The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Advertisement.
• Letters, &c.
• Letter I.
• Letter II.
• Letter III.
• Letter IV.
• Letter V.
• Advertisement.
• Catechism of Political Economy; Or, Familiar Conversations On the Manner In Which Wealth Is Produced, Distributed, and Consumed.
• Chapter the First.: On the Composition of Wealth and the Use of Money.
• Chapter II.: On the Utility and Value of Products.
• Chapter III.: On Production.
• Chapter IV.: On the Operations Common to All the Species of Industry.
• Chapter V.: On Capital and Land.
• Chapter VI.: On the Formation of Capital.
• Chapter VII.: On the Manner In Which the Value of Products Is Established, and of the Charges of Production.
• Chapter VIII.: On the Profits of Industry, Capital, and Land; That Is, Income.
• Chapter IX.: On Wages, Interest, and Rent.
• Chapter X.: On Incomes Founded On Immaterial Products.
• Chapter XI.: On Consumption In General.
• Chapter XII.: On Private Consumption.
• Chapter XIII.: On Public Consumption.
• Chapter XIV.: On Public Property and Taxes.
• Chapter XV.: On Public Loans.
• Chapter XVI.: On Property, and the Nature of Riches.
• Chapter XVII.: On the Real and Nominal Price.
• Chapter XVIII.: On Money.
• Chapter XIX.: On Signs Representing Money.
• Chapter XX.: On Markets.
• Chapter XXI.: On Regulations Or Restraints of Industry.
• Chapter XXII.: On Importations, Duties, and Prohibitions.
• Chapter XXIII.: On Exportation.
• Chapter XXIV.: On Population.
• Chapter XXV.: On Colonies.
• Erratum.

CHAPTER VI.

On the Formation of Capital.

I SEE that to create values, that is, riches, industrious talents and capital are necessary. I can conceive that industrious talents may be acquired by study and practice; but how is capital to be procured?

It must be created, or borrowed of those who have created it.

How can it be created?

To answer this question, it is necessary to begin by giving some notions on consumption, although this is not the proper place, and it ought to be developed hereafter.

What do you understand by consumption?

Consumption is the opposite of production: it is a destruction of values produced. We cannot destroy matter any more than we can create it; but we can destroy the utility that has been given to it; and, in destroying its utility, we destroy its value. That is what is called “to consume.”

We do not wantonly destroy things of value: what end is proposed in doing so?

Either to procure an enjoyment or else to reproduce another value. The consumption of food or clothing is an enjoyment: it has no other result. Reproductive consumption is neither so simple nor so easy.

In what does it consist?

It consists in the industrious destruction of one value, so as to produce another in place of that which is destroyed, and which exceeds it in value sufficiently to pay for the industry employed in the operation. Thus the agriculturist who sows a grain of corn destroys the value of it, but he does not destroy it in the same manner as he who eats it: he destroys it in such manner as that it shall be reproduced with profit: and even if he employs this grain or many grains in feeding fowls, he still destroys the value of this grain; but as he increases the value of the fowls, he produces a value which usually replaces, with profit, the value which was consumed. This is called reproductive consumption.

Every thing that a man consumes for his own use is then an unproductive consumption?

No, not all. When eatables, drinkables, or wearing apparel, are consumed by men who are at the same time employed in producing a value equal, or superior, to what they consume, it becomes a reproductive consumption. It is so much the more reproductive as the value of the products which these men have created during the consumption exceeds the value of those they have consumed.

Give me examples of reproductive consumption drawn from manufacturing industry?

Besides the maintenance of his workmen and agents, a manufacturer consumes the materials which he transforms. He consumes, also, although more slowly, the utensils he employs. Thus a soap-maker consumes, reproductively, oil, soda, wood, or coal, cauldrons, &c. and even the place and workshops in which he exercises his industry.

Give me examples of reproductive consumption in commercial industry?

