The Online Library of Liberty

A project of Liberty Fund, Inc.

• Murray N. Rothbard, Preface
• Murray N. Rothbard, Introduction
• Part 1: The Theory of Capital
• Review of F. W. Taussig, Wages and Capital: an Examination of the Wages Fund Doctrine (1897)
• Recent Discussion of the Capital Concept (1900)
• The Next Decade of Economic Theory (1901)
• Review of Böhm-bawerk, Capital Und Capitalzins (1901)
• Review of Böhm-bawerk, Einige Strittige Fragen Der Capitalstheorie (1902)
• Review of Böhm-bawerk, Positive Theorie Des Capitals (1902)
• The Nature of Capital and Income (1907)
• Are Savings Income? —discussion (1908)
• Clark's Reformulation of the Capital Concept (1927)
• Capital (1930-35)
• Reformulation of the Concepts of Capital and Income In Economics and Accounting (1937)
• Part 2:: The Theory of Interest
• The “roundabout Process” In the Interest Theory (1902)
• The Relations Between Rent and Interest (1904)
• Review of Gustav Cassel, the Nature and Necessity of Interest, and Eugen Von Böhm-bawerk,recent Literature On Interest (1905)
• Interest Theories, Old and New (1914)
• Capitalization Versus Productivity: Rejoinder (1914)
• Interest Theory and Price Movements (1927)
• Part 3:: The Theory of Rent
• The Passing of the Old Rent Concept (1901)
• Landed Property As an Economic Concept and As a Field For Research— Discussion (1917)
• Comment On Rent Under Increasing Returns (1930)
• Rent (1930-35)

Part 1

The Theory of Capital

Review of F. W. Taussig, Wages and Capital: An Examination of the Wages Fund Doctrine

This book consists of two main parts—a historical resume of the wages-fund controversy, and a presentation of the author's own conclusions on the subject. The historical portion is by no means unimportant: in fact, it cannot fail to receive commendation from all quarters for impartiality of treatment, acuteness of criticism, fullness of knowledge and clearness of style. This review, however, must be confined to the author's “positive theory” as contained in the first 125 pages of the volume.

Among the limitations which Professor Taussig places on the problem he is investigating is one that deserves a special word of comment. He limits the problem to the determination of “the total that goes to laborers as a whole.” “It is only with the total,” he says, “that the wages fund, or the discussion of wages and capital, has to do” (p. 109). “The causes which determine the share which a particular set of laborers shall have are different,” and present a different set of questions. This distinction, to be sure, is made with practical unanimity by the adherents of the wages-fund doctrine in any of its forms: it may almost be considered their shibboleth. The author accepts it without question. May we venture to suggest that it is the fundamental source of what seems to be the error in the view he presents? “Total wages”
is an abstraction—and, moreover, a useless and misleading abstraction. To suppose that one set of forces determines the total going to laborers and that another set of forces then distributes this among the different classes and individuals, is to reverse the true order of fact and of thought. Total wages are merely the arithmetical sum of individual wages. The latter are in a sense the dynamic element; the total is a passive result. To view the matter otherwise is to go astray at the earliest stage, and to set one's self seeking for a shadowy and uncertain explanation of a vague and shadowy thing.

Professor Taussig's first chapter, entitled “Present Work and Present Wages,” is devoted to a very lucid description of the leading features of the modern industrial process. In the case of the great multitude of products, as he shows, a long series of acts extending over a considerable period is necessary before the finishing touches are put upon them. The conclusion is clearly drawn that “present labor produces chiefly unfinished things, but the reward of present labor is finished things.” In the sense that “the current yield of industry” (p. 22) is always having put to it the finishing touches, wages may, indeed, be said to be paid from current product; but in a truer sense “real wages are virtually to their full extent the product of past labor” (p. 17).

The main conclusion of chapter two, entitled “Capital and Wages,” is as follows: Taking wages to “mean all the income of all laborers” (p. 43), and capital to mean “that supply of inchoate goods, in all stages toward completion, from which the steady flow of real income is derived” (p. 44), “we may lay it down broadly,” says Professor Taussig, “that wages are derived from capital” (p. 43). This proposition “has nothing to do with money or money wages” (p. 45). “The relation of wages to capital,” here expressed, “would be the same under any social organization” (p. 45). Real capital, under any rational conception, consists of “things tangible and usable”; real wages, of “the enjoyable commodities which the laborer gets” (p. 46).

The author perceives, however, that this proposition is entirely too general to be used to support a doctrine of a wages fund. He admits that

this reasoning, while directed to wages, applies equally to every other form of income....[What] is true of wages is true of interest and rent and business profits. All are derived from capital in the same sense.... If any law of wages has been reached...it is but a statement of the fact that all the enjoyment of to-day comes from commodities which are the product of past labor [p. 48].

The result thus reached would appear very neatly and conclusively to dispose of the concept and phrase “wages fund,” except as a literary curio. In the same sense and with equal scientific significance can it be said that there is a profit fund, an interest fund, a rent fund—a possibility which earlier in the book (p. 16) does not escape the author's notice. Yet he would not have the reader draw a conclusion which his own conservatism hesitates to accept. The reader's judgment is therefore suspended by various expressions: “if any law of wages has been reached” (p. 48); “and yet there is something more to be said of wages and capital than this general proposition;” “the unmistakable differences in the mode in which the various members of the social body get their share of the general income bring some important consequences, both as to distribution at large and as to wages and the wages fund.” These expressions indicate that the author intends to retain the expression “wages fund,” and to show that there are good reasons for looking upon such a fund as differing in some points worth the noting from the part of the social income going for rent, for profits and for interest.

In carrying out this purpose the author may fairly be expected to conform to certain minimum requirements. First, we are justified in expecting that real wages, and not mere money wages, shall be the subject of his discussion. Professor Taussig keenly appreciates the proneness of other writers to err at this point. “The obvious distinction between real wages and money wages,” says he, “makes its appearance in every book on the elements of economics, but it is too often forgotten when the causes determining wages come to be examined” (p. 15). As he elsewhere expresses it (p. 231), this is a convenient short cut which breeds confusion in the mind of the reader while veiling the real question. (See also pp. 17, 19, 45, 46, 47, 231, 245, 247, 297 et passim.)

Secondly, we may expect that he will avoid the error, to which he so frequently refers, of considering that the “capital”—the “fund,” whatever it be called, that constitutes real wages—is “necessarily owned by the individual who pays wages.” “Such reasoning,” as he says, “does not touch real capital or real wages” (p. 46).

The capitalists who directly employ laborers have usually no ownership of the commodities which make real wages. If these real wages come from capital, the capital is certainly not in the hands of the employers [p. 20. See also p. 258 among others].

Thirdly, we may justly require of the author a comprehensible explanation of the way in which the “wages fund” is marked off from, or carved out of, the total income of the community; and we may expect that in some important respects this shall be shown to differ from the process which apportions the shares of the other factors in distribution. This “total income,” elucidated by the author in the first two chapters, is essentially the “subsistence fund” of Böhm-Bawerk. Yet the author says: “There is an obvious difficulty in the fact that the general subsistence contains the income not only of laborers, but of the whole community” (p. 316). Indeed, he thinks the Austrian writer has gone “but a very little way toward explaining just how the total subsistence fund and its ripening installments are diverted to one and another class in the community” (p. 317). When Professor Taussig further adds that “an investigation of the machinery of distribution...is the essential part of the wages-fund problem” (p. 317), he seems to imply a promise to make an examination of these “essential” questions before quitting the subject. Moreover, the promise is made distinctly (p. 16) where the author says that the question “whether there can be any possibility of separation of this net income into parts destined for any one set of persons, or appropriated to them,” will engage his attention “at a later stage.”

Every one of these minimum requirements the author fails to meet. First, instead of striking straight at the fundamentals and refusing to consider the mere “machinery by which laborers are enabled to get their real wages” (p. 15), he makes this machinery, that is, money wages, a central object of his attention. Having devoted some discussion to “real income and real wages,” he begins a fresh chapter with the announcement: “In the present chapter money and money income play a vital part” (p. 51). The suddenness of this change of face comes as a surprise and a disappointment to the reader. Moreover, throughout the chapter the discussion blooms with that perennial error, emphasis of the superficial monetary aspects of the problem. Money income and money payments, flowing first into the hands of the immediate employers, absorb all the author's attention. Further, repeated use is made of “funds” in the sense of money funds in the hands of the employers. Among numerous instances one of the most noteworthy is the following:

The hired laborer gets his wages from capital in a sense in which the independent workman does not. His money income...is turned over to him by capitalists. It comes from funds in the possession of a body of which his immediate employer is a member.... In this sense his earnings depend on a wages fund—on the sums which the employers judge it expedient to turn to the hire of labor [p. 75]....[With the same connotation he says:] In an important sense hired laborers are primarily dependent for their wages on the funds which the whole body of active capitalists can and will turn over to them [p. 78].

It is unnecessary and, indeed, impossible here to follow out all the details of the reasoning on these points. The author himself in his criticism of others has most satisfactorily shown that such a treatment but skims over the surface of the question. It ends in what seems little more than a mere verbal quibble.

The second requirement is met no more satisfactorily. The capital or funds that are discussed are throughout looked upon as in the hands of the employing class, except where the conception is widened to included the great body of money-lenders “whose business it is to make advances to the more immediate directors of business affairs” (p. 63). Throughout the chapter the concept of capital, or funds, fails to include all the sources of the real income that the laborers enjoy—for example, stores of goods in the hands of independent producers, and even a portion of labor itself, so far as personal services make up that real income. There is no hint that such elements may play a part in determining the remuneration of labor.

Nor is the third requirement fulfilled in the author's discussion. He practically brushes aside, when he reaches it, the problem of the fixing of the shares in distribution. Nowhere does he show that there is anything peculiar about the part going to labor that can entitle it, in distinction from the other parts, to be called a fund. He summarizes his own results in these words:

In fact the wages-fund doctrine, or what there is of truth in it,...can tell us little...as to the fundamental causes which...determine the share of that real income which in the long run shall go to wages or interest or rent (p. 322).

Moreover, Professor Taussig does not show what the fundamental causes are which determine the different shares at any given time. Once he confesses that his examination of “the immediate source of the money wages of hired laborers is at best incomplete; the inquiry as to the source of real wages remains the important one in the background” (p. 64). But with the remark that “the questions as to the machinery of immediate money wages are important enough” (p. 65), he returns to their consideration. The reader looks in vain for any further light upon this question in the remaining chapters.

The “main conclusions” reached by the author appear to be that there is more than one tenable sense in which a wages fund may be spoken of—that, indeed, there are two wages-fund doctrines. Neither is quite like the doctrine as held by the older economists. The one is broader than theirs—so broad, in fact, that it seems to the reviewer nothing more than a statement that what the laborers enjoy is a part of the total income of society. In this it is hard to recognize more than a bald truism. The second doctrine which the author presents is the one wherein the superficial monetary aspects alone are kept in view. This is impressed upon the reader with much emphasis; yet, as my italics show, the author's faith fails him when he comes to state it for the last time:

Hired laborers are dependent on a wages fund (if one chooses so to call it), which is in the hands of the capitalist class. Their money income is derived from what the capitalists find it profitable to turn over to them [p. 321].

No further citation is needed to indicate that the author has, without intending it, given the coup de grâce to what was left of the old wages-fund doctrine. He intends to be conservative, and he shrinks from the logical conclusions of his own reasoning; yet no one, so effectively as he, has shown that the wages-fund doctrine, in any tenable form, is nominis magni umbra.

Recent Discussion of the Capital Concept

To most readers the reopening of the question as to the concept of capital will seem to call for an apology. If after so much discussion the fundamental definitions have not been generally agreed upon, some will say that further argument on terms and concepts is a waste of time. While practical questions of great importance await profounder study, impatience of metaphysical quibbling is pardonable; but in recent years many students have felt that there was need of earnest effort to make clearer and more consistent the fundamental concepts. These are the tools which aid men to think on economic subjects. A flaw in these concepts, an unsuspected ambiguity in a word or phrase, not only mars the conclusions of the student, but affects the popular judgment on the most practical questions. The circumstances and special problems of former generations have caused the grouping of unharmonized ideas under one term; and it is the business of the economist to measure, mark, and correct the concepts, to make the parts consistent with each other and the whole fitted to the needs of social discussion. The writer believes that there is no economic term to which this statement applies more fully than to capital, and this belief is the apology for the present paper. The concept of capital holds a central place in every economic system, and on its treatment have always depended the leading categories in the theory of economics. All agree, whatever definition may be held, that this is increasingly “a capitalistic age.” The place, therefore, of the concept in all practical problems is growing more and more dominant; and a better definition of it is the most urgent need of the abstracter branch of economic science.

1.

BÖHM-BAWERK

A point of departure admirably fitted for our purpose is found in the Positive Theory of Capital of Böhm-Bawerk, which was given to the English reading public in 1891, and at once gained a large following. There are several advantages in beginning here. As the author's purpose was to present not only a theory of interest, but, as the title indicates, a Positive Theory “of Capital,” we get the most typical cross-section of the study. We start with the known; and we direct our criticisms not against abandoned errors, but against views widely accepted.

Böhm-Bawerk undertook in his two large volumes to deal thoroughly with the theories of interest, and, to do so, was led to deal with the concepts of capital; for, thought he, it is capital for which interest is paid. However much he disputed the relation of production and interest, he had no doubt, in undertaking his study,1 as to the relation of capital and interest. Interest is the yield of capital in the broader sense, and capital the source of interest. They are correlative terms. To clear the field for his own concept of capital, Böhm-Bawerk, therefore, passes in review the various conceptions of capital that have been employed. He begins by following the historical order,2 and later groups the concepts in logical order.3 In the chapter on historical development he begins with a mention of the mediaeval view of capital as “an interest-bearing sum of money,” gives a few words to Turgot's “saved goods” (a very inadequate, not to say mistaken, interpretation of Turgot's view), and passes on to Adam Smith's division of these into consumption goods and capital that brings an income. In Smith's treatment the author thinks he finds the germ of the productivity theory of interest, which he considers false. Smith, in giving two varieties of the concept,—capital as a means of acquisition to the individual, and capital as a means of social production,—has in reality given, says Böhm-Bawerk, “two entirely independent conceptions, resting substantially on quite different foundations, and only connected externally by a very loose bond.”4 After devoting several pages to discussing this difficulty, the author abandons the historical order, and enumerates eight other variations of the concept: Hermann's “every durable foundation of a utility which has exchange value”; Menger's “groups of economic goods of higher rank [productive goods] now available to us for future periods,” Kleinwächter's “tools of production”; Jevons's “sustenance of the laborer”; Marx's “instruments for the exploitation of the laborer”; Knies's goods available to satisfy wants in the future; Walras's goods which can be used more than once; MacLeod's “value of the productive power contained in material goods.”5 These are discussed more at length in Chapter V., the most important contentions being that the distinction between consumption goods and what he calls “the true instrument of production” is essential; that labor must not be confused with capital; that land must for many important reasons also be kept distinct; and that capital should be looked upon not as a “sum of value” hovering over goods, but as the “complex of goods” itself.6

Among these many variations the author gives his approval to that of Adam Smith, giving it “a more distinct formulation,”7 however, and distinguishing between the wider and narrower conceptions, acquisitive (private) and productive (social) capital.

Of the former he says: “Capital in general we shall call a group of Products which serve as means to the Acquisition of Goods. Under this general conception we shall put that of Social Capital as narrower conception.”8 The problem of interest, he thinks, is connected with private or acquisitive capital, not necessarily with social or productive capital.

We may represent in the above diagram the results of the author's long inquiry. The large circle represents the entire material wealth of society. The outer band marked L is land, or all natural agents. The entire circle P contained within that band consists of “products.” The next band, C G, is consumption goods. The concentric circle S C, within, is social capital, and the oval C is “capital in general,” or private capital, embracing all social capital and, in addition, such consumption goods as are let for hire. Representing this in another way, we have the following classification:—

What judgment now is to be passed on this reading of the capital concept? We must be struck by the fact that in the matter of simplicity the results of the author's study are not ideal. But he asserts with a tone of triumph that the “conception meets all our logical and terminological requirements. Logically, it is unassailable.”9 He concludes with this hopeful prophecy: “If, then, unbiased people are ever to agree on the conception of capital, we may expect that this will be the one chosen.”10 His strongest ground for such a hope was the fact that he had made a place under the name “capital” for the two most generally employed concepts, and that the concept of social capital is the one widely held,—“products used for further production.” He did not claim much originality for this part of his work. He says: “The heavy part of the Positive Theory of Capital lies in the theory of interest. In the other portions of the subject [he seems to mean the concept of capital] I was able, at least on the whole, to follow in the footsteps of previous theorists.”11

The immediate reception of this portion of the author's work largely justified his hopes. His careful restatement of the concept and the authority of his name undoubtedly added to the prestige it already enjoyed. The more usual point of attack on the author has been his interest theory, not his capital concept, which has been far less questioned,12 in fact, has usually been accepted as flawless. Some protests, however, have already been raised against it; and, although it is still the dominant concept, discontent with this and other features of the older economic thought has been spreading. The earnest teacher, using the available text-books, and attempting to correct their treatment in accord with recent criticisms, is in despair. To one who has watched the course of the discussion it might seem that the service of Böhm-Bawerk's work, so far as it touches the capital concept, lay not in settling, but in reopening the whole question. Remembering, however, that most students still accept Böhm-Bawerk's statement of the concept, we turn to a group of thinkers who would give other readings to it; and we shall confine our study to the leading representatives of two differing views on the question.

2.

J. B. CLARK

This part of the Austrian writer's work, especially, was attacked by Professor John B. Clark,13 who defends the productivity theory of interest, though that point we need not raise in this paper. His own views had been published14 at the same time as the German edition of the Positive Theory of Capital; but more attention was attracted to them, it is probable, as a result of this controversy than at their first publication. I shall not enter into the merits of the discussion as a whole. It was carried on with great skill, with some later confessed misunderstandings, and at times, perhaps, with an over-subtlety which makes it exceedingly difficult to follow. I shall simply try to state the issue involved as to the capital concept.

In every-day speech and in the writings of economists there have been, since before the time of Adam Smith, two broadly marked ways of thinking of capital: one views it as concrete goods, such as tools and machines; the other, as the money expression, or market value, of the goods. It is probable that no writer has long kept from the use of the term in both these ways, no matter what his formal definition. Frequently both uses will be found on the same page. A few writers only have chosen to frame their capital concept in accord with the second of these ways of thinking.15 Böhm-Bawerk has taken the former way, defining capital as the concrete goods; and in the interest problem he insists on the need of comparing goods of like kind and quantity. Clark declares this to be an error, and defines capital in harmony with the second way of thinking of it. He says, “There is in existence a permanent fund of productive wealth, expressible in money, but not embodied in money; and it is this that business men designate by the term capital.”16 The concrete things which make up this fund he calls “capital goods.” In contrast with this list of goods he often speaks of his kind of capital as “true capital,” or “pure capital,” which, as he says elsewhere, “resides in many unlike things, but consists of a single entity that is common to them all. That entity is ‘effective social utility.’”17 Again, he says: “Capital goods are...vanishing elements. True capital...is abiding.”18 Elsewhere he clothes his definition, which he calls “the common and practical sense of the term,” in these words: “Capital is an abiding fund of wealth employed in production.”19

Needless to say, Böhm-Bawerk defends himself vigorously against the charge of “side-tracking” the theory of capital in defining the concept as he had done. The controversy turned about the phrase “goods of like kind and quantity,” and the question as to the real nature of the comparison of present and future goods. Clark holds that it is two sums of “quite different goods” that are compared. Böhm-Bawerk saves his phrase by the expedient of making the “goods of like kind and quantity” mean “dollars,” “exactly as does Professor Clark.”20 This is not a novelty with him; for, as he points out,21 he had “in many, and in some of the most important, passages of the Positive Theory of Capital...used money as an illustration of the proposition that present are worth more than future goods.” Without quite indorsing Clark's comment on this point, we may agree with him that this appears to surrender the entire question concerning the formula “of like kind and quantity.”22 What meaning is in the phrase “the technical superiority of present goods over future goods,” when those goods are made to mean dollars? What becomes of the elaborate analysis of the roundabout method of production?23 Certainly, it means something very different, when the present goods employed are taken merely as circulating medium which is not in the normal case retained by the individual producers nor used up by society. The truth is, Böhm-Bawerk had fallen into the common error of using two different conceptions of capital, and at the first attack was found in an untenable position. This phase of the controversy seems to end by showing that the conception of capital made use of by Böhm-Bawerk himself, when he discusses business problems, takes the money expression, and differs in important ways from that of concrete goods expressed in his elaborately framed definition. A word as to the relation of these two views. It is to be noted that both parties agree that economists must study wealth under both these aspects. Böhm-Bawerk admits that he does so. The point against him is that, while framing his concept and basing his argument as to interest on the first, he introduces the second view, in some ways inconsistent, without recognizing the shift of concept. And Clark says that “the issue is not whether concrete capital goods are or are not to be studied at all. For certain purposes they have to be studied.”24 But he would confine the term “capital” to the sum of wealth or “permanent fund” constituted of the perishable goods.

The conception championed by Clark is of great significance; and, before going further, it is important to consider some peculiarities and difficulties in Clark's way of setting it forth.

(1) The discussion is confined by Clark at the outset to social capital.25 He uses this term in a wider sense than Böhm-Bawerk does (as is explained in the next paragraph), but not differently as to the exclusion of consumption goods. Social capital is that kind which Böhm-Bawerk himself considers to be productive. Clark gains thus a distinct tactical advantage over his opponent in upholding the productivity theory of interest, though that is not of immediate importance to us here. The fact, however, that Böhm-Bawerk does not note this limitation, but fights the issue on the ground chosen by his adversary, shows that he himself is caught in the confusion of the two concepts, and is the strongest evidence of the inexpediency of the division of capital into social and private.26 On the other hand, the fact is of immediate interest to us that Clark gives this narrower content to the term “capital,” confining capital to “material forms of wealth that do not directly minister to consumers’ wants,”27 and does not make a place for acquisitive consumption goods, nor explain the interest from them, as is done by Böhm-Bawerk in his concept of private capital. In this respect the concept evidently needs addition or correction.

(2) In the second place, Clark's explanation of the genesis of capital is inconsistent with his own concept. Land used productively—for example, a farm, a waterfall, a mine, any rare and useful natural agent—is capital according to his definition. In his earlier utterances, such things are in plain words included.28 In the later articles this is still the inevitable implication of the definition,—“a fund of productive wealth expressible in money”; but a reader new to the author's doctrine would find no specific statement to this effect, and there would be small chance that the meaning in question would be gathered. The whole logic of the argument is against it. “The genesis of capital,” we are told, “takes place by a process for which the good old term ‘abstinence’ is, as I venture to maintain, the best designation.”29 This does not seem to give a place in capital to natural agents. There are, we are told, two classes of accumulators: the typical capitalists, who save to make permanent additions to their capital; and the quasi-capitalists, who “save sums now, intending to spend them later.”30 There is no place here for the unearned increment of a newly discovered mine, which to-day forms for many men the chief productive wealth expressible in money. if this is saving, it is a sense so unusual as to require a special explanation by the author; and it is difficult to see how it can consistently be given. There certainly would be no attempt to evade the real question by assuming that the dollars that bought the mine had been saved; for the mine may not have been sold, and, if so, it is irrelevant to the issue. If the definition adopted by Clark is consistently applied, there are necessarily many things forming a part of capital which never have been saved, and which never have called for abstinence, as Clark employs that term.31 In fact, Clark seems to show here, as did Böhm-Bawerk, some traces of the error of the labor theory of value, so difficult to throw off.32

(3) Again, Clark would seem to err by extreme statement in making it in the nature of capital to be a “permanent fund.” “In creating capital, we put the personal good away from us forever.... An addition to the social fund of perpetual capital is brought into existence.” “Nothing generates capital that does not add to the permanent fund of invested wealth.”33 “True capital...is, in the absence of untoward accidents, perpetual, and yields perpetual fruits.”34 Many other expressions emphasize the same thought. Now this evidently does not apply at all to the author's quasi-capitalist, who saves to spend later. That, of course, is why he uses the term “quasi,” which evades the issue. Either such savings are capital (in which case why quasi?) or they are not capital, and may be omitted from the concept. The author, after stating that a part of the accumulation of capital is due to these quasi-capitalists, proceeds as if there were none such. If better or more tools and larger stocks were accumulated, and were then allowed to deteriorate while in use without being replaced, our author must certainly call them capital while they lasted; and, if so, the element of permanency is no essential part of the capital concept. Indeed, if a fund of productive wealth must be permanent to be capital, we cannot be sure that there is any such a thing; for we have not the gift of prophecy, and all human interests are fleeting.35 Clark himself says, “Capital...normally will never perish”; but “this is not saying that no capital ever perishes in fact.”36 This says clearly enough that permanency is not an essential mark of the concept, and makes meaningless both the word itself in that connection and a number of sentences, besides those quoted, in which this feature is emphasized as a vital mark of the concept. There is a valid thought in his contention, but it is not that capital is in its nature perpetual. There is ambiguity in the phrases “increase of capital” and “decrease of capital,” because they may mean either some of the parts or the whole. A part of capital may perish while the total amount of capital is preserved or even increased. Clark would confine the expression to the while of capital, and objects to the form of statement “capital is destroyed” when the value of the concrete goods is passed on to other goods. But what of the cases where the total value is not preserved? The zeal of his attack carries him to an extreme and untenable expression, and makes him insist upon an unessential.37

(4) Less successful than his contention against Böhm-Bawerk about “goods of like kind and quantity” is Clark's claim that capital “synchronizes all industry and its fruition,” that because of capital “industry and its fruition are simultaneous.” There are several objections to such an expression.

(a) I am not quite in sympathy with the point of view of either of the parties to the discussion, but between them it is a question not as to what happens,—not of fact,—but of expression; and Böhm-Bawerk's opinion commends itself when he says38 it is a “figure of speech” that is “misleading” to say that the real wages, consisting of “consumption goods” received to-day for work done on goods not be completed for years, are the “true and immediate fruit” of, e.g., the tanner's labor.39 To the tanner, of course, they are the “immediate” and only fruits, since they are all he gets for his labor. The question is, does it seem logical and expedient from the general standpoint in economic discussion to consider and speak of them as the “true fruits” of that day's labor? The expression chosen appears to say merely that these things express the present market value of the laborer's services; that is, it is a roundabout and somewhat whimisical way of stating the truism that they are the man's wages.

(b) Further, it may be urged that the inaptness of this expression is more apparent when something other than subsistence goods is considered. In the example chosen of the tanner, it is at least debatable whether it is best to call the shoes he gets to-day the “true fruit” of his labor. But in the case of the laborer receiving food and clothing for digging a canal or working on a marble palace, it is straining the point further to use the expression. If here, too, his wages are called the “true fruit” of his labor, it still appears that the peculiar power ascribed to capital is due only to one part of capital, the finished consumption goods. No matter how large a stock of capital in the form of machines, buildings, and raw materials may be on hand, if there be no stock of finished goods, labor and its results are not synchronized.40

(c) A further objection to this way of conceiving of the nature of capital's work is that it would, if true, be applicable only to “produced” forms of capital. As indicated by the phrases “industry and its fruition,” “labor and its fruits,” it implies vaguely the labor theory of value as to the origin of capital. The picture of labor continuously flowing into the reservoir of capital and consumption goods at the same time flowing out41 is not satisfactory as applied to products; for it implies that the inflow of a quantity of labor forces out consumption goods whose quantity is determined or measured by the quantity of inflowing labor. The value of consumption goods flowing out, however, is greater in varying degrees than the value of labor flowing in; and it is only through their values that we can compare at all the quantities of the two streams. Further, it is not a happy figure; for it suggests that all the goods that are a part of capital will eventually become consumption goods, whereas in many cases this is not expected nor desired. It is significant that Clark in describing the process speaks only of “the materials, raw and partly wrought,” of which an article for consumption is made. He ignores machines and durable goods. It is only in the gradual passing on of their value, as they are used up, to the things that are made by them, that machines and more durable agents can be said to ripen at all.”42 Even Clark's value conception of capital, however, though it explains this point better than does the concrete concept of capital, does not avoid the difficulty. The point may be most clearly seen in the case of natural agents, which, as we have noted, are in Clark's treatment included in the “fund” of capital. If we consider not merely capital in the form of products more or less fitted for consumption, but, as his concept requires, durable natural agents also, the phrases we are criticizing appear hardly short of absurd. Clark forgets this kind when he says: “The capital goods that are set working are not permanent. They pass away, and are replaced.”43 Natural agents, the field, the waterfall, insofar as they are thought of apart from betterments upon them, have not been originated by labor; and they are not in a state of transformation that will eventually ripen them into consumption goods. They stand there to be used by man, if he wishes, as an aid in securing future harvests or products; but neither the things themselves nor their value or money expression is “synchronizing” labor and its fruits. If there is any synchronizing, it is done not by this, but by some other part of capital, and is, therefore, not an essential mark of the capital concept.

(5) It is likely that to some points in what has been thus far said the answer will be made that they are due to misunderstanding of the author's meaning. No doubt the author attaches great weight to the constrast he draws between true capital and capital goods, which it might seem I had neglected. The reply is a criticism stronger, perhaps, than any of the foregoing against Clark's capital concept. There is in his mode of thinking of this contrast an over-abstraction that is neither expedient nor logical; and there results in his presentation some inconsistency of thought and statement. In some passages, capital is said to be as concrete a thing as can be. It “consists in goods. It is not an abstraction, and it is not a force independently of matter. It has substance. If at any instant we could collect in one place all the material forms of wealth that do not directly minister to consumers’ wants, we should have the fund for the moment before our eyes in substantial embodiment.”44 Capital is thus “productive wealth, expressible in money, but not embodied in money.”45 That is plain enough, and we are still on solid ground: we are not puzzled here by the “entity, effective social utility,” of the earlier statement,46 where capital does not consist of the concrete things, but is the “fund that resides in many unlike things,” and is “embodied in instruments of production.” This has the unpleasant flavor of Marx's labor jelly, though it need not be taken as more than a loose, convenient way of expressing the market value of the concrete things. But the development that follows of the paradoxical contrasts between capital goods and true capital appears to be mischievous subtlety. The very adjectives “true” and “pure” applied to capital are suspicious. Why not plain “capital”? We are told that “the genesis of capital goods is unlike that of capital.”47 It would seem that, if capital consists of concrete goods, then making concrete goods is making capital. But the author says not, unless those goods are net additions to the stock; that is, more than replace the capital destroyed in the same time. “Build an altogether new engine. That is creating capital. Renewing an old one is only preserving capital.”48 The simple mode of expression that some capital has been created, while an equal amount has been destroyed, is thus not to be permitted. Surely, since capital has substance and consists in goods, there is only one way in which its amount can be preserved while some of it is being destroyed; and that is, by “creating” more capital to replace that destroyed. And what would be the circle within which the balance must be struck? Would it be the individual, the national, or the world economy? If John builds a machine while his neighbor lets one decay, then has John created no capital? It is true that care is often needed, in speaking of any increase, to indicate whether it is a net increase or not, but no more needed in the case of a “fund of capital” than in that of a herd of cattle. The striking antithesis of the goods that make up capital with the capital itself appears thus to be over-abstraction and unreality.

To sum up the objections to Clark's conception of capital:49

(1) It includes only goods used in “production,” and does not recognize nor prepare to explain the interest-bearing qualities of consumption goods.

(2) It is confused in attributing the genesis of capital to abstinence (as he uses that word) while including in capital natural agents for whose origin no abstinence was required.

(3) It errs in making permanency, or perpetuity, an essential mark of capital.

(4) The statement that an important, if not the chief, function of capital is to “synchronize industry and its fruition” is a misleading figure of speech. It can be affirmed, even figuratively, only of the part of produced goods that is to be at once consumed, and is quite meaningless as applied to the durable natural agents which are a part of his capital concept.

(5) The conception, starting from concrete goods, is developed away from them into a more abstract, dematerialized “pure” or “true” capital, which is put into contrast with real things.

3.

Irving Fisher.

We now turn to the notable contribution of Professor Irving Fisher.50 He lays a basis for his own treatment with sound statements as to the requisites of a good definition, and careful studies of the definitions and usage of the leading authorities. He believes that a mistake has been made as to the real character of the problem, that it is not one of the classification of wealth, and that unavoidable difficulties “attend every effort to delimit capital from ‘other wealth.’”51 His own conclusion, then, is that capital should be taken to mean simply all wealth at a point of time.52 It is contrasted not with other wealth,—for that category is exhausted,—but with the same wealth as a flow during a given period, and at a rate. The contrast, then, is between a stock and a flow, and still more important “between stock and rate of flow.”53 This conception is ingeniously developed, use being made of mathematical terminology, and is applied in criticism of rival definitions. Finally, the attempt is made to show how it could be employed in the discussion of various economic questions.

To grasp more fully the import of this radical proposal in economic terminology, let us note in what regards it differs from the conceptions we have been considering.

(1) Its content is wider than that of any foregoing concept. Böhm-Bawerk excludes all natural agents and most consumption goods from his wider concept, private capital, and excludes the other consumption goods used in acquisition from the narrower concept of social capital. Clark appears at first to include all natural agents, though excluding all consumption goods, then treats capital as if it originated only in labor, and did not include natural agents, and finally mystifies us by his contrast of capital goods and pure capital, leaving us in doubt whether he would include any concrete things as such. Fisher's concept takes them all in, sweeps down the wall between the old concept of capital and consumption goods on the one hand and natural agents on the other. To my mind this suggestion is the most fertile part of Fisher's discussion.

(2) It agrees with Böhm-Bawerk's and differs from Clark's conception in considering that the concrete things should be estimated by physical measurements, and not in their money expression. The objection to Clark's view in this regard, he says, “is not that this summation of value is inadmissible, but that it is a secondary operation. Objects of capital are antecedent to the value of those objects.... Wheat must be measured in bushels before it is measured in dollars.”54 He, therefore, finds it a “serious objection to Clark's definition” that he endeavors “to include different sorts of capital in the same fund, reduced to a common equivalent in terms of value.” Here, in my opinion, is a radical defect in Fisher's view. (a) It is true that wheat must “be measured in bushels before it can be measured in dollars,” but it must also be tested for quality. One will not value as highly a small apple as a large one, a sour as a sweet one, a rotten as a sound one. We could thus say that apples must be measured in sweetness before being measured in value. But an inventory of all possible measurable qualities, while helpful in estimating, would not itself express the amount of capital, for the things might after all have no value at all. (b) Though an intelligible description of the quantity of any single kind of goods could be made in such terms, yet the total quantity of many different kinds of goods cannot be expressed for economic purposes in a single sum excepting in terms of value. A capital account in which five pounds of feathers were added to a bushel of wheat and a yard of cloth would give a curious total. (c) Fisher is inevitably betrayed into inconsistency when he comes to estimate the quantities of wealth, and express in percentages the relation between the stock and rate of flow; for this can be done only by comparison of values.55

(3) This conception shares what I believe to be an error, common with it to both of the others,56 in that it makes the income of a community consist of “streams...of the very same commodities”57 that compose the total capital. This, again, implies that all things of value originate in labor, and are on their way towards the goal of consumption goods: whereas many things, standing where they are, may be made to push other things towards that goal, though never getting nearer to it themselves; e.g., machines and natural agents. Fisher means by income a “flow of things” (material things), and rejects Mr. Edwin Cannan's conception “of income as a flow of pleasure,” or satisfactions.58 The book-keeping of society will be thrown badly out of balance if services be not counted as a part of income; but, even if services be included as a part both of income and of capital at a point of time, there are still many things, as above indicated, that are a part of Fisher's capital only, and never are a part of the flow of income. They never have been made for consumption, and never will be fitted for consumption.

(4) A final objection is that the term “capital” is made synonymous with wealth, and two good words are employed in the same sense. Fisher anticipates this objection, and recognizing its validity, if the fact be true, defends by saying that wealth presents the two aspects of income and stock (capital),—differences important enough to merit separate terms. This defence fails, if the point made in the preceding paragraph is sound. By wealth, Fisher must mean here “all wealth.” As I have shown, all capital must be considered wealth, and all wealth capital by Fisher's definition, though all wealth has not been nor will all wealth become income. Wealth and capital thus are synonymous, while income differs from them not merely as an aspect, but in the group of goods which composes it.

The concept under discussion is credited in part to Professor Simon Newcomb, is indorsed in the main by Mr. Edwin Cannan, and has received the approval of Professor Hadley in his Economics. Its merits and the ability of its presentation by Fisher have surely attracted other followers to one or another feature of it. It has therefore a worthy standing among the competing conceptions. Some portions of the presentation are most illuminating, and must be looked upon as distinct contributions to economic theory. Careful distinction between a stock of capital regularly employed, the turn-over in a business, and the income from a business have not always been made; and confusion has resulted. But this difficulty is not such as to call for the construction of the capital concept with that distinction as the central thought. On the whole, there is little probability that this conception will triumph, its defects both as to consistency and expediency being of an essential nature, its points of merit being capable of adaptation to another and better central thought.

We now have finished our review of the more notable recent conceptions, rivals to that put forward by Böhm-Bawerk. Though confined to a few names, it has necessarily taken a somewhat wide range in the points considered. It is hoped to use the fruits of this study in the next two divisions in which the analysis of Böhm-Bawerk's conception is resumed. I shall then go on to formulate more positively a capital concept which will be free, I trust, from the many objections that have been considered.

4.

PRIVATE AND SOCIAL CAPITAL: AN ILLOGICAL DISTINCTION

I have sought in the foregoing to give a clear statement to the capital concept of Böhm-Bawerk and its recent rivals, those of Professors Clark and Fisher, to show the main points of difference, and finally to criticize in some detail the conceptions of these later writers. We are now prepared to return to the criticism of Böhm-Bawerk's views which were the starting-point of our study, and, taking up more thoroughly than before some of the issues involved in his definition, to work towards a positive conclusion.

The distinction between private and social capital is considered by Böhm-Bawerk to be of the very greatest importance, and he deems his clear distinguishing of them to be one of his highest services to economic theory. The failure to distinguish them, he thinks, is the chief reason for the “false” productivity theory of interest. If the difference is not seen between capital, the source of interest, and capital, the tool in production, interest, he argues, is naturally thought to be due to productivity. But, if it is clearly seen that a part of interest-bearing capital is not a tool in production, then productivity cannot be the one essential explanation of interest. This point was evaded by Clark, as I have shown;59 for he simply considers social or productive capital, and omits mention of acquisitive consumption goods. It was not raised in his discussion with Clark by Böhm-Bawerk himself, for his attention was fixed on other points; but in his reply to Walker it is put very clearly. “There is interest without any production whatever....I refer, for example, to interest on consumption loans and to the return on durable consumption goods, such as rented houses, pianos, and the like.”60 Private capital is, by his view, social or productive capital plus some other things, enjoyable and more or less durable products let for hire to the user. Of what importance is this class of goods that makes all the difference between the two concepts? He has here mentioned rented houses and pianos: the stock illustration is the masquerade suit let by the costumer. A complete list of these articles would include a very small amount of wealth compared with that in social capital, and, doubtless, very much less than that in the rest of consumption goods. Yet it would be wrong to claim on this account that it is not worth while to make a difference in the concept. Logical differences of any importance call for distinctions in concepts, no matter how slight be the quantitative differences. I pass, therefore, to a criticism of the logical grounds for such a distinction.

(1) There is no need to make an independent conception on account of this group of income-bearing things, if an explanation can be given that will dispose of them in a simpler way. Here are two houses lived in by the owners in two neighboring towns. They are called consumption goods, bearing no income. Owner A moves into another house, paying $300 rent, letting his own for an equal sum. His house then becomes acquisitive capital. Owner B does the same, and his house becomes capital. Chance or choice leads each to occupy the other's house. Each, through a broker and without knowing who his tenant is, pays the other $300 yearly, and both houses are capital. Shortly, they move back into their own houses, which at once cease to be capital; and the “income” of each man is reduced $300.

The puzzle is an old one. It compels us to say that a thing becomes capital or ceases to be capital not because of any change in its physical or economic nature, not because it is more or less serviceable to the community, not because the use to which it is put is altered, but simply because the man who owns it does or does not happen to be the one who enjoys that use. Now Böhm-Bawerk himself, in his interest theory, has given us a hint of the way such an absurdity can be avoided without the use of a separate concept,61 though he does not see the application possible here. The person who rents a house buys the “material services” of the thing during a definite period. The whole value of the house is simply the sum of a long series of uses. To the logical eye, though not to the technical eye of the law, the tenant or user is the owner of the thing during the time, with only such conditions as will insure its safe keeping and return at the close of the period. It may be looked upon as a sale to the tenant of a use or a group of uses defined by a period of time, and with the agreement to return the use-bearer when a group that has not been purchased begins to mature. The value of the unpurchased uses does not appear in the transaction, but they are bound up with the use-bearer that is given and returned. The dancer is often compelled to deposit the price of the masquerade suit when he takes it out. After the ball is over, his subjective valuation having fallen, he is the gainer by returning it at an agreed price which to the costumer represents its worth as stock to him. The latter keeps such things in stock because there are, on an average, enough such sales to pay his trouble, expenses, and a return on that amount of stock. Such rented consumption goods, being owned for the time by the user, form, then, no exception to the general class of consumption goods The income of the dealer or the house owner is explained as a profit gained in exchange, like that of any other retail merchant, and includes a payment for services, risk, and income from stock employed. To explain such transactions as the sale of a group of uses (which is actually the temporary sale of the use-bearer) is entirely consistent with Böhm-Bawerk's treatment of interest, and makes needless the elaborate distinction between private and social capital.

(2) The foregoing would seem to be a valid reply, at all events as an argumentum ad hominem, to Böhm-Bawerk; but it may appear to some to be too elaborate and artificial. The distinction in question may then be attacked on the still stronger ground that it confuses things economic and legal. It is based on an unclear view of the relations of economic and contract interest. Let us look at this distinction. Contract interest is the interest actually paid by one person to another as the result of an agreement. Economic interest is the advantage attributable to the possession and use of a thing during a given period, regardless of its ownership. There is economic interest when a man uses his own plough to raise a crop or his own storeroom as a place of business.62 Now, in the case of all the things included under social (productive) capital, contract is based on and tends to conform to economic interest. In all such cases it is economic interest that we seek to explain logically through the economic nature of the goods. Contract interest is a secondary problem,—a business and legal problem,—as to who shall have the benefit of the income arising with the possession of the goods. It is closely connected with the question of ownership. Only by accident, mistaken judgment, or old agreements, can the contract interest connected with social capital continue when economic interest does not. The two are related as cause and effect. Yet in the case of the relatively small group of consumption goods let for hire there is in the current view here represented by Böhm-Bawerk only contract interest, there being supposed to be no economic interest on which it is based. The economist's problem in distribution is essentially an impersonal one, to determine the economic contribution regardless of the question of legal ownership. Here, if it be held that there is no economic interest or contribution, we have an anomalous case where the final answer to the interest problem must contain a mixture of economic and legal elements. No solution of this contradiction will, I believe, be found short of the view that contract and economic interest are normally inseparable. By “normally” I mean that no man contracts to pay interest, or, being free to choose, actually does pay it, unless he has reason to believe that he thereby will gain the benefit of what must be called economic interest of a somewhat greater amount.

(3) This brings us to another objection to the distinction between social and private capital; namely, that it involves a wrong conception of the nature of income. I shall maintain that income must be looked upon as a series or group of satisfactions, not as a series or group of material things. Though scattered authority may be found for this view, it is at variance with the views alike of Böhm-Bawerk, of Clark, and of Fisher, as well as those of the great majority of economists, and requires explanation and defense. The thesis is that the economic goods which are “produced” either by human effort or by the material services of goods must, in their last analysis, be looked upon as satisfactions. Böhm-Bawerk notices this view as expressed by Roscher, and rejects it;63 yet the view is one peculiarly in harmony with the psychological treatment of value which Böhm-Bawerk favors. Indeed, it seems to me the view to which that value theory logically and inevitably leads. Roscher fails to apply this thought consistently, as Böhm-Bawerk rightly shows;64 and with that we will not concern ourselves. The view suggested looks upon all material goods as means of production or capital, their value being derived from the states of satisfaction to which they minister or which they enhance. Böhm-Bawerk's objection to this lacks validity. He says: “Any unbiased person can see how unfortunate this is. Without due cause it obliterates the very important distinction between the production of goods which satisfy want and their consumption. It christens, for example, the idler as a zealous producer, always thinking how he may produce the personal goods of satiety, of ease, of contentment, and so on.” It needs only to be replied to this that the idler in such case would be wrongly christened. The term “means of production” must be confined to objective means of producing a subjective state, not to subjective states, to Buddhistic dreams that unite the dreamer with Nirvana. The pleasure of basking in the sun is a fact of which economic theorists must take note; but that pleasure can be secured usually by the use of free goods, and thus is not an economic satisfaction. It becomes an economic satisfaction when it is conditioned on the control of some scarce material agent or can be secured only by effort. The test, then, of economic personal goods or satisfactions is dependence on either objective things or persons, or on reaction against the outer world by the man seeking the satisfaction. If the objection of Böhm-Bawerk is urged beyond the extreme and inapplicable example he has given, and is applied to the personal services of one man for another, it leads to the old and abandoned distinction between productive and unproductive labor. We do christen many men “as zealous producers because they are producing the personal goods of satiety,”—in other men. Such services must be counted as ephemeral forms of wealth, enjoyed or consumed at the moment of their production. This is no more obliterating the distinction between production and consumption than eating a hot cake fresh from the griddle obliterates that distinction. The two things are as logically separable in thought when they occur simultaneously as when a second or a decade intervenes. We have ceased to consider it essential to “productive” labor that it should be first embodied in material form, however fleeting. The same untenable distinction is adhered to almost universally in the case of the services of material goods. Their productive contributions must be put on the same basis as those of labor, to be measured by the intensity of the wants they aid in satisfying and the psychic states they help to produce. The house of the mill-owner is, logcially considered, producing directly, his mill is producing indirectly; for only after a devious journey will the contribution of the mill reach its goal in the satisfaction of wants. Our economic book-keeping can be made to balance only when real income be looked upon as a flow of pleasure in all cases, not as a flow of goods in some and a flow of pleasures in others, as is done generally now.

(4) This view makes possible the correction in the concepts of private and social capital of another fault which calls for our fourth and last objection to this part of the almost universally accepted treatment. The fault is this. Interest is looked upon as connected with a special class of goods: it must be recognized to be connected with everything of value.65 The value of anything is built up on its uses or services to men. Wherever there is a postponed use, that use is subject to a discount. Its present worth is less than its worth will be at maturity. Consider the case of consumption goods. In the orthodox view a bushel of apples, kept by the grocer from fall till spring, is capital, and normally shows economic interest in enhanced value. Bought in the fall and stored in the cellar by the housewife, it is a consumption good; and economic interest is absent. But that early purchase can only be rationally explained as we take account of the increment of value on the apples thus stored, and this is economic interest. Larger purchases in advance effect, of course, economy of labor, and bring an additional motive to make them; but this is not saying that the whole saving is wages, and that no interest is gained.

The radical consequences of this view are evident. It erases all distinction between the essential economic character of so-called productive and consumption goods. The term “consumption goods” may still be conveniently retained to mean, as at present, the material good in its final form in the hands of the one intending to use it; but it ceases to be an essential economic category. Every material good and every human service has value only as it is a condition to the satisfying of a present or prospective want. The abiding value of the diamond is built on no more substantial foundation than its flash and sparkle. Market values are the capitalized economic contribution of objective agents to psychic states; and these states are the final, highest, only essential economic products.

To sum up the objections to the concepts of private and social capital:

(1) The distinction between them rests on a supposed difference in the interest-bearing character of different groups of consumption goods. This difference can be explained in a simple way that makes needless an additional concept.

(2) The distinction between them rests on legal, not on economic grounds, and involves a confusion of economic and contract interest.

(3) The distinction rests on an incomplete and illogical view of the nature of income and the services of goods. The income that needs to be explained by economic theory is the flow of objectively created pleasures coming to the individual and the community.

(4) In these concepts the interest-bearing quality is confined to the conventional production goods and such consumption goods as yield contract interest. Many actions connected with “consumption goods” are left unexplained. The interest phenomenon is found wherever there is abiding value.

Our conclusion, then, is that the distinction between social (or productive) and private (or acquisitive) capital rests on illogical grounds. Böhm-Bawerk thinks it a great advantage that “not withstanding the material difference there is between capital, the factor of production, and capital, the source of interest, it is not necessary in [his] reading to make two conceptions of capital that are entirely foreign to one another.”66 We must assert on the other hand that the two conceptions he has given us are so largely foreign to one another.”67 that, instead of an advantage, it is a source of much confusion that they are called by the same name, as every careful reader of Böhm-Bawerk's work must have noted. For example, he defines capital at the beginning of his discussion68 as “nothing but the complex of intermediate products which appear on the several stages of the roundabout journey.” By this he evidently means his social capital; and he then proceeds to show that “capital in general”—that is, private capital—is something more than such a complex. The reader is frequently in doubt which one of these different concepts is designated when the word “capital” is used. A great advantage will be gained when, dropping unessential distinctions, we are able to save the term from double meanings.

5.

CAPITAL AS PRODUCT: THE LABOR-VALUE FALLACY

Thus far we have considered only the question of the uses to which goods are put as determining whether they are capital. Böhm-Bawerk's definition, however, in common with nearly all usage, limits the conception of capital in another way; namely, with regard to its origin. As well private as social capital consists of a “group of products.” In the foregoing, I have widened the term productive as applied to consumption goods; but the products there mentioned (feelings, satisfactions), being ephemeral, do not increase the capital stock existing at a given moment. And, being final products, these states of feeling cannot be used in further economic processes, and do not, therefore, widen the definition Böhm-Bawerk has given us. The test so far applied to these concepts has been alone that of economic function. Confining capital to material “products,” as does Böhm-Bawerk, applies an additional and distinct test,—that of economic origin,—and must be separately examined.

The purpose of the adjective “produced” in the phrase “produced means of production” is to exclude land. While conceding that there are some good reasons for including land under capital, Böhm-Bawerk declines to do so for the reasons which we may enumerate, as follows:—

• 1. Land is immovable. Capital is, for the most part, movable.
• 2. Land is a gift of nature. Capital is a result of labor.
• 3. Land cannot be increased, capital can be.
• 4. The social and economical position of the landlord is essentially different from that of the capitalist.
• 5. Property in land and property in movables are justified on essentially different grounds, and they are commonly attacked by quite distinct people.
• 6. Land is the special agent in a kind of production [agriculture?] that is economically distinguished by many important peculiarities.
• 7. The income from land differs in many ways from income from capital.
• 8. Using capital for all material means of acquisition leaves us no name for produced acquisitive instruments.
• 9. Popular usage does not put land under capital, but opposes the two.
• 10. Usage does not apply the term “interest” to the income from land.69

He concludes that “it is most convenient to keep land quite distinct from other kinds of productive wealth,” and that “there is a considerable balance in favor of defining capital as the ‘produced means of acquisition,’ and against the inclusion of land.”70

Of this formidable list it must be said that not a reason given, considered singly, is free from flaw, some are quite mistaken, and collectively they are not conclusive. The worth of 1 is destroyed for purposes of definition by the limitation “for the most part.” It is not that a definition may not be based on a difference in degree, where qualities grade off from one extreme to another; and, if something of importance depends on the degree, it may often be expedient to draw a line of division more or less arbitrarily somewhere. Here, however, it is not so. Things, like houses, ditches, trees, that are as firmly fixed as the soil itself and whose value would be quite lost if they were moved, are, without a question, included in capital. Turning to the other part of the statement, that land is immovable, it is found quite as untrue. Parts of land are shifting from day to day. It is usual for those who follow this definition to consider that a thing ceases to be land and becomes capital the instant it is moved by man's agency or effort; but to appeal to this to prove the point is to confound “unmoved” with “immovable.” No matter is immovable. To say that “land” means something that has not been moved by man begs the question, and this is evidently an untenable definition of nature or material agents. Some writers who have followed out such reasoning have been led to narrow the essential concept of land down to mere situation,71 or, differently expressed, to the “geometric relations in which any part of it stands to other parts.72 This is a very different idea from the one here defended by Böhm-Bawerk, and would not be consistent with some of the other reasons of this list. Reason 1 in the list appears to be an illogical use of reason 2, it being falsely assumed that results of labor are necessarily movable in the relative sense in which we can use that term of material things, and that gifts of nature are immovable. No such parallelism exists, and the two reasons are often in conflict.

Passing 2 and 3 for later and fuller consideration, we take up 4 and 5, which appeal to social and personal grounds of distinction, not to economic and impersonal ones. Here is again a confusion of the political or legal question of ownership with the real economic question, the function performed or contribution made by material agents. This difference, moreover, in the social position of landlord and capitalist, so emphasized, can be shown to rest on accidental historical grounds which we cannot now discuss. Again, the emphasis of this difference is largely due to the misleading terminology which is under discussion. And, finally, I would contest the statement that property in land and “movables” is justified on essentially different grounds. They must be, and are by most political theorists of to-day, justified on exactly the same ground.

In 6 and 7 appeal is made to differences in economic nature. In reason 6 there is again the fallacy of thinking of land as a field used for agriculture. It must be said, first, that land, in the sense of the word under discussion,—i.e., natural agents—is an indispensable agent of the milling industry, carpentry, and every other art, as well as of agriculture. To call land the “special” agent of agriculture because that part of land which consists of fertile soil is necessary for plant life is to make a very crude distinction, based on no logical principle. At most a difference of degree only is involved, in that a larger area is usually needed to produce a given value of food than is needed to produce that value of other things; but the reverse is frequently true. Secondly, it may be said that “the important peculiarities” (the chief of which no doubt is thought of as the law of diminishing returns) here attributed to agriculture are in no way peculiar to it. The belief that they are rests largely on the basis of a false terminology. As to 7, likewise, we have a begging of the question; for the differences in our ways of regarding interest and rent are primarily due to the terminology whose correctness is under discussion. Finally, it must be noted that, when Böhm-Bawerk comes to explain interest from durable goods,73 he refutes the statement that income from land differs in many ways from income from capital, and, “obeys many distinct laws of its own.”74 He then finds that the two incomes “have one common final cause.”75 “Land rent is nothing but a special case of interest obtained from durable goods.”76

In 8, 9, and 10 the appeal is to usage which is shifting, and by no means uniform in the direction Böhm-Bawerk assumes. As to 8, the reply is that it will be an advantage not to designate by special names the group mentioned if it is shown, as will be done later, that such a group should not, either for logical or practical purposes, be marked off from the other parts of capital. Indeed, it is one of the most important advantages of a different terminology that it gets rid of the figment in question. Reasons 9 and 10 contain doubtful statements. Popular usage and economists, even those who favor Böhm-Bawerk's terminology, in many cases class land under capital, speaking of the investment of capital in land, and reckoning the land with the man's capital thereafter. So, when a loan is made in money, we are always told that the thing really borrowed is what the money buys: if machines, then it is really these for which interest is paid; if a farm, then it is this for which interest is paid. The moment you give the money aspect to the loan, no attempt is made to distinguish between the income from land and the income from other material agents.

I have left to the last reasons 2 and 3, which, stated together, read that land is a gift of nature and cannot be increased, while capital is a result of labor and can be increased. This thought is the central one in the distinction: it is the parent of all the other reasons; and we here trace to their source the errors just considered. The trail of the serpent, the mark of the labor theory of value, is over the whole treatment of capital as the product of former labor. Böhm-Bawerk does not escape it. He has indeed given a most able refutation of that theory,77 and takes frequent opportunities to stamp it with his disapproval. In his later volume he says that the phrase “stock of accumulated labor” is a metaphor,78 and, again, that it is employing a mere “figure of speech” to speak of capital as “previous labor” or “stored-up labor.”79 In refuting socialist views, he has shown that capital “is not exclusively ‘previous labor’”80 ; but he is not free from his own criticism when he adds: “but it is partly and, indeed, as a rule, it is principally, ‘previous labor’; for the rest, it is valuable natural power stored up for human purposes.”81 Later he again makes greater limitations on the proposition, and says: “The asserted ‘law,’ that the value of goods is regulated by the amount of the labor incorporated in them, does not hold at all in the case of a very considerable proportion of goods; in the case of the others, does not hold always, and never holds exactly. These are the facts of experience with which the value theorists have to reckon.”82 In these statements we have the view that the value of capital is not in proportion to previous labor, and that capital owes its value partly to scarce and valuable natural powers. The same idea appears elsewhere. “Capital—to keep the same form of expression—is 'stored-up labor,’ but it is something more: it is also stored-up valuable natural power.”83 The part attributed to natural powers reaches at times the vanishing-point as Böhm-Bawerk shows;84 but he does not draw the obvious inference that the part of labor reaches at times the vanishing-point, and that many products, many things classed by him as capital, are exclusively “stored-up” natural powers. Why continue to apply the phrase “products of labor” more than “products of nature” to those things which owe to labor proportions of their value varying from all to nothing? Where there is no labor, would Böhm-Bawerk cease to call the thing capital? Certainly not, must be the answer, if that is the only difference. To take his own illustration, used against Rodbertus for another purpose: “If a lump of solid gold in the shape of a meteoric stone falls on a man's field,”85 will it not be capital as much as any other piece of gold? According to proposition 2, which we are criticizing, it would not be capital, but land, being a “gift of nature.”

In truth, Böhm-Bawerk does not concern himself about any such difficulties, but speaks literally of capital in the very phrase he has called a metaphor. He says, “The next stage of the controversy brings us to the question whether we are to give the name of capital only to the products of labor that serve for acquisition, the ‘previous stored-up labor,’ or are to include land.”86 Again, he approves the same usage when he says, “Mill has so far yielded to the pressure of facts as to admit that capital is itself the product of labor, and that its instrumentality in production is, therefore, in reality, that of labor in an indirect, shape.”87 It seems to Böhm-Bawerk self-evident that capital is produced. “Every child knows that a piece of capital, say a hammer, must be produced if it is to come into existence.”88 Now there might be some uncertainty, taking the sentence alone, as to just what is meant here by “produced”; but the context shows that this means just what the last-quoted sentence does, that capital is produced by labor. In the discussion of the roundabout method of production he consciously omits89 from the productive powers the uses of land “for the sake of simplification,” and assumes that the annual endowment of powers consists only of “labor years.” There is the danger in this omission that it may accustom the author and his readers to the thought that capital indeed consists of stored-up labor alone. In fact, most products are due to the use of both sources of production; but supposing he had omitted “for the sake of simplification” the labor years, and had assumed that the productive powers of land alone produced all goods. Such cases, in fact, occur where a fixed flow of goods from natural agents has an annual value without the aid of man. Yet it probably never would have occurred to Böhm-Bawerk to speak of such goods as products if, as is usually the case, they were not fully fitted for consumption, hence were intermediate goods. I have looked in vain not only in his writings, but through economic literature, for an admission that capital may be a “product” of unassisted nature as fully as it can be the product of labor. Yet there seems no valid reason why that view should not be held, the only reason why it is not being that the labor theory of value still influences the thoughts and utterances of men.

Our immediate study, let us recall, is the validity of a distinction between capital and land, on the ground that the one is and the other is not the product of labor. We have just seen the difficulty of applying it in the case of capital. We must now note that Böhm-Bawerk gives up the attempt to apply it strictly to land. He says that improvements on land, so far as they are completely incorporated with it, “are to be kept separate from capital for the same reasons90 which made us keep land itself separate from capital.”91 Evidently, the author deceives himself. He has forgotten one of the most important reasons for the distinction, the one we are discussing; namely, that capital is the result of labor, and land is not. In this case he is classing the improvements with land, not because, but in spite of the fact that they are the results of labor. He sees the difficulty, and in a note says: “I may be accused of want of logic here on the ground that such improvements are always products which serve towards further production, and therefore come under our definition of capital.”92 But he argues, “The criticism is correct as to the letter, but wrong as to the spirit.” What can the spirit of the distinction be that is so opposed to the words of the definition? We get this answer: “A stay propped up against a tree is certainly not the tree itself, but an outside body. But who would still call it an outside body if after some years it had grown inseparable from the tree?”93 So far as this has any application at all, it disproves what the author wishes to support; for we should not call a stick around which the tree had grown a part of the tree. The tree has the unity of life and organization, and the stay is no part of it. The essential thing for us, however, is that here also is a set of cases in which Böhm-Bawerk finds it practically impossible to make the distinction between capital and land depend on whether their source is in labor. Though the source of their value is in labor, some things are to be classed with natural agents because they are physically inseparable from natural agents. May we not ask why, if the labor is incorporated in the land, does not the land become capital? In some cases a touch of labor is all that is needed to “produce” goods of large value from natural materials, which are then called capital. Why call a combination of natural agents and labor land at one time and capital at another? A satisfactory reason, if there be one, has never yet been given.

To sum up the objections to the attempt to make the distinction between land and capital rest on the absence or presence of labor:—

• 1. Some capital, things treated as such by Böhm-Bawerk and others, is not the result of labor at all,—for example, the meteoric lump of gold, the annual crop of fruits on an untilled field, the yield of a mineral spring.
• 2. It is not logical to call capital a result or product of labor, any more than to call it a result or product of land. Nearly all capital owes in part its economic existence to labor; but its value is not measured by the “amount of labor,” whatever that may mean, any more than it is measured by the amount of uses of land. In fact, we have no way of expressing the amount of labor or of uses of land, except through their value.
• 3. If the mere presence of labor in producing the present values is what is meant by “production,” then, practically, all land must be classed as capital; for there is little of it that has not had its value enhanced by labor applied to it.
• 4. The attempt to distinguish between the part of the value of a material thing that is due to labor and the part that is due to nature, keeping thus nature (or land) and capital distinct, is vain when once the labor has been spent. This is recognized by Böhm-Bawerk in certain cases, like permanent improvements on agricultural fields; but this case differs in no essential from every other case where scarce natural materials are united with labor. It is purely arbitrary to call some such combinations land, and others capital.
• 5. Finally, it is not true that land, as understood by the business man or the economist when he really comes to his problem, consists only of the gifts of nature. Large areas are made and reclaimed, and then are treated precisely the same way as the land that exists little changed since coming from nature's hand.

The reasons are so many and conclusive against this distinction that only the influence of the labor theory of value over those who think themselves emancipated from it can explain the persistence of the error. Yet this distinction is of the essence of Böhm-Bawerk's concept of capital. A consistent capital concept never can be based upon it.

6.

A RESTATEMENT OF THE CAPITAL CONCEPT.

We have seen94 that Böhm-Bawerk holds the view that capital should be taken to consist of concrete goods, and that he opposes strongly any attempt to make “some kind of abstraction the essence of capital.”95 He does not think that capital should be spoken of as a “sum of value” or as “circulating power” or as “purchasing power.”96 He believes that capital consists of “the common material goods called mills, looms, ploughs, locomotives.” It is these, and not “an immaterial sum of value,” which “can grind corn, or spin yarn, or plough up land, or carry a load.”97 We have seen that the attack of Clark on the work of Böhm-Bawerk assumes that the concrete conception is the one that Böhm-Bawerk makes use of, and that it is a false one. Our criticism of Böhm-Bawerk's treatment is on a different line; namely, that he has not one, but two concepts of capital,98 and that, while defining capital as if it could be spoken of without reference to value or the use of value expressions, he employs a value concept almost entirely in his reasoning on the interest problem. He makes a shift without being conscious of it, and makes use of the concept which Clark criticizes him for ignoring.

In the concept of capital must be united both the thought of concrete things and that of their value, for their quantity is only measurable in a way that permits of comparison in terms of value. There is nothing metaphysical or abstract about this: it is what business men are doing constantly. They do not attempt to compare amounts of capital by physical standards of measurement. Things which lose their value are no longer counted as capital, no matter how large their amount. A change in the quality involving a change in value or in value of a given quality is at once counted as a change in the quantity of capital. And the idea of capital is carried over to all things of value, regardless of the question of the origin of the good. Böhm-Bawerk illustrates this usage frequently, for example, when he speaks of the “capital value of land,”99 and, again, in making use of the word “capitalization” in explaining the value of land and interest arising from it.100

The business man, followed by the economist when he comes to discuss practical problems, starts with the thought of a man with a sum of money to spend for buying goods; and this buying is called “investing” his capital, or, as the word originally meant “clothing,” the money in the form of other material things. When the money is thus “invested,” it may be in the form of machines, buildings, lands, products on which labor has been employed. If the investment has been fortunate, we say, comparing the values with the value of the money expended, that the capital has increased. Now there is of course some danger of confusing capital with money, but no more than in every case where money is used to express the value of other goods. What is the capital? Either the money or the thing whose value is expressed in money. Money is itself a concrete thing, one in which the value of other things is expressed. It is this expression and measurement of market value which is the essence of the capital concept in much business usage, as well as in most economic discussion, no matter what may be the formal definition. This must be recognized in our definition.

Capital, in our conception, is an aspect of material things, or, better, it consists of material things considered in one aspect,—their market value. It is under this aspect that men have come more and more to look at wealth. The growth of a money-economy has made it more and more convenient to compare and measure the value of dissimilar things in terms of dollars. Things are thus capitalized. A writer, tracing the development of the wealth concept, has well pointed out that at one time wealth was looked upon as consisting of things of use to the owner, lands, flocks, herds,—use-values, to use the old phrase,—but that now it is looked upon as made up of things having exchange value, estimated in terms of the general standard of value in the community.101 He would confine the term “wealth” to this latter concept, leaving the former without any special name; while the proposal here is to confine the term “wealth” to the former concept, and apply to the latter the term “capital.” We thus adhere as closely as possible to popular usage. We should thus speak of a man's wealth as consisting of a number of acres of land, a herd of horses or cattle, a number of machines or ships; but we should say that his capital consisted of so many thousand dollars’ worth of land, cattle, and the like. We say that a company has a capital of so many thousand dollars, and it is invested in buildings and machinery. The distinction between nominal capital and paid-up capital, and that between the capital stock consisting of paper certificates or shares and the capital of valuable material things, present no serious difficulties. Wealth and capital consist of precisely the same things. Wealth is the popular expression for goods the exact valuation of which is not stated. Capital is merely the ordinary market value expression of wealth. As we cannot give to the value of anything an arithmetical expression except in terms of some other concrete thing, we find it most convenient to express it in terms of money. The increase or decrease of capital is not measured by any ultimate standard. The changes in its money expression do not necessarily reflect changes in the welfare of the community or of the individual. Over periods of time, changes in the quantity of capital can only be determined in a conventional way, by men's agreeing to accept one commodity or group of commodities as a standard. But at any moment the different portions of capital are homogeneous, and can be compared, added, or subtracted as we see men doing every day in business.

The term “property,” again, is loosely used in place of wealth or capital, but can be clearly distinguished from them as the legal, not the economic, aspect of valuable material things. In short, “property” has as its essence the idea of legal right; and in connection with material things the important right is that of control. Ownership is simply a greater or less degree of control. The term “property,” meaning legal rights of control, is broader; that is, extends to more things than the terms “wealth” or “capital,” for it includes patent rights, legal monopolies, valuable agreements from men to do or not to do certain things, all having the common feature that the value is not attached to or connected with or attributed to a material thing, but is due to the legal right to control or limit some person's action. It seems inadvisable to try to make the content of wealth as large as that of property by considering that men become wealthy to the degree that their rights are limited in the interest of others.102 To illustrate the use of the terms “wealth,” “capital,” and “property,” we would say that a stock of goods is wealth, it is (or it represents) a capital of $10,000, and it is the property of Jones, and the property is worth $10,000. If Brown holds a mortgage of $5,000 on the property, however the lawyers may look at it, we must consider that Jones's property (or right) is only of the value of $5,000. The property of Brown and that of Jones are both found within the capital of $10,000, and in total value cannot exceed it. The value of the property owned never can exceed the capital that is the object of the legal right. Many absurdities in our laws of taxation have resulted from confusing the economic view of wealth with the legal question of ownership, and of confusing, still less excusably the mere paper evidences of legal rights with the wealth to which those rights apply.

To restate the definition that has been arrived at: Capital is economic wealth whose quantity is expressed in a general value unit. It is used as applying to a single thing or to a group of things. There is no place in it for the distinction, the inconsistencies of which have been discussed, between individual and social capital. We do not call the services of things that minister directly to satisfaction unproductive while calling the personal services of men productive, even where nothing material results. We do not retain the distinction between consumption and production goods as essential in economic discussion. All valuable things of more than momentary duration are “intermediate goods,” are capital, in that they are valuable because designed to satisfy future wants. While the definition thus sweeps away any limitation on the content of capital because of a difference in future use, it likewise sweeps away any limitation because of a difference in the origin or source of its value. Capital is not thought of as made up only of goods whose value is the result of labor. It has been shown that the prevailing distinction between “natural agents” and “produced agents” of production involves radical defects of logic and is practically not maintained. This definition is emancipated from the false labor theory of value. In regard to the contending views—first, that capital consists of concrete goods, and, second, that it is the value of goods,—the definition harmonizes them by defining capital as consisting of the concrete things, but only when considered as homogeneous and comparable units of value.

I would not exaggerate the significance of the change here proposed in the capital concept, yet it would be folly to ignore the consequences its acceptance would involve for economic theory. Text-books must be rewritten, and many questions must be re-examined. This is not because the concept is unused by the older writers, but because they have used it without recognizing how different it was from their formal definitions and the concept employed in other parts of their work. Many students of recent years have felt the need of a readjustment of the leading economic concepts. This concept requires and makes possible such a readjustment. The current theories of land value, of rent, of interest, to a greater or less extent rest on the unsound ideas which have been criticized throughout this paper. On another occasion the writer will attempt to state the outlines of an economic system of thought in harmony with the capital concept here presented.

NOTES

The Next Decade of Economic Theory

To forecast from present tendencies and current theories the direction of further development in the abstracter economics is, as I fully realize, an undertaking venturesome and liable to error. Even when years have passed, it is not always possible to characterize a decade or a generation of growth in any science, to say that just this or that tendency was the dominant one during the period in question. There are so many lines of thought, so many practical problems to influence, so many varieties of thinkers, that there has not been a year since Adam Smith published his work in which almost every leading aspect of economics has not been to some degree under discussion. There has been continuity in the growth of economic thought, yet certain periods are marked by the peculiar development of some leading economic doctrine. As the thoughts of men have been ripe for a new study of a special group of industrial phenomena, and for a new statement of their relations, and as the practical needs of the day have prompted to new attempts at economic theories, that subject or group of subjects has taken the center of the field of attention. On this basis we may distinguish various epochs in economic theory.

EPOCH OF THE UTILITY VALUE DISCUSSION.

Certainly the years from 1885 on belong to the utility value theorists. The Austrian writers, read at once in the original by English and American students, and quickly introduced to the broader English speaking public through excellent translations, hold the center of the stage. The work of Jevons, in date of publication so much earlier, must be credited to this later period if the decision is made with reference to the interest attracted and the discussion aroused. American economics may almost be said to have won its spurs in the independent development of some essential parts of the doctrine and in the opening up of new fields of psychological analysis which have yielded some of the most valuable fruits of the discussion. This sudden revival of abstracter or deductive economics, just as such studies seemed to be growing into discredit, is one of the most remarkable chapters in economic theory. Without question the period has been one in which economic analysis has grown keener and economic thought has taken a broader view.

SOME RESULTS OF THE VALUE DISCUSSION.

The President of this Association not long ago published a survey of the last “Decade of Economic Theory” in the United States. Some may dissent from portions of it (for when did one economist ever agree entirely with another?), but as a whole it is, though condensed, so comprehensive and satisfactory that it would be idle to attempt to cover that ground again. Let us then merely put in relief some results of the value discussion, the principal feature of this period, so far as it concerns abstracter economic analysis. Certain of its results which must be recognized are the following:

The old cost-of-production theory of value is discredited as anything more than an immediate and superficially practical explanation of prices.

The utility principle is no longer a supernumerary member, but is the strongest limb of our value theory.

The importance of wants, motives and consumption in the discussion has been greatly and permanently enlarged.

The marginal principle as a device of explanation and as a mode of thought, has become indispensable, and is finding new applications constantly.

A satisfactory statement of the relations of supply and utility in the determination of value, though attempted by many, does not seem to have yet been attained, though the essential nature of this relation is certainly perceived by a large number of students.

That a universal law of value is possible, which will explain in a broad way the value importance assigned to every economic agent, has become almost unconsciously, within the last few years, the firm conviction of students.

The old artificially cumbersome system of separate “laws” and explanations for each of the leading factors of production, has become an anachronism in our text books.

These ideas, so startling a short time ago, have become a part of the accepted stock of economic doctrines to the great body of oncoming students. Those of us who got our first bent in economic theory more than ten years ago, before this notable development, must beware of the personal equation in judging of the progress of such doctrines. The younger generation is adjusting itself to these new modes of thought; to it they are no longer in controversy. The significance of these developments in economic theory we cannot yet fully realize. They are changing our methods of approach to every practical problem in economics. They are having further results in economic theory.

THE CHANGING VIEW OF THE FACTOR CAPITAL.

Let us turn now from these attained results of the value discussion, to some of the yet immature though ripening fruits. A central doctrine like that of value cannot undergo such great changes as these without compelling soon a readjustment of all the doctrines with which it is intertwined. One of the most important to note is the change in the whole conception of the factors of production and of the relation of the conventional shares to each other. First to mention is the concept of capital. There has been a marked lull for several years past in the discussion of this branch of economic theory, which might give the impression that the discussion was generally considered closed and that interest in it had ceased. Such is far from the case. The seeds of doubt sown by the able series of articles on the nature of capital that appeared from 1890 to 1896 have been ripening in many minds. The main connection of this with the value discussion is found in the idea of the origin of capital. The conventional capital concept is a cost-of-production concept. The value of capital is traced to former labor which has been needed to produce it. Such a concept involves many internal inconsistencies, manifest on any close study, and many external inconsistencies manifest on its every application to practical affairs. So dominant, however, has been the cost-of-production theory of value in the thoughts of men, that these essential objections have been waved aside as only petty and apparent exceptions which must be found in any application of general formula to actual affairs. Capital has been treated as the product of labor, though there were thousands of things included in capital which, as monopolized fruits of natural resources, had cost no labor or but an insignificant show of it. We have been told at one moment that rent was not measured by labor or due to it, but was a surplus gained without labor, and in the next we have seen the wealth that was paid over to the landlord as rent used by him as capital and defined as the product of labor. We are told in all the text books that capital is “stored up labor,” that “its value is due to labor,” that “it is labor in another form,” both the ideas and the antique phrases reflecting the labor theory of value. We have continued to use these phrases after we have made laughing stock of that theory, and after we have recognized utility, regardless of the origin of the good, as the measure of value. Writers who use in a masterly way the utility and marginal concepts, nevertheless accept as an ultimate standard of value a rejuvenated Ricardian or Marxian labor unit. Nothing could more emphasize the hold of the old thought modes and the vigorous effort that must be made to be rid of them.

The old capital concept is in unstable equilibrium. The difficulties are too apparent and too many minds are seeking a way to avoid them, for this situation long to continue. Thousands of students are treading the paths of doubt and inquiry. Logical consistency demands that the capital concept be framed without reference to labor as its source or origin, and without limits as to its use. When the utility theory displaced the cost-of-production theory of value, this change of the capital concept became a logical necessity.

With this, of course, must go a change in the whole conception of interest, which likewise is connected in the still current treatment with a factor that has been produced by labor. The multitudinous and naive inconsistencies of the older treatment became apparent when viewed in the light of the later value theory.

THE CHANGING CONCEPT OF RENT.

While this change is going on in the capital concept the rent concept is changing also, and from the same logical causes. The old rent concept, long supposed to be the surest attainment of economic theory, depended in a negative way on the labor theory of value. While capital was supposed to be the product of human effort, and interest in an indirect way a payment for it, rent on the contrary was a surplus coming without human effort. It was the one great exception to the cost-of-production theory, an exception, however, which was supposed not to weaken but to strengthen the theory, by giving it a paradoxical, carefully guarded and completed air. A favorite test of economic acumen for generations has been a comprehension of the phrase, “Rent does not enter into the cost-of-production.” Though this may be true (it is the central thesis of a recent and valuable book on economic theory), many students are coming to believe that it is merely an illogical trick in the explanation of values. The difficulties of the rent theory as confined to natural resources began early to manifest themselves, as a study of the older authors shows. Long before the utility theory brought such doubt into the economic world, the theory of rent, the “pons asinorum” of political economy, as Mill called it, was becoming a very difficult bridge for even the most orthodox thinkers to cross, without cutting some very asinine capers, judged by Mill's maxim. A study of our contemporary writers shows the concept in ruins. Marshall, who has connected “quasi rents” with every agent of production, and made land rent only a species of a large genus, has gone further from the old system of distribution than he appears to have dreamed of in starting. Macfarlane has made an interesting and able attempt to give to the rent concept some excuse for being, but in widening it to the “price determined” factor, he has wrecked it beyond recognition. Hobson has retained the conventional division of the two material factors with no hint of doubt of their consistency, but has extended the concept of rent until it enwraps the economic world. Clark started twelve years ago, it would seem, from the idea of Bastiat, that the rent of land can be reduced to a payment for labor, and applied this in criticism of the single tax doctrine. As he has developed this independently he has met the other converging lines of thought on rent, and in his last work gives the most satisfactory statement yet made of an emancipated rent concept. The situation is not final, and at no time since Adam Smith has greater confusion of terminology existed, or have opinions upon important questions of economic theory been more unsettled. The logical development of the theory of value must bring us soon to more general agreement as to a theory of monopoly, scarcity, or differential gains, which was the starting point of the development of the theory of rent. Whether the rent concept is to be broadened to cover all such cases, or is to be defined as something still different, is one of the important questions of economic theory to be settled in the next decade.

THE PRACTICAL NEED OF NEW CONCEPTS.

What has been said must not be taken to imply a belief in the growth of theory from internal logical necessity, independent of, and uninfluenced by, the practical needs of the times. Few cherish now such an idea of theory. The conventional concepts of capital and interest, land and rent, were largely determined, as is now generally recognized, by the conditions of the times in which they were developed. The living questions and practical interests of to-day are having no less influence in determining the lines of economic speculation and the form it shall take. And it is likely that when the future chapter shall be written on the economic theory of this day, it will be said that industrial needs were stimulating to a development of the leading economic concepts in the same direction along which theoretical consistency was urging. This thought may be stated more specifically.

STAGES OF INDUSTRIAL DEVELOPMENT AND CORRESPONDING CAPITAL CONCEPTS.

A century ago, when economic concepts were taking the form they have in the main retained, even then they were an illogical compromise between two sets of ideas belonging to two different economic epochs. The mediaeval agricultural and natural economy had rent payments and physical measurements as its typical and general form of contract and payment. The new industrial, capitalistic, and money economy was developing rapidly, but had not become dominant as it is to-day. Even such city men as Ricardo were so under the influence of the old ways of thought that the real difference between these two kinds of economic conceptions could not be clearly seen by them. Rent as a return to natural resources seemed a different kind of return, with a different source, from interest as a return to city wealth, so evidently the work of man's hands, whose value was so easily transferable, and whose return always took the money expression. They never doubted that they were taking the same point of view as they looked at the two factors, two shares, two economic laws, that seemed so essentially different. In fact they were taking two different points of view, one of the 16th and one of the 19th century, and were thus finding contrasts and distinctions which corresponded, not with reality, but with their own shifting modes of thought. The enormous development recently of capitalistic enterprise, the marketing of every form of natural resource by means of shares and bonds, the expression in money form of the value of nearly every kind of wealth and the decline of the agricultural and extractive industries in relative social and economic importance, have made this unconscious confusion of mediaeval and modern viewpoints in economic theory an increasing hindrance to clear and practical thinking. In order to be suited to the discussions of an age that is increasingly industrial, the capital concept must be unified and cleared of its feudal elements.

THE SCARCITY FACTOR THEN AND NOW.

The old rent concept also is found to be inadequate in this age of rapid growth of industrial corporations which enjoy some public franchise or peculiar economic situation, of large industry exercising a power on prices over areas and periods more or less extended, and of multiplying trusts and monopolies. The theorists of a century ago, looking on value from the cost-of-production standpoint, thought of monopoly as a rare thing, due generally to political favor, and almost negligible in ordinary economic discussion. The contribution and value of land, the only exception to the law of labor value that was quite obvious to them, was accounted for by “the law of rent.” Now when our economic growth is bringing to our attention every day new instances of the influence of scarcity on value, often by social changes outside the control of the one who gains by them, often by the capitalists’ own manipulations, it can no longer be ignored that the coat of economic theory is a bad misfit. It is in Hibernian phrase, too long at one end and too short at the other. The rent theory explains so much that it is not true in one direction, and in the other it does not explain at all. This difficulty worried even Ricardo, it caused Mill a deal of anxiety, and industrial developments have made it greater every year. There is no solution short of a new terminology. The Ricardian law of rent is being relegated by industrial development to the curiosity shop of outgrown economic theories.

SOME PROPOSITIONS.

These are some of the difficulties. In order that the suggestions as to the kind of work to be done in the next decade may be specific, and may serve as a basis for thought and discussion, some propositions expressed or implied in the foregoing paragraphs may be recapitulated.

• 1. The concept of capital must be given an importance in economic theory corresponding to the dominant place of capitalistic enterprise in present industrial affairs.
• 5. The concept must be re-defined so as to correspond more closely with commercial usage and the needs of practical discussion.
• 6. The conventional division of the factors of production is illogical, and must be abandoned. This involves a re-study of many problems and a re-writing of large portions of economic literature.
• 4. The old idea of rent as a payment for a gift of nature must be rejected; it is questionable whether the later tendency to extend the term rent to every differential gain will prove to be a fortunate development.
• 5. The labor theory of value and the notion of labor units as in some way usable for a standard of value, are persistent errors which vitiate a large part of current economic discussion, and must be completely thrown aside.
• 6. The doctrines of rent and interest as currently taught are hopelessly entangled in these old and illogical distinctions. The two forms of return for material goods must be considered as differing in modes of calculation, not as to kinds of agents and as kinds of return.

RESTATEMENT OF THE OBJECTS OF THIS PAPER.

The object of this paper may now be restated as follows:

• 1. To account rationally for the conviction that has been growing among economists that economic terminology is in an unsatisfactory state.
• 2. To show the necessity of rewriting the theory of distribution along radically new lines.
• 3. To reduce the mental friction and waste of social energy that must accompany the acceptance of doctrines, a readjustment of which is shown to be inevitable.
• 4. To indicate specifically the direction which the new doctrines must take, the points at which energy of thought may most effectively be applied.

Review of Böhm-Bawerk, Capital und Capitalzins

It is over sixteen years since the first edition of this work was published, and nearly eleven since the English translation appeared. The great activity in economic and social studies which has marked the intervening period has been due in large measure to the rapid industrial changes that have been in progress; but if one book is to be named more than any other as influencing and stimulating to the abstracter studies, as furthering the philosophic analysis of economic questions during this period, it is this book to which the honor must be given. Its importance lay not so much in the conclusions it reached, for it was almost entirely historical and critical, as in its method of acute analysis, its example of tireless research and scholarship, and its awakening of thought. Even the remarkable second and companion volume, The Positive Theory of Capital, does not surpass it in these regards. The later volume, though much more widely read and discussed, and arousing a keener interest in the student, owes to the earlier critical volume much of the air of authority and scholarship which are its strength and its charm.

In the case of a work that is so well known it is unnecessary to dwell on the parts that remain unchanged. Interest will center
around the alterations and additions. The author says of these in the new preface: “The changes are not important. They are limited to a few improvements in the composition and the correction of a few errors that had been overlooked. On the other hand I have had occasion to make copious additions, increasing by more than a third the size of the book.” On every essential question the author's views remain unchanged. The additions count up 192 pages, of which 23 are in the new preface, 54 are in the added section on John Rae, 25 are in the discussion of Marx's third volume and the controversy connected with it, and 90 are in the new concluding chapter entitled “Contemporary Literature on Interest.” Some clew to the activity of economic discussion in the various countries may be found in the Autoren-Register. There are 88 names that did not appear in the first edition, distributed by nationalities as follows: Germans, 25; Americans, 16; Italians, 14; English, 12; Austrians, 4; Norwegians, 4; Swedes, 3; Dutch, 3; Danes, 2; Swiss, 2; French, 2; Russian, 1. Grouping these by languages it is seen that 35 per cent. write in German, 32 per cent. in English, 6 per cent. in Italian, 10 per cent. in Scandinavian, 3.5 per cent. in Dutch, 2 per cent. in French, and 1 per cent. in Russian. But this alone is not a fair test of the relative attention given to them by Böhm-Bawerk. Many of the authors are merely mentioned, or are cited in a footnote, as is the case with all but those writing in English or German. As to the text additions it is not easy to determine what justly should be credited to each group. Rae is spoken of by the author as a Canadian, but John Stuart Mill refers to him as “a Scotchman settled in the United States.” His book was published in Boston in 1834, and its recent prominence is due to Mr. Mixter's essay in the Quarterly Journal of Economics on “A forerunner of Böhm-Bawerk.” It would seem that America might claim him. Macvane receives a page, Walker two, and Carver nine, a total of 66 pages to America. The English writer singled out for attention is Marshall, to whom in preface and text 29 pages are given. The German writers receive 67 pages, nearly half turning immediately about the belated volume of Marx, and much of the rest connected with the old discussion of surplus value. Omitting thirty other pages, not assignable to special writers or countries, it appears that 42 per cent. of the additions are devoted to German writers and 58 per cent. to writers of English, of which America has 41 per cent. and England 17 per cent. This is a showing that may well justify a little harmless pride if it represents at all fairly the relative activity of economic studies in the different lands. The exceptional length of the section given to Rae, a forgotten author of earlier date, it may well be said, invalidates any such claim for America; but, on the other hand, it may be said that the German additions are in large measure given to Marx's posthumous book, that there is a strong tendency for an author to exaggerate the importance of the writers in his own language, and finally that the most important of American contributions, probably the most important of all recent contributions, to the interest problem, those of Fisher and Clark, not to mention several others, are barely referred to. It is hard to reconcile oneself that so much energy has been wasted in refuting trite eclecticism, when original and farreaching contributions by these Americans are all but passed in silence.

Amends may be made for this, however, in the revision of The Positive Theory of Capital, which is promised at an early date. This will be looked forward to with interest none the less keen because of the difficulties in which the author is sure to find himself. The movement of economic thought is rapidly leaving behind it the concept of capital with which Böhm-Bawerk works. It is not to be expected that the able author will change his point of view, but to the task of meeting objections and eluding the charges of inconsistency he will bring that remarkable acuteness and ability which he has shown himself in these volumes to possess.

Review of Böhm-Bawerk, Einige strittige Fragen der Capitalstheorie

This little group of essays, dedicated to the “true friends of theory,” is a reprint of three articles which appeared during 1899 in the Zeitschrift fur Volkswirtschaft, Socialpolitik und Verwaltung. The author's object, as he explains, is not to present any new theory of capital or interest or to make any changes in the one which he had before presented, but rather to examine more carefully some questions of detail in the doctrine of capital that are essential for the solution of the main question. Of the five distinguishable subjects discussed, the four less important ones comprise the last third of the pamphlet and may be first mentioned.

The author maintains that the confusing of interest, the return of capital, with the earnings of the entrepreneur, as is done by Philippovich, is a step backward away from clear thinking and a clear economic terminology. He refutes Dietzel's idea that there must be, not one, but several theories of interest—that in turn, or according to the particular problem, the abstinence, the productivity, the exploitation, the time-value theory or others, must be employed. The author makes a telling criticism of this eclectic method of avoiding the real problem involved. He then replies to the objection made to his own theory by Philippovich, to the effect that it explains only a part of the cases of interest. And, finally, he criticizes the loose acceptance by Lexis of the
socialistic exploitation theory of interest, sharply and powerfully arraigning that sentimentality which has led many thinkers, especially in Germany, to concede validity to the socialistic theory of interest, while rejecting the reasoning on which alone rational validity can be demonstrated.

Let us turn now to the major theme of the essay—the nature of the roundabout process. Böhm-Bawerk's conception of the “average production period” as that period which elapses between the application of productive agents and their reward in the form of satisfaction, and his proposition that by roundabout methods a greater product can, as a rule, be attained, have been variously criticized and attacked. Especially the assaults of Lexis, called for a reply. In defense of his ideas, the author retraces much of the argument of his earlier works, developing and illustrating the thought in many details. He first clears away some misunderstandings, by defining the production period not as the absolute time that elapses from the first application of labor and capital until the securing of the enjoyment, but as the average length of the interval. As the main objection turns on the effect of inventions which shorten the various industrial processes, while giving a larger product, he considers at length the effect of inventions and improved processes. He concludes that they are dynamic factors that check, but do not reverse, the movement of the rate of interest, and maintains the truth of the general rule set forth in his theory. He returns to the same argument in the next division, maintaining that the greater productivity of the longer period can be shown both by observation and experience (pp. 43–52).

He then turns to a different but related question, as to whether (pp. 51–63) the rate of interest is fixed in the whole range of industry or, as Lexis has maintained, in a particular branch of it. The same question appears under a slightly different aspect in this form: whether the different branches of trade have an essential effect on each other in the matter of the rate of interest. Böhm-Bawerk analyzes the methods by which the rate of interest and the successive uses of capital are equalized in the various lines of industry. From the standpoint of the author and that of Lexis, who apparently approaches the subject from the same side, this is a subtle and convincing piece of analysis. Its defects, viewed from a different standpoint, will be suggested below.

Finally, in this division Böhm-Bawerk vigorously resents the view that his notion of the production period and the length of the roundabout process is unsound, in that it deals with magnitudes practically not determinable. Admitting that it is impossible to measure the productive period, he says that this is equally true of many causes which must be recognized and reasoned about in the various sciences. He says it would be very pleasant and interesting to know all these facts, but that a lack of knowledge does not invalidate his theory. The details of the arguments presented cannot be discussed here, but it must be confessed that, despite the great ingenuity displayed, they leave the vague impression that somehow the real question has been evaded. Not a single concrete example has been given where an individual producer practically measures this period, whereas in the cases of cost of production and of the marginal buyer in market value, which Böhm-Bawerk adduces as strict analogies, there are clearly evident some points at which the magnitudes of satisfaction or cost, usually unmeasured, appear for a moment in concrete and measurable forms.

Considering as a whole the author's argument on the central theme, it can be called successful only in a negative way, as a refutation of various objections that have been made against it. The author has not advanced the solution of the problem, positively, a single step. Critics of the Positive Theory have frequently declared in effect that, while its author had ejected the productivity of capital from the front yard of his theory, he had opened to it the side door and had given it the freedom of the house. For what place are we to assign in the broad theory of interest to the “productiveness of the roundabout process”? Is it the main and fundamental, or is it only a supplementary and partial, explanation of the cause of interest? The essay under review certainly puts it in the central and leading place: it is the greater productiveness of labor when applied in a long and roundabout way which is the great and efficient cause of interest on capital. If that is not the impression left on the reader of this essay, and the one the author intends to leave, then we have missed its purpose. And yet this is out of harmony, first, with the author's own strong negative criticisms of productivity theories as affording only incomplete answers to the interest problem and, secondly, with his formal statement of the theory of interest as due to the difference between the value of present and that of future goods.

Let us venture to suggest very briefly an explanation of this appearance of wavering in the author's conclusion. Starting with a narrow concept of capital as composed of things produced by labor, he has not succeeded in escaping various of the old errors of the labor-value theory which he himself has elsewhere so successfully discredited. That concept suggests the thought that labor is put into the material form of capital to appear later as enjoyment. Some cases may be found in seeming support of this view, but others that clearly forbid it. When or in what way will the labor expended in digging the Isthmian canal become enjoyment? There will be an annual yield of enjoyment, but the “principle,” or result of the labor, is, as John B. Clark has strongly emphasized, an abiding thing, never to be used up. Again, Böhm-Bawerk recognized before he concluded his Positive Theory that the capitalization of land is only another aspect of the interest problem, yet his productive period or roundabout process has no validity there. Indeed, his capital concept is a cost-of-production concept and does not make possible a consistent explanation of the theory of interest or the capitalization of scarce agents—“natural” means of production. The period of production seems plausible when illustrated by examples of capital thought of as “previous labor” (see Strittige Fragen, pp. 11, 12, 17, et passim). An “average waiting time,” however abstract and unrelated to any practical calculation which business men make in determining investments, appears to be a possible thing, if capital can be reduced to applications of labor at various times, destined all to appear at a later moment in the form of consumable goods. But when the problem of comparing present and future goods is thought of in the form of a balancing of present and future rentals, as is done in the case of capitalizing scarce natural agents, the fallacy is evident. Then there is no “round-aboutness” in the application of labor. There is neither a series of technical processes nor an application of labor which will mature as enjoyment at a later period. The rate of interest falls gradually, as future rents increase in value relative to present rents, and accordingly are discounted at a lower rate of interest. Great as have been the services of our author in stimulating to clearer and deeper thinking in economic theory, his presentation of a Capitalstheorie evidently is not destined to be a finality. Some development it is sure to undergo, and is undergoing. And that development clearly lies along the lines of a value concept, as opposed to a cost-of-production concept of capital.

Review of Böhm-Bawerk, Positive Theorie des Capitals

This second edition, long awaited with lively expectation by students of economic theory, proves to be an unchanged reprint of the first edition published some fourteen years ago. The author has found it impossible in the midst of his duties, recently undertaken as finance minister of Austria, to carry out his revision of this part as he had already done with the first part of Capital and Capitalzins. The author still adheres to his purpose of revising the Positive Theory, but is unable to do so until a more favorable time arrives. The student acquainted with recent magazine articles by the author, in which he has replied to his various critics, is aware, however, that no appreciable change has taken place in Böhm-Bawerk's views on the interest theory. His writings on the problem in the past fifteen years have been taken up, not with the revision and amendment of his interest theory, but merely with a restatement and defense of his well-known views against the critics who have assailed it from many directions. Each year is making the revision of the Positive Theory a more difficult task. The work of Böhm-Bawerk has been the most stimulating influence that has come into economic theory in the last half century, and yet his Positive Theory seems fated to go the way of its many predecessors. Its acceptance by students is each year becoming less and less possible.

The Nature of Capital and Income

The work before us1 notably strengthens the forces making for the new conception of capital. Professor Fisher here renders a threefold service. He demonstrates mathematically the inconsistency of the old classification and conception of factors and incomes; he shows the mathematical consistency of the value concept of capital and of the capitalization theory of interest; and he illustrates by actuarial methods the application of the new conceptions to business problems. All three of these proofs have been offered before in verbal form, and the results are already accepted by a number of American economists. But it is always possible to miss the point more easily in a verbal argument, especially when it involves the rejection of familiar conceptions. The argument at a number of points is here restated fully, clearly, and conclusively. The peculiar endowment and training of Professor Fisher as both mathematician and economist made him uniquely capable of this notable performance in economic exposition.

The chief topics and the order in which they are treated are as follows: The introduction treats of the nature of wealth, of property, and of utility. Part one deals with the nature of capital, of capital accounts in private and corporate business, and of various correct and incorrect methods of summing up capital, as revealed in a study of the principles of accountancy. Part two deals with income in the usual concrete form of commodities and money, applies the methods of accountancy to the estimation
and summation of incomes, and concludes with the discussion of psychic income as the final or true form of which all others are but reflections. Part three approaches the central theme of the book, the ratios between capital and income: here are treated the interest rate, capitalization, and various accountancy questions involving the distinction between capital and income. Summaries of the last part and of the whole work conclude the text which is followed by appendices, aggregating seventy pages, mostly on the mathematical formulae and methods of expressing capital and income. Many parts of the text also are illustrated with diagrams and mathematical examples. Such a brief list of topics gives no adequate idea of the methods and style of treatment. For these, as well as for substance of doctrine, many of the chapters merit and must receive careful reading by economic students.

Agreeing so fully with the general doctrines defended by Professor Fisher in opposition to the conventional conceptions, the reviewer deems it unneedful to attempt here a mere epitome of the various arguments. Nor would it be profitable to dissipate the discussion over a score or more of minor questions where the author may be in error. It seems best in the cause of economic science, however, to call attention to some doubtful conclusions, and, as a help to the interpretation of this work, to indicate how Professor Fisher's views have developed since his first essays in this subject ten years ago. These comments conveniently group themselves about the three parts of the text: (1) the nature of capital, (2) the nature of income, (3) the relation of capital and income, with a conclusion (4) on the relation of Fisher's doctrines to contemporary speculation.

The nature of capital.—Professor Fisher sees the essence of his contribution to the theory of capital in the distinction between a fund and a flow, “the most important application” of which “is to differentiate between capital and income.”2 He gives this definition:

Capital is a fund and income a flow. This difference between capital and income, is, however, not the only one. There is another important difference, namely, that capital is wealth, and income is the service of wealth. We have therefore the following definitions: A stock of wealth existing at an instant of time is called capital. A flow of services through a period of time is called income.3

Thereafter he refers not to one but to two fundamental distinctions between capital and income, those “between fund and flow, and between wealth and services.”4 Here without comment or footnote, is introduced into the definitions of capital and income which he had presented ten years before a radically new element, and one denoting the abandonment of the former thought. His original view is indicated in the following quotations:

All wealth presents a double aspect in reference to time. It forms a stock of wealth, and it forms a flow of wealth. The former is, I venture to maintain, capital, the latter, income and outgo, production and consumption.5

The total capital in a community at any particular instant consists of all commodities of whatever sort and condition in existence in that community at that instant, and is antithetical to the streams of production, consumption and exchange of these very same commodities.6

These [older] definitions....assume that capital is one sort of wealth and income another....Economists have thought of capital and income as different kinds of commodities instead of different aspects of commodity in time.7

Endeavoring to account for the fact that Marshall did not apply this antithesis of fund and flow to capital and income, Fisher says:

Possibly the reason why this step was not taken lies in the fact that Marshall conceives of income as a flow of pleasure rather than of goods. He conceives of capital as antithetical to the enjoyable income which it brings in. But the simpler antithesis is not between a stock of goods and the particular flow which it may earn or purchase, but between the stock and the flow of goods of the same kind.8

Marshall....allowed the notion to survive that capital is one species of wealth and income another.9

In criticizing an expression of Edwin Cannan's Fisher expresses what in his view is the error in it:

the omission of the explicit statement that income and capital consist of the self-same goods.10

Speaking of the distinction between capital and income, Fisher rejects again

the old and harmful notion....that this distinction implies some difference in the kind of goods concerned.11

At the beginning of the second article he reiterates the view that the sole distinction between capital and income is that between fund and flow.

A full view of capital would be afforded by an instantaneous photograph of wealth.12

The reviewer pointed out some years ago13 the impossibility of this view, saying:

this conception shares what I believe to be an error common with it to both of the others [Clark's and Böhm-Bawerk's] in that it makes the income of a community consist of “streams....of the very same commodities that compose the original capital.” There are many things that are a part of Fisher's capital only and never are a part of the flow of income. Income differs from wealth not merely as an aspect but in the group of goods which compose it.

In the book one may search in vain for the idea that wealth and income consist of goods of the same kind. It has been without comment abandoned and therewith has been taken away the very raison d'êetre of the contrast between fund and flow. The original concept was unsound, the new idea is the all important one.

Let us look more closely at the origin and defects of the original concept. The only applicable definitions of stock that are found in the two authorities at hand are as follows: The Standard Dictionary definition (6): “any accumulated store or reserved supply that may be drawn on at will;” (7) “material accumulated or ready for employment.” The Century Dictionary, definition (18) reads: “hoard or accumulation; store; supply; fund which may be drawn upon as occasion demands.” These meanings accord fairly well with the thought of fund and flow of the same things, but accord ill with a stock of wealth and a flow of accumulation of services nor of incomes to be drawn upon as occasion demands, or a supply that may be drawn on at will.

Is it not possible for the reader to make a shrewd guess as to one or two of the causes leading to the error in Fisher's original definition? The first is, that he apparently identifies two very different propositions. He is contending for a conception of capital that includes all existing wealth and not merely produced productive agents. The proposition that “capital is not any particular kind of wealth, but a stock of wealth of any kind existing at an instant of time,” he deems equivalent to the proposition that capital is a fund and income a flow. So long as he held the idea that income consisted of the same things as capital, it was easy to identify the two thoughts. When later the idea of sameness of substance was given up, the definition was retained.

Another contributory cause of this error may be better understood after the discussion of income and of ratios, but may be referred to now. Fisher began his study of capital14 with his attention fixed upon the relations between the inflow and outflow of concrete goods. Not until the third article15 do other relations take a prominent part. All his illustrations in the first two articles apply to the conception of stocks and flows of the same goods (not incomes at all, as he later comes to see). Some examples will make this clear:

Stock relates to a point of time, flow to a stretch of time. Food in the pantry at any instant is capital, the monthly flow of food through the pantry is income.16

Commodities of which a large stock exists are usually commodities whose flow is not conspicuous, while in those where the flow is large, the stock in turn is insignificant. Factories, ships and railways illustrate the first class; food, drink, fuel, illuminants, the second. The former are therefore set down as capital and the latter as income.17

The stock of carpets in a store is not so closely associated with the flow of interest paid by the merchants in maintaining this stock, or of the profits earned by its use, as it is with the flow of carpets into and out of the store. The distinction between a stock and a flow of the same kind of goods is prior to that between a stock of one kind and a flow of another.18

Other examples implying the same view are found in the contrast of rivers and lakes where in fact the water is the same, and of which Fisher says that behind the “arbitrary classification lies the real scientific distinction between ‘gallons’ and ‘gallons per second.’”19 In another illustration of the case of money loans, the language used is: “the sum lent being a stock and the succession of interest payments constituting a flow.” Speaking of the wage fund, he says that it should have been looked upon as a flow dependent

not upon the magnitude of the fund, but upon the rate at which it is replenished. This rate is not a fund at all, but a flow; it bears the same relation to a fund that a flow of so many gallons per hour does to a reservoir holding so many gallons of water.20

At a later point, Fisher seems unconsciously criticizing his own doctrine when he says:

in [most theories of income] the annual supply or consumption of food and clothing, not their use, is regarded as income. That is, income is conceived as a flow of the first of three kinds distinguished in this article instead of one of the third.21

This is in the last article in which he has come to look upon services as the only thing deserving the name of income.

Thus in the first article Fisher forms his peculiar concept of capital and frames a definition to fit a case which later analysis compels him to relegate to a non-fundamental place in his theory. Beginning by emphasizing as essential the sameness, he ends by emphasizing the contrast, of the things composing capital and income.

The instant we include any such concrete wealth under the head of income, that instant we begin to confuse capital and income.22

The misleading phrase “fund and flow” must be looked upon as a historical accident and one unsuited to the better capital concept which Professor Fisher has now adopted.

Another difficulty that will be more clearly seen later in this review is that the earlier concept applied to stocks or sums not expressed in terms of value. The reviewer has, on a previous occasion, directed a criticism to this point.23 In the first of the earlier articles, Fisher objected to Clark's definition of value on the ground that he tried to include different sorts of capital under the same fund, reduced to a common equivalent in terms of value. He added: “the objection is not that the summation of value is inadmissible, but that it is a secondary operation.”24 The whole implication is not clear but this much is, that in Fisher's opinion the value summation is no essential part of the capital concept, and that a summation of concrete objects by inventory or by description of physical qualities, not only is a capital sum, but that it is the primary and essential capital sum. In the second article,25 value of wealth and value of property are admitted as two of the senses of capital, but stocks of wealth and of property as quantities (inventory and description without valuation) are given the titles of capital-wealth and capital-property. In the book these terms are retained but as hardly more than formalities, for nearly the whole attention is given to the value concept of capital. Fisher's own treatment becomes subject to his own former criticism directed against another, for he includes “different sorts of capital in the same fund, reduced to a common equivalent in terms of value.” Capital is still thought of as the “flash-light picture” of incomes,26 but it is said to be

heterogeneous; it cannot be expressed in a single sum. We can inventory the separate columns, but we cannot add them together. They may, however, be reduced to a homogeneous mass by considering not their kinds and quantities, but their values. And this value of any stock of wealth is also called capital....Unless it is otherwise specified, the term capital will be understood in this sense.

This brings the treatment pretty nearly in harmony with the criticism to the effect that “the total quantity of many different kinds of goods cannot be expressed for economic purposes in a single sum, except in terms of value.”27 That this is a good and necessary change is unquestioned, but that it shifts Fisher's concept from its original basis is no less certain.

The nature of income.—Fisher's income concept has undergone a change no less radical and beneficial than has his capital concept. Three stages can be pretty clearly distinguished. First, income is conceived of as the flow of the same concrete commodities which make up the fund of wealth, as seen in the examples given above. “The monthly flow of food through the pantry is income.”28 It is because he thus thinks of wealth as “used for both capital and income”29 that Fisher framed his concept as he did. He criticized Marshall for conceiving of “income as a flow of pleasure rather than of goods.” Quite as strongly he criticized Cannan:

Like Marshall, Cannan seems to conceive of income as a flow of pleasure, but capital as a stock of things; and thus, in spite of the clear statement of the time distinction between them, this distinction is not regarded as fully adequate, and there persists a trace of some additional distinction between the substances of which capital and income are composed.30

No hint of any other view appears in the first article.

In the second article in distinguishing between wealth and property, a different thought is suggested of the services of wealth, i. e., the desirable events it occasions. A footnote refers to several writers who have discussed this subject. The thought lies near that these services are the income of the wealth; but no statement to that effect is made. Near the end of the third article, these services suddenly are presented, not only as income, but as the only income. The last problem treated in the article, that “of income and its distribution,”31 begins:

In some respects, the third group of relations, those between stocks of wealth and the flow of services they render is the most important and fundamental of all.... The value of the services we shall call the income from the wealth.... Textbooks now usually point out that a “part” of income consists of services of man and uses of durable wealth. I propose to go a step further and show that all income consists of services.32

The services cease in this view to be tangible things of the nature of wealth.

Every article of wealth is to be pictured as simply the tangible and visible handle to hold fast invisible streamers or filaments of services reaching into the future.33

In the book this is in the main the notion of income presented:

The only true method, in our view, is to regard uniformly as income the service of a dwelling to its owner (shelter, money or rental).34

The belief is implied that this sum of money-rentals and enjoyable services is a homogeneous income because it all consists of services to the owner.35 This is a complex of contractual money incomes and economic services of goods to men. This summation of heterogeneous elements, direct services from goods and money payments by men in exchange for services of goods, is not a satisfactory solution of the problem, but it is “the solution offered in the present book” as a homogeneous expression of the real income concept.36

Fisher is not satisfied with this himself, and in the third stage of his concept he is led to the “psychic stream of events as final income.”37 The income of enjoyable objective services leads up to subjective satisfactions. He says: “it is usually recognized by economists that we must not stop at the stage of this objective income. There is one more step before the process is complete.” He then defines subjective income “as the stream of consciousness of any human being,”38 or “simply one's whole conscious life.”39 Does this not go a bit too far in the widening of the concept, and ought it not to be limited to certain of the states of consciousness, making the definition run somewhat as follows: “the pleasurable psychic impressions which objective goods aid to produce”?40 Fisher implies this limitation in saying later that to evaluate this income “it is only necessary for the individual to answer the question what money is he willing to pay for any enjoyment brought about by means of external wealth.”41 The chapter has many just observations on the subjective items which “are by no means to be despised by the economist, who has far too long busied himself with a study of the superficial objective phenomena.”42 The thought, however, is far removed from that of an income of concrete wealth, indeed the original idea has quite disappeared.

Fisher ends his formal analysis by enumerating three kinds of income, subjective, objective services, and money.43 It is true, as Fisher says, that “we are at liberty to consider any one of them as income in its proper place,” but there is still danger of confusion, and he does not escape it. The argument that the process of exchange cannot contribute anything to the total income of society becomes involved in ambiguities. The sale of a book occasions “an element of income to the seller and an element of outgo to the purchaser.”44 And it is said that the book yields no income until the reader peruses it. This evidently confuses mere accounting in terms of money with psychic income. In the same vein it is said that “book selling adds nothing to the income of society, but the reading of the book does.” The error of this appears when we consider that, using words in the same sense, labor however productive, wealth however well directed toward increasing the fitness of goods to gratify wants, would add nothing to income; the final act of consumption alone would add to the income of society!

A number of other passages present difficulties of the same kind. It is especially hard to tell what is the real or the “realized income” under discussion. At times it is purely “psychic satisfactions”;45 again it seems to mean money income actually secured;46 again money expenditure, even when largely made by using up invested capital.47

This same shifting meaning of income possibly accounts for the origin of Fisher's doctrine that increase of capital value is not income.48 The doctrine in brief is that the increase of capital as it grows in value, as for example between two interest payments, is not income when both capital and increase are reckoned in terms of money. If a forest, worth $20,000 ten years ago, is now worth $32,000, the increment of $12,000 may be counted as capital but not as income during that period.49 Fisher would not speak of income until the wood is cut and sold, and insists upon the distinction “between income that is realized by the investor and income which is earned by the capital.”50 This implies some idea of a kind of income that does not come to any person. He goes on:

Realized income is the value of the actual services secured from the capital; earned income is found by adding to realized income the increase of capital value, or deducting from it the decreases.51 Expressed in a single sentence, the general principle connecting realized and earned income is that they differ by the appreciation or depreciation of capital.52

It is venturesome to question mathematical examples when presented by Professor Fisher, but these seem quite misleading. He says the truth of the doctrine “is evident from the fact that this item is never discounted in making up capital value.”53 This example follows:

Suppose, for instance, with interest at 4 per cent., that a man buys an annuity of $4 a year, which does not begin at once but is deferred one year. Since this annuity will be worth $100 one year hence, its present value will be about $96, which, during the ensuing year, will gradually increase to $100. If this increase of value of (about) $4 is itself to be called income, it should be discounted. But this is absurd. The discounted value of $4 would be $3.85, which, if added to the $96, would require $99.85, or practically the same as a year later instead of $4 less as is actually the case. In other words, the hypothesis which counts an increase of value as income is self-destructive; for if the increment is income, it must be discounted, but, if discounted, it is practically abolished.

It would indeed be absurd to discount the income a second time and add it to the capital value, for it has already been discounted and added to the capital sum. If it had not been, the capital sum would be the discounted value of an annuity to begin two years hence, which would be about $3.85 less than $96. And so every successive annuity has been included to arrive at the capital sum. Of course it would be an error to count it first as increase of capital and then as an additional sum of income the moment it becomes payable. But take away this increase of the capital value during the year and you take away the income, which is nothing but the increment in capital value detached at certain conventional points and put at the disposal of the owner.

Does not the thought shift in this example from the stage of money income to the stage of enjoyable income? Yet Fisher is discussing money income and deems the income to be realized whenever the money is paid to the owner of the capital. In the merely monetary aspect of the question, there is as yet no enjoyment, but in a developed money market the capital value of the annuity would be salable any day for a sum including the accrued income. On the other hand, the annuity at the expiration of the year may be money income not expended for gratifications, but reinvested in other future incomes. The increment of money income in any elapsed year is therefore the primary fact, and increase of capital occurs only on condition that the accrued money income is not withdrawn but is added by reinvestment, or is saved.

The same difficult doctrine is set forth in an elaborate illustration in which three brothers are supposed to be subjected to an income tax. Each supposedly inheriting $10,000, the first invests the sum in a perpetual annuity of $500; the second puts his in trust to be invested in an annuity of $1,000 after fourteen years when the capital has doubled; the third, a spendthrift, buys an annuity of nearly $2,000 for six years.54 In Fisher's view, the $500, the $1,000 and the $2,000 are the true realized incomes, which alone should be taxed under income taxation. The second brother should be taxed on nothing until after fourteen years, as until then he would be spending nothing, and the third brother would be taxed during his brief spendthrift career on an income of $2,000, the amount he is spending. The argument is substantially that a tax on expenditures is more equitable and expedient than either a tax on the annual net increase of capital in the owner's hands (the usual ideal of an income tax), or a tax on capital value (the general property tax). The general argument as to the virtues of consumption taxes is frequently made, but if true it hardly supports the proposition Fisher is advancing. There is no pretense that the ordinary income tax is a consumption tax; it is frankly, however crudely, a tax on net earnings which are at the disposition of the taxpayer either to save or to spend without encroaching upon his other capital. Where, therefore, is the fallacy to which reference is made?55 There is no pretense that the general property tax is a consumption tax; its ideal is frankly the taxation of all property rights in proportion to their present capitalized value. The double taxation and injustice too frequently found in its practice is caused by bad administration and by bad reasoning of quite a different nature.

In this illustration “true realized income” is used in the sense of the amount of money expended for enjoyment, whether it is taken from the current earnings of capital or from the original capital sum invested. According to this usage income is never money coming in but always money going out. Income is not an addition but always a subtraction. The confusion between money income and subjective income could not be more evident.

No more convincing are the other illustrations. In the case of the vacant land rising in value,56 it is not necessary to wait until the land is built on and enjoyed, for it is money income that is to be calculated and that is realized in every resale of the land. Is this not a “proper place” at which money income can logically be estimated? According to the view taken57 the exemption from taxation of forests in Europe, cited as a “more rational system” due to longer experience and to a recognition that the growing forest should not be treated as income, is not, it is safe to say, based upon the reason assigned by Fisher. It is simply a social expedient, a conscious subsidizing of forestry, because forests more than most other wealth in the hands of individuals confer broad social benefits upon others than the owner.

Another minor point in this connection. The treatment of money income is out of harmony with the conception and definition of income as a flow. Capital is repeatedly spoken of as “for the present yielding no income;”58 there are long periods “during which no income is realized;”59 in annual contractual payments of interest or annuities, it is said that “during the entire year up to the very end there is no income at all.”60 Income thus is treated not as a flow but as a number of sums of money due at definite though perhaps very irregularly distributed points of time.

The relations between capital and income.—Coming to the examination in detail of the relations between capital and income, Fisher presents “the four income-capital ratios,” capital being called a stock of wealth or of property and being expressed either in physical terms or in value.61 These four “ratios” are: (1) physical productivity, (2) value productivity, (3) physical return, (4) value return. “The ratio of the quantity of services per unit of time to the quantity of capital which yields those services may be called physical productivity.” These quantities are expressed physically as acres, as bushels, not as values. The first difficulty here is that a large part of the services yielded by goods is not physical, and in such cases and in so far there is not physical productivity. The examples chance to be chosen where there is some (wheat from acres, cloth from looms). But the second difficulty is that it is not possible to ascribe to a particular piece of “capital” in a physical sense the whole product which is at the same time and in the same sense the product of labor and of other pieces of “capital,” such as the building, the land, etc. This physical productivity is not a measurable thing which can be compared with the physical pieces of “capital.”62 Not until value has been imputed to it can it be so compared, and that is the fourth ratio.

These objections do not apply to the third ratio called “physical return” (bushels per $100 of capital applied), for here it is not the whole product but the part imputed by marginal measurement that seems to be considered. The second ratio is the “value productivity” (dollars rent per acre or per dwelling, and wages per laborer). The fatal objection lies to all three of these so-called ratios that they are not ratios. With some diffidence the point must be raised that ratio in mathematics implies the relation between two numbers or magnitudes of the same kind. There may be a “rate” described as dollars per acre per year, but not a “ratio,” for that must be a numerical relation between two quantities of similar dimensions. No wonder that after only three pages of formal definitions this statement is made: “in this book we are concerned chiefly with the fourth relation, value return, or the ratio of the value of income to the value of capital.”63 Most of what has preceded and all of what follows pertains to this value ratio, which is the essential feature of the capital concept, though a different idea is embodied in Fisher's definition, as has been indicated above. The author as he proceeds comes to recognize that no other subject is engaging his attention. At the conclusion of the part on the relations between capital and income, he says: “we have finished our study of the relations between capital-value and income-value.”64 “Our special theme has been the value return—the relations between income-value and capital-value.”65 Still more significant is the last page but one of the text.

It is to the relation between capital and income in the value sense that our attention throughout this book has been chiefly devoted. It has been noted that the relation between capital and income, taken in the value sense, is profoundly different from the relation between capital and income when either or both are measured in their various individual units. When capital and value are measured as “quantities,” capital may be said to produce income; but when they are measured in “values,” we find that it is necessary to reverse this statement, and to say that income produces capital.66

In this it appears that the rejected stone has become the headstone of the corner. This profound difference between capital and wealth comes very near being recognized as the essence of the capital concept. But the thought halts short of the inevitable conclusion that the wealth aspect of value is to be found in the production of incomes, whereas the essential capital aspect is the evaluation of incomes and the expression of their present worth. Fisher early committed himself to a conception of capital that has dimmed this distinction, from which conception criticism has as yet only partially freed him.

Relation to contemporary speculation.—With these exceptions this work presents the modern capitalization theory with an invigorating air of practicality. There is no worship of the old fetiches, such as artificially produced or as hypothetically unimproved agents. There is no illusion that the income of land bears a peculiar relation to price, or that the influence of time upon value is limited to some classes of produced agents. Capital is treated as the present worth of expected incomes, and the essence of the capital problem is found in the value relations between incomes and capital sums. Professor Fisher here shows that this problem has now, by the aid of the new value concept of capital, been brought within the range of logical and mathematical treatment and of the usages of business. As Professor Fisher's suggestive articles ten years ago helped to attract attention to this subject and to present the issues involved, so this riper and weightier contribution will help to tip finally the scales of judgment. A book not appealing directly to a large audience, it will be carefully read by the critical few, and its influence will spread with the new conception of distribution to ever-widening circles of thought.

Every author draws his inspiration from sources of which he is rarely quite conscious. Fisher's mathematical interest led him to ascribe to the mathematician Simon Newcomb the paternity of his original conception of capital and income as fund and flow of the same goods, although his account of the influence shows that it was only a phrase caught from a quite different connection, and that it was not intended by Newcomb to have attached to it the thought that Fisher gave it.

Newcomb applied his distinction only to problems of monetary circulation.... Intent on elucidating questions of monetary circulation, Newcomb failed to see that the same conception would clear up questions of capital.... The fact that the author of the distinction between stock and flow did not apply it to capital, and the fact that also Professor Marshall, who was quick to see the importance of Newcomb's distinction, did not so apply it, have often caused serious doubts in my own mind as to the propriety of that application.67

There was indeed occasion for serious doubt. Fisher did not note that because Newcomb's use of it was confined to monetary problems the funds and flows were expressible in homogeneous units of value, whereas Fisher extended the thought to heterogeneous masses of agents and their incomes, even when not expressible in value units, and insisted that the concept of capital be not limited to funds expressed or measured in terms of value. All the development of the concept since has been away from Fisher's original idea toward a conception derived from other sources.

So quickly have the sounder and tested fruits of the studies of Patten and Clark been appropriated, so thoroughly have they become a part of our thought, that they now seem simple truths. Many remember the stimulus they found in Patten's analysis of the ideals, tastes, and economic nature of man. How revolutionary was the thought that life, aspirations, and effort were the center of economic study rather than acres, clay, and iron. Under the influence of a theory of consumption, economics has changed from a study of the physical sources of wealth to a psychological science. The novel of yesterday has become the commonplace of today.

A score of years ago Clark reopened the question of the capital concept by challenging the usual classification of capital and land, of rent and interest. His thought so traversed the conventional definitions and conceptions that for years it found few disciples, yet its fault was rather that it changed the old view too little than too much. Slowly the new thought became familiar as it was presented in its different aspects; the difficulties of the older view became more evident; while here and there the new idea bore fruit in comment or critical essay that clarified details or showed new applications to practical problems.

Among such essays showing the awakened interest in the concept of capital must be classed the articles from Professor Fisher's hands ten years ago. The present work is an evidence of the growing part now played in economic theory by the psychological analysis and of the development that the capital concept has undergone of late. Fisher's present views are in some regards the logical outcome of the recent psychological studies in economics, and in other regards, of the Clarkian protest against the old classification of economic factors. The relation to the latter is probably more close and direct than Fisher has recognized.

However it may be as to the particular influences, Fisher in his later thinking has probably been more affected by the spirit of his times than his citation of authorities would indicate. Outlining his conceptions of capital and income with little conscious reliance upon contemporary speculation, and guided largely by a mathematical analogy, he has been forced as he developed the thought to take account more and more of the conclusions reached by others. His first articles had, as he later found, been to a considerable extent anticipated.68 The capital concept of a fund of concrete wealth changes beyond recognition into a valuation or present worth of rights to future incomes. The income concept of a flow of the same goods that compose the flow of wealth is transformed into the at-first-rejected thought of psychic gratifications. The four capital-income ratios shrink in the course of the treatment to one, and that the very one whose character as capital he at first most doubted. Yet he still believes that the whole book is “only the elaboration of the ideas outlined some years ago in the Economic Journal.“69 His treatment continues to labor under the incubus of the original erroneous definitions and of the original impossible fourfold hyphenated terminology, compelling us to talk of wealth-capital, property-capital, etc.

These are perhaps but the inevitable penalties of a certain isolation in Fisher's capital theory. He began the analysis and reconstruction of the capital concept as if it were a task apart from the theory of distribution as a whole. Beginning with the a priori mathematical concept of stock and flow, he tried to embrace under it all the forms and the whole problem of wealth. A large part of this is prior to, and a necessary condition of, a theory of capital, which is peculiarly the time aspect of value. His study as it has advanced has led to the incidental consideration of difficulties which demanded systematic and fundamental treatment. The capital theory presented has therefore a certain character of intellectual aloofness that leaves it out of touch with the larger theory of distribution of which it should be but one part. Much of what is best in the present work is thus somewhat belated, keeping the plane of the discussions of a decade ago and lacking that sense of unity and co-ordination in the theory of distribution which of late has been increasingly felt and expressed.

These criticisms are offered to center attention upon the points most controverted, and to give the perspective in which the work should be viewed. The work as a whole has a marked significance. It puts into convincing form some important disputed conceptions, and it must rank among the memorable contributions made by Americans to economic study.

NOTES

Are Savings Income? —Discussion

We are discussing a question of terminology but not a question “merely” of terminology. In “the bright lexicon” of the newer economic criticism there is no such word as “merely” in application to questions of terminology. Against such a word the literature of economic thought gives many warnings in the fallacies resulting from ambiguity of terms. “Merely” terminological differences soon appear in the form of real and practical differences when ambiguous terms are applied in the discussion of practical questions. Even in this case Professor Fisher has promptly deduced from his peculiar concept of income some peculiar conclusions as to the justice of certain forms of taxation; and at a time when economic theory and financial practice alike are leading to the taxation of the unearned increment on land held for speculation, Professor Fisher is led to condemn both this theory and this practice.

Professor Fisher confesses that his conception is opposed to the usual view of economists, of business men, and of accountants, and that therefore the burden of proof rests upon him. More than that, his denial that additions to capital are money income is a paradox of the sort that economics is now generally rejecting. It is just such a paradox as that “rent does not enter
into price,” or that “savings are at once consumed,” or that “demand for commodities is not demand for labor”—such paradoxes, once considered to be the quintessence of economic wisdom, are now, by economic criticism, being relegated to the lumber room.

The very title of Professor Fisher's paper presents a terminological question, and is misleading. The subject is not so much “Are savings income?” as, Is an increment in the value of capital in a given period to be considered money income? Whether or not that increment of capital, when it is at the disposal of the owner, will be saved or spent is a later question and not involved in our present inquiry. Our question and our attention may be confined to the period within which the income accrues and matures. Professor Fisher's critics contend for the almost universal business usage of the term income as an increment of business power expressed in money value. What is the kind of income here under discussion? The term “income,” rightly or wrongly, is applied to two (indeed, several) different things. We contend that the question here is of money income, whereas Professor Fisher has his attention fixed upon a different kind, namely, psychic income. He apparently agrees that capital as a business concept is the anticipated value or present worth of future psychic incomes. And he therefore concludes that in the period of its acquisition this capital is not money income to its owner. This is a non-sequitur.

In Professor Fisher's paper is meant by income evidently psychic income or value of the gratification. He presents us with a diagram which depicts the larger part of the argument in his paper. But what do those lines mean? In themselves they are but chalk marks. The lines a, b, c, d, and e in his diagram represent the income when it is detached and converted into enjoyment, when, in so far, the capital ceases to be capital, and is converted into a present realized psychic result. At that moment the line does not represent a monetary income, but a monetary outgo. He is looking at the end and ultimate goal of the valuation process, whereas the business man is estimating the objective income, the money value accruing in the period, regardless of whether that money will in the next period be saved or consumptively spent.

The chief reliance of Professor Fisher in his rejection of common practice and common judgment is undoubtedly his belief that the increments of capital value of future periods are not discounted from the present moment as is the psychic income. It may be said that the question is not as to the discounting of future incomes, but as to the view to be taken and the term to be used in reference to past and present increments of value. He says that the increment of value up to date is not income. We say that it is, and, of course, if it is saved, not spent, and is added to capital, it will continue to contribute its portion to the subsequent increments of capital. It is this estimate up to date in any accumulative period that is in question here. Treating the past increments of capital as income simply recognizes the increments that have accrued to the moment.

But the capital sums of an accumulating capital, taken at different points of time, are the actuarial equivalent one of another, when viewed from the present moment. The money income at the moment it occurs is the actuarial equivalent of a later larger money income that will result from the saving of the present monetary income. With this thought in mind it is evident that the incomes a, b, c, d, e of the diagram can be treated as Prof. Fisher treats them only on condition that they be consumptively used; in other words, that they be converted at that moment into psychic income. If they are kept by the owner and used normally and rationally, they accumulate in the hands of the owner. If Professor Fisher transfers them to another capital account at that moment, it is simply concealing beneath a new bookkeeping entry a source of additional income for the future. If, therefore, incomes e, d, etc., are not detached from the owner's capital, but merely given another entry in the accounts, the curve N n would be extended toward the right and upward. The money income of the earlier periods, being saved and added to the capital sum, become themselves the source of new increments of value in the succeeding period. And this shows again that the detached incomes of which Professor Fisher speaks, must be not money incomes, but money outgoes, consumptive expenditure of a part of the capital value.

Indeed, there is here seen a difference between Professor Fisher's mode of conceiving of the problem of income and the mode in business calculations. Professor Fisher is thinking of the income as subjective; business deals with income as objective or as objectively expressed. Professor Fisher thinks of the income as occurring only when it is detached from the capital, a conception true at the moment of monetary expenditure and psychic income. Business thinks of the income for the most part as occurring when it is attached to the owner's capital, a conception true of the monetary income. These two conceptions have perhaps the relation that Professor Fisher elsewhere calls an interaction. Business practice, the logic of which we are defending, treats the income as occurring within the given period in which it either attaches or is enjoyed as usufruct. When a portion of the capital is spent for gratification, that much money value is detached and becomes psychic income.

It must be recognized that the capitalistic estimate and expression of incomes is not an ultimate psychological analysis of the problem of value. It is an estimate of income in objective terms, but an estimate at once logical in its place and indispensable in practice,—a statement probably true of the whole “cost of production” conception when rightly limited and understood. Professor Fisher's use of terms flies in the face of usage. While thinking of the income as detached value, he ignores the significance of the present and past attached value. Once a disbeliever in psychic income, he now, with the zeal of an apostate, becomes intolerant of any other conception even when monetary income is the subject under discussion. Is a thousand dollars in money received as a gift not an income when it is received? Is a ten-thousand-dollar estate received by legacy not an income to the beneficiary? Is a hundred dollars earned within this month by personal service not income because it is not yet enjoyment? Is the hundred dollars interest received from a mortgage or the hundred dollars rental received from a farm not income? To all these receipts Professor Fisher must deny the name of income for the same reason he has denied it in his discussion and in his book. He does so deny, defending a conclusion out of harmony with common usage and theoretical expediency, a conclusion only to be accounted for by his ambiguous use of the word income as both monetary and psychic.

Clark's Reformulation of the Capital Concept

1.

STATEMENT OF CLARK'S DOCTRINE

The eightieth anniversary of the birth of John Bates Clark, our honored master in social philosophy, calls renewed attention to those economic issues in the discussion of which he has had a most vital part.

As a humble contribution to the volume which his fellow economists here bring as token of their regard, I would essay to review Clark's reformulation of the capital concept, and to trace its continuing influence upon economic opinion. No one can say what its total effect ultimately will be, but we may now form some judgment of its logic and of its aptness in practical discussion, and of the measure of acceptance which it has up to the present attained in America and England.

It is almost forty years since the publication of Clark's monograph entitled Capital and Its Earnings.1 Hardly larger than a magazine article (merely 61 pages of text) it is yet one of the important milestones in the history of American economic theory, and likewise marks significantly new interests and a new stage of development in Clark's own thought. He was then in his forty-second year and had, since the age of thirty, been contributing toward “the reformulating of certain leading principles of economic science,” through occasional magazine articles. These were “republished with varying amounts of revision and the discussion extended” in his first book, The Philosophy of
Wealth, in 1885. While the work of that decade shows Clark to be, in his own words, “in revolt against the spirit of the old political economy,” unsatisfied with its “defective” premises and its “degraded conception” of human nature (mere selfishness), and discontented with the actual relation of “capital” (the employing class) with “labor” (the wage earning class), it gives no hint or warning of the author's purpose to replace with a new conception the conventional notion of capital as an economic factor of production. That came in 1888 seemingly out of a clear sky.

Let us first restate, as briefly as we can, just what the thought was, and then seek to account for its appearance at that time. The more essential points in which Clark departed from the then prevalent views of capital may be reduced to five. He said:

• (a) The conventional capital concept is ambiguous, meaning both “pure” capital and concrete “capital goods.”
• (b) “Pure capital” is a fund of value.
• (c) Land in all its forms is a part of concrete capital.
• (d) All concrete goods yield rents.
• (e) All pure capital yields interest.

(a) Clark declared that economic science had and was using two unlike conceptions of capital, while believing that it had but one. Hence ambiguity, confusion, “logomachies.” Clark would frankly accept both concepts, clarify them, and distinguish them by somewhat different names. One is the abstract, the other is the concrete concept. The abstract conception, paradoxically, is the one “employed in business a hundred times where the concrete conception is employed once”;2 whereas “the actual practice of economic science has been to first define capital in the concrete, and then, in the problems connected with it, to tacitly substitute again and again the abstract conception.”

(b) Clark calls capital in the abstract sense “pure capital,” which is a “fund,” a “single entity” common to all the concrete forms of capital. This fund or entity is expressly declared to be “effective social utility,” but this mysterious notion is repeatedly spoken of more simply though somewhat puzzlingly as “the value that a business man invests” in the various instruments and materials he uses. This is the value conception of capital in contrast with the concrete goods conception as defined by the conventional definition of the older political economy.

(c) Clark classed as concrete capital not merely the artificial, humanly “produced means of production,” but all instruments and materials, including land and all other natural agents.

(d) Clark correspondingly widened the meaning and application of the term rent beyond that of the orthodox English economics, making it apply to the “sums earned by outward and material instruments of production” of any and every kind, i.e., the earnings of concrete capital. The rent law is universal.

(e)Clark called the earnings of “pure capital” interest, and he conceived of this as rent (value) expressed as a percentage of the value of the abstract capital. Thus interest, as Clark wished to express it, did not consist of uses, yields, earnings, or incomes other than those composing rents, but simply was rent, expressed as a price in relation to the price of the instruments that embody the fund.

That these ideas appeared at that time to be radical novelties in American and English economic theory, is evident. The vigor and incisiveness of their statement helped them to command immediate attention even from those who were not ready to accept them as true. It must have been obvious that their acceptance would involve sweeping changes in the structure of the then accepted theory of distribution, with its sharp division between (natural) land and (artificial) capital as factors of production, and between rent (of land) and interest (on capital) as forms of “earnings” or incomes. Clark himself began at once to shape and build a structure of distributive theory but faintly forecast in his earlier essays, and increasingly to this day these ideas have exercised an influence upon theoretical opinion.

2.

POSSIBLE SOURCES; THE AMERICAN TRADITION

Ideas departing so far from prevalent opinion rarely if ever spring as pure inventions of the moment from one mind. Nor does a change in the content and direction of an individual's thought, as marked as that of Clark at that time, occur without some influence from other thinkers or from environing conditions. But to trace such influences to their sources seems, in the case of Clark, at first unusually difficult. His literary style is didactic rather than polemical, and his thought seems to move along positive lines hardly at all conscious either of his forerunners or of hostile opinions, once he has formulated his own views. His writings give slight internal evidence of the sources of his thought. In the monograph in question the only references to the opinions of others are in minor matters, in three cases dissenting (from Ricardo, J. S. Mill and Sydney Webb) and in three approving (A. Smith, S. N. Patten, and Clark's co-worker, Giddings). The sources or the starting points of Clark's own thought must be sought more widely in the circumstances of his life and of his surroundings.

The first possibility might seem to be close at hand in the fact that Clark was an American. A scholarly study has recently shown3 that with few exceptions writers on economics in the United States from Raymond in 1820 to Perry in 1877 (including Phillips, Wayland, Vethake, M. Wilson, Cardoza, Tucker, Carey, and Amasa Walker) defined capital as privately owned means of production, emphasized its valuation or price aspect, and included land among the concrete goods in which this value was embodied. Some of the exceptions serve to prove the rule, for these exceptions were men of English training or faithful disciples drawing their ideas directly from Ricardian text books. Such unorthodox views arose naturally in America where were lacking the artificial feudal limitations upon the sale of land, and where landholders were not marked off socially from capitalist merchants as a separate class. Here land was readily bought and sold and was from the earliest settlement the chief object of investment with a view to speculative profit. This environment had prompted one American writer after another (apparently without mutual influence) to develop conceptions radically different from those of the English school. It might have likewise prompted Clark quite independently to his very similar thought. And there were particular circumstances at the time Clark was writing, namely, the active discussion of Henry George's single tax proposal, which undoubtedly had directed Clark's attention strongly to this problem of the capital concept. Of this, more later.

But if Clark got this thought either directly or indirectly from American economists, it is not evident in his writings. The generation of young economists who in the seventies and early eighties brought a new spirit into American economic studies, did not develop the indigenous traditions, but unfortunately neglected them and turned to Germany for the new sources of their inspiration. At the same time there was in some quarters (e.g., Dunbar, Macvane, Laughlin, Sumner) a reactionary movement toward a new affirmation of Ricardian “orthodoxy” as reformulated in the work of J. S. Mill. Even Francis A. Walker did not develop his father Amasa's more original American treatment, but built his, scheme of distributive theory on the older foundations of “land, labor and capital.” There was thus, in the thinking of both the rival schools of thought of that time, a lack of reality and of rootage in the solid earth of our own economic conditions. American economic theorizing suffered then and still suffers from this defect. Clark's reformation of the capital concept, though couched in excessively abstract phrases, was the most vital attempt made in that period to find that reality. It was a new and distinct declaration of independence for American economic thinking.

3.

TRACES OF GERMAN ECONOMIC PHILOSOPHY

Almost equally lacking in Clark's writings are any suggestions that the ideas now under discussion were derived from German sources; but that such is the case can hardly be doubted in view of all the circumstances. Clark was a student in Germany in 1876–1877 and was for a considerable period at Heidelberg under Karl Knies. Clark's writings in the first ten years after his return, mostly embodied in his Philosophy of Wealth, evidence the deep influence of the ideas of the historical school and of the economic-ethical doctrines then current in Germany. Knies himself had published in 1873 Das Geld subtitled also “a discussion of capital” a second, enlarged edition of this was dated 1885. In this work appears a conception of capital strikingly like the one of Clark which we are examining. This conception had become traditional in German economics after the original work of Professor F. B. W. Hermann4 first began to exercise an influence upon German thought. Hermann based his capital concept on property,—though it cannot be said that he succeeded in clearly distinguishing the thought of the value of property from the thought of the concrete goods. He included not only land within the concept of capital, but also immaterial goods or legal rights to income, even though the claims were upon persons and to services, and not to material goods. Probably the greatest change made by Hermann was to extend the definition of capital beyond artificial, produced, goods and to include as capital anything (or at least its value) that is the durable foundation of a use that has value.

Very similar ideas were developed by Carl Rodbertus in the thirties and forties, most significant because of the great influence they exercised upon later thinkers in the period of developing German state socialism after 1870. Especially Adolf Wagner acknowledged his profound indebtedness to Rodbertus.5 To Wagner is due the much wider circulation and influence in the last quarter of a century of these ideas which he restarted and endorsed.6 Wagner credits Rodbertus with “the essential distinction between capital in the purely economic sense as any stock of material agents and means of production, and capital in the historico-legal sense as capital-possessions.” He cites the statement of Knies that political economy uses capital in two senses, as concrete means of production, and as a stock of goods acquired by an owner. Both Wagner and Knies recognize the double meaning of capital as a tool in economic processes (technological sense) and as a source of private income (acquisitive sense), the distinction on which so much of the thought of Thorstein Veblen as well as of Karl Marx, seems to have been based. When Knies says approvingly that what has been called capital is “fundamentally nothing but a mere abstraction,”7 the expression might be the original of Clark's “entity,” “this abstract conception of capital.”8

Clark, in common with all other Americans pursuing graduate economic studies in Germany, must have become familiar with these ideas. Yet why did no trace of them ever appear in the writings of other students returning from Germany, or even in Clark's writings, until 1888? Is not the explanation to be found in the fact that Americans went abroad with minds already cast in the mold of the Ricardian-Mill “orthodox” scheme of distributive theory, and these concepts persisted. It was possible for these students to acquire a zeal for displacing (or for supplementing) deductive methods with historical studies, and in favor of state activity vs. laissez-faire, without any essential change in the old conceptions of the economic factors and shares in distribution. This is well illustrated by H. C. Adams, R. T. Ely, and many others besides Clark. The more difficult question to answer is: Why did Clark ever, and why did he alone, break through this crust of conventional ideas, and in 1888 advance the views, received as complete novelties, with which his name has ever since been linked.

The important eras of human thought, we are assured by philosophers, rarely, if ever, are initiated by entirely new ideas, but by the rediscovery and restatement of old ones. Therein consists the more effective originality. It has been said, perhaps extremely, that the first time a new thought is expressed or an invention is made, the world simply pays no attention to it. Not until it is repeated independently and rediscovered a hundred times, and then only under peculiarly favoring conditions, does the world look up and say: yes, there is something in it, but nothing original—indeed it is very old. Until the world has received an idea in this way, its rediscovery for the hundredth time is as original as its discovery the first time, and its mere restatement by one aware of its earlier origin and rejection, calls, for that very reason, for as great vigor of thought, and for faith and conviction.

4.

EFFECTS OF THE SINGLE TAX AGITATION

The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. Started in 1879 by the publication of Henry George's book on Progress and Poverty, it gained within a few years the most remarkable vogue in popular interest. It attracted at once the attention of leading economists. Professor W. G. Sumner attacked it in 1881 in magazine articles.9 Professor Francis A. Walker, who seems to have been stirred to indignant protest particularly by George's proposal to confiscate land values, made it the subject of a series of lectures at Harvard in 1883, published under the title of Land and Its Rent. But Clark, until after the publication of his first book The Philosophy of Wealth,10 and apparently until 1888, gave it no mention in his published writings. The chief theoretical pillar of George's doctrine was the Ricardian rent theory, and Walker, even while assailing George, had avowed himself to be “a Ricardian of the Ricardians,” declaring that “Ricardo's rent doctrine can no more be impugned than the sun in heaven.”11 He would have none of Bastiat and Carey, who had sought to reduce the origin of all land values to labor. Yet Walker somewhat unconventionally treated capital in the aspect of value as “a capital sum” to be invested12 as well in land, “in the soil,” as in agricultural improvements, and not as any particular group or kind of economic agents. No formal definition of capital in the old terms of “produced” means of production appears, yet Walker is not conscious of any departure from “the general body of orthodox economic doctrines,” the “validity” of which he thinks he is merely confirming.13

Events were just at that time crowding each other fast in the single tax propaganda. Progress and Poverty was translated into many languages and was said to have had a larger sale than any other book ever written by an American. In 1886 George was nominated and ran for the mayoralty of New York City, and of the three candidates he polled the second-highest number of votes. In 1887 George was a candidate for the Secretaryship of New York State but was defeated. No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty.

At this moment Clark stepped into the arena of discussion armed with a new weapon, a valuation, or investment, concept of capital. His little monograph wears the mien of pure theory, and lingers for a time as its author himself says “in a region of abstract thought.” But having in mind the circumstances just described, one can hardly fail to see on almost every page reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that “it may be found that these principles settle questions of agrarian socialism.” Repeatedly the discussion turns to “the capital that vests itself in land,” declared to be “a form of investment neither more nor less lucrative than others.” On the ethics of confiscation Clark concludes that morally as well as legally “pure capital when invested in land, has the same rights that elsewhere belong to it.” And as to confiscating all land values by the single tax, he exclaims: “would it be robbery? No; it would be the quintessence of robbery.”

Two years later at the “Single Tax debate” at Saratoga, Clark developed in a very interesting way his ideas of pure capital as seeking investment in whatever form the State has said it may take. He sees it as a policy of expediency for the public welfare in the long run. The State “has said that it [capital] may go into land. For ends of its own it has so decided; and the ends are good.”

But Clark felt that he had got hold of a deeper truth, more than a mere argument on a current issue. This monograph represents in most respects a completely new start toward a systematic theory of distribution which has little in common with his views in The Philosophy of Wealth, excepting “effective utility” (the marginal principle). It is needless to restate the argument of this well-nigh classical essay. Though brief, it is rich in ideas, and any one who has not read it will be well repaid by its careful study.

But read to-day, even by the most friendly critic, the argument reveals certain defects, partly arising out of its original polemical impulse, and partly due to the influence of the older conceptions upon Clark's thought. As to the latter, traces of the labor theory of value remain in the confusion between the process of evaluating “concrete instruments,” including natural land, and the “personal sacrifices incurred in the service of society” in bringing concrete instruments into existence. When “the fruit of twenty years of labor” is exchanged for a piece of unimproved land, the value in the land is declared to embody “the fruit of personal sacrifice” of the buyer.14 But whence came the value of the land before it was sold? Again, though including the most imperishable land among the things which embody pure capital, Clark sees the “concrete forms of capital” as constantly vanishing. “The bodily tissue of capital lives by destruction and replacement.” In truth, Clark had not developed a consistent capitalization concept, or made a clear distinction between, on the one hand, technical production as the source and origin of what he called “capital goods,” and, on the other hand, financial valuation of rights, incomes, claims (to land and also to personal services, good will, privileges, etc., as well as to “artificial” concrete goods) as a source of his “pure capital.”

Nevertheless, his great achievements in this matter were that he brought out into the open the old ambiguity between “capital value” and certain concrete things called capital, and that he presented “capital” as essentially an investment concept; and that he gave a broader reading to the idea of rent. These notions have been apples of discord, and even yet professional opinions have not attained to unity upon them. It is of interest to observe the position taken toward the value concept of capital by some representative economists.

5.

THE MORE CONSERVATIVE VIEWS

Böhm-Bawerk's conclusions on the capital concept were surprisingly old-fashioned. Beginning with a new conception of the so-called “interest problem” as that of differences of the value of goods because of time, he wrecked his attempt at the very first by his conception of capital (goods) as limited to produced means of production. For if, as he believed, “capital” and interest are coextensive facts, he cannot explain with such a capital concept the manifold time differences that appear everywhere, in land uses, legal rights, financial incomes, human services, etc. On no other point did Böhm-Bawerk differ with Clark so categorically as on this; he would have none of the valuation concept of capital.15 Not even the most conservative of his contemporary neo-Ricardians were so uncompromising on this point. Yet not for a single page does he succeed in avoiding the valuation concept of capital when once he begins to use one. His capital is always an investment sum, expressed as so many kronen, pounds sterling, or dollars.

Professor Taussig devoted large space in his text to the discussion of the capital concept, returning to it again and again, evidently troubled and more or less impressed by nearly every count in the newer criticism on this subject. It seems a just characterization to say that Taussig's general conclusions and position resemble somewhat those of Marshall, outlined below, but show certain significant differences. First, he is somewhat more definitely conscious that the adoption of the valuation concept involves a radical break with the older doctrines. Secondly, he therefore more explicitly (though with various concessions and doubts) adheres to the older formal definition of capital in terms of concrete goods, and to the older idea of the two-fold division of the “instruments of production and the different sorts of return to their owners” (i.e., land and capital, rent and interest, respectively).16 Third, he, much more explicitly than Marshall, reaffirms a pretty bald labor-theory-of-value to account for the origin and distinctiveness of capital (concrete),17 conceived of as “artificial” in contrast with land as “natural.” In accord with this thought, he (probably unique in this regard) denies “productivity” alike to capital and to land, and thinks labor alone can properly be said to be productive, more so to be sure if applied “through the use of tools” than without them, more applied “on some land...than on other land,” but in any case it is always labor alone that has “productivity.”18 Fourth, far more than Marshall, he struggles to escape from the meshes of the inevitable valuation concept. He sees, as Marshall did not, that he is being trapped into a repudiation of the older views. He was forced to recognize that “the ordinary business method of measurement” of capital is “in terms of value.” He confesses that the old distinctions between rent and interest “find no response in the world of affairs.”19 Earlier20 he had recognized that it was “often convenient to measure and record capital in terms of value and price,—as so much money,” and he had even issued fair warning that he would “sometimes” so far conform “to everyday terminology” as to speak of capital in terms of its “value or price.” (Of course, he always does express capital in those terms whenever he discusses investment of capital and interest as a rate per cent of return—no one can do, otherwise.) Yet he explicitly rejects the “valuation principle”21 and indicates what he thinks are its absurdities.22

Professor Seager, a colleague of Clark's at Columbia, acknowledges in the preface of his text his indebtedness