of capital derived mainly from Senior.^[3]

But although Human Labour, and the Agency of Nature, independently of that of man, are the primary Productive Powers, they require the concurrence of a Third Productive Principle to give to them complete efficiency.[...] To the Third Principle, or Instrument of Production without which the two others are inefficient, we shall give the name of Abstinence: a term by which we express the conduct of a person who either abstains from the unproductive use of what he can command, or designedly prefers the production of remote to that of immediate results. [...] The Powers of Labour and of the other Instruments which produce Wealth may be indefinitely increased by using their Products as the means of further Production. [...] The division of the Instruments of Production into three great branches has long been familiar to Economists. Those branches they have generally termed Labour, Land, and Capital. In the principle of this division we agree; though we have substituted different expressions for the second and third branches. We have preferred the term Natural Agents to that of Land, to avoid designating a whole genus by the name of one of its species: a practice which has occasioned the other cognate species to be generally slighted and often forgotten. We have substituted the term Abstinence for that of Capital on different grounds.
Senior, Political Economy (1850), "Statement of the Four Elementary Propositions"

The point is that individuals gradually accumulated capital by abstaining (virtuously) from consumption so that eventually they had saved up capital.

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Marxist Theory of Capital

Karl Marx's theory of capital is relevant because he examined the matter so closely. Marx's 3-volume Capital (linked below) is a critique of conventional classical notions of the factors of production and their relation to each other; nearly all the attention goes to capital. Marx attacks the classical theory of capital on the grounds that capital is not the same thing as virtuously accumulated saving; it is not the same thing as entrepreneurship, either. Capital is a social relation. In a capitalist modality of production, the capitalist does not acquire wealth by setting aside saving for future production (that reverses causality!), but by securing power over the production process. The capitalist buys labor power, thereby separating it entirely from the worker; this enables capital accumulation, i.e., the steady growth in power over social relations of production.

Marx did not deny that "abstinence" occurs for the creation of new capital equipment; rather, he observed that this was more likely to represent the abstinence of the worker, since the capitalist mostly accumulates capital through credit:

Capital also is a social relation of production. It is a bourgeois relation of production, a relation of production of bourgeois society. The means of subsistence, the instruments of labor, the raw materials, of which capital consists – have they not been produced and accumulated under given social conditions, within definite special relations? Are they not employed for new production, under given special conditions, within definite social relations? And does not just the definite social character stamp the products which serve for new production as capital? Capital consists not only of [...] a sum of material products, it is a sum of commodities, of exchange values, of social magnitudes. Capital remains the same whether we put cotton in the place of wool, rice in the place of wheat, steamships in the place of railroads, provided only that the cotton, the rice, the steamships – the body of capital – have the same exchange value, the same price, as the wool, the wheat, the railroads, in which it was previously embodied. The bodily form of capital may transform itself continually, while capital does not suffer the least alteration. But though every capital is a sum of commodities–i.e., of exchange values–it does not follow that every sum of commodities, of exchange values, is capital. [...] It is only the dominion of past, accumulated, materialized labor over immediate living labor that stamps the accumulated labor with the character of capital. Capital does not consist in the fact that accumulated labor serves living labor as a means for new production. It consists in the fact that living labor serves accumulated labor as the means of preserving and multiplying its exchange value.
Marx, Capital (1867), I.v.

All of the orthodox economic accounts of proto-capitalism are inaccurate. A typical example is Gen. Francis Amasa Walker's Political Economy, p.62, in which he includes a rambling discussion of canoe makers. Capital is described as having accumulated for centuries through the heroic efforts of virtuous men who providentially save for a shortage of fish. Oddly, Gen. Walker was a US brevet general from the Civil War who no doubt was proud of the ability of Usonians to enrich themselves quickly, rising swiftly from pauper to baron. But he turns to the dawn of capital, with Native Americans organizing a fishing expedition.

What exactly happened to the capital that Native Americans accumulated? Why must Walker describe the distant past when he was writing in the Gilded Age? The short answer is that the actual historical accounts of capital accumulation involved a combination of luck, accident of birth, and criminality. Workers in the 19th century usually were tottering on the brink of starvation, and driven into the crowded cities by landlord evictions.

Most large fortunes, including that of Walker's hypothetical fisherman, came from borrowing anyway; the capitalist usually is not an accumulator, but an entrepreneur. Marx's objection to capital accumulation is not the wealth that the capitalist obtains (surplus value), but the control over social relations of production. Marx is not going to mock enrichment that occurs through actual self denial, although historically, it was not always self-denial that got the capitalist started. He does not even object to the greater wealth, but rather, to the power of everlasting self-perpetuation.

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Notes

↑ Adam Smith, The Wealth of Nations, Book II, "Of the Nature, Accumulation, and Employment of Stock" (complete text online).
↑ John A Hobson, The Evolution of Modern Capitalism, Charles Scribner's Sons, London (1894), Appendix to Chapter VII, "Are Goods in the Possession of Consumers Capital?", p.209
↑ Nassau W. Senior, Political Economy, London: Richard Griffin and Company (1854)

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