A merchant consumes the value of the maintenance of his workmen, that is, of his carriers, lightermen, sailors, porters, and agents of every sort: he consumes also his instruments, which are carts, horses, ships, warehouses; and we may even consider as part of his consumption, the advances which be makes for the purchase of his merchandise. All these advances are restored to him by the value of the products which go out of his hands: that is, the merchandise in a state to be sold.

All these undertakers of industry reproduce with loss, or without either loss or gain, or with profit, according as they reproduce values, which are either inferior, equal, or superior to the values which they have consumed.

What is the effect of these facts, as it respects capital?

That which is called productive capital, or, simply, capital, consists of all those values, or, if you will, all those advances employed reproductively, and replaced in proportion as they are destroyed.

It is easy to see that this term capital has no relation to the nature or form of the values of which capital is composed (their nature and form vary perpetually); but refers to the use, to the reproductive consumption of these values: thus a bushel of corn forms no part of my capital if I employ it to make cakes to treat my friends, but it does form part of my capital if I use it in maintaining workmen who are employed on the production of that which will repay me its value. In the same manner a sum of money is no longer a part of my capital if I exchange it for products which I consume: but it does form part of my capital if I exchange it for a value which is to remain and augment in my hands.

How is capital amassed?

Capital is augmented by all that is withdrawn from unproductive consumption, and added to a consumption which is reproductive.

Capitals that are amassed are then consumed?

Without doubt.

Can capitals be amassed without being consumed?

Yes, capitals, that is, values may be amassed under one form as well as another, in gold, silver, or merchandise, and no part of it used for production. These are idle capitals, which may become productive hereafter, but which in the mean time do not yield any of those profits which we shall consider presently. Capital thus accumulated may be transferred from one to another by exchange or by succession, and may be lent in one form as well as in another, either in the form of merchandise or of money: but in whatever form it is transferred or lent, it consists in the value of the things transferred or lent, and not in the things themselves. Thus when Paul a clothier sells cloaths on credit to Silvan a woollen draper, he really lends to Silvan the value for which he gives him credit; although this value is not lent in money, but in merchandise, and although it is to be returned not in merchandise but in money.

Is land a capital?

Land is made use of in the way of capital. It is an instrument for which no other can be substituted, and by means of which we make materials for our use, and consequently give them a value. It may be transmitted or lent (by way of letting) as capital may: but it differs from capital as it is not a human production, but is furnished to us by nature, and is incapable of increase by accumulation like capital.

I comprehend that a capital, which is a mass of values accumulated by the care which has been taken to snatch them successively from improductive, and to devote them to reproductive consumption, belongs to him who has taken the pains and imposed on himself the privations of which it is the fruit: but why should land, which is given gratuitously by nature, be the property of any one?

It is not the object of political economy to inquire what may have been the origin of the right to property. It shews only that land, and consequently its products, is susceptible of appropriation, that is to say, of becoming the exclusive property of such or such; and that this appropriation is highly favourable to production: for if land and the products to be derived from it, did not belong exclusively to some one, no one would take the pains, nor make the advances necessary, to obtain these products; much less to cultivate and enrich the soil. For the same reason it is useful that capital and its products should be an exclusive property; it is the only means of inducing its accumulation and its productive employment.

You have said that land differs from capital, inasmuch as it is not like the latter, capable of extension; but the clearing, the buildings and the enclosures by increasing the products, are equivalent to an actual extension.

The improvements which are values accumulated by industry on land are a capital, and the profits which result from the whole are the united profits of capital and land.

But how can we transfer or lend capital of this kind?

It can only be done by transferring or lending at the same time the land itself. It is for this reason that capital so employed is called an appropriated capital. There is in the same manner much capital locked up in many manufactories, in all the utensils and in the buildings which are generally much more valuable than the land on which they stand. Thus when we have exchanged a moveable capital for a mill, a forge or a house to live in, we cannot put ourselves again into the possession of that portion of our capital, without selling at the same time the land as well as the buildings upon it.

The other capital is called circulating capital. There is no other difference between them than that the materials of which these respective capitals are composed, are more conveniently and more easily exchanged, and in smaller portions in the one case than in the other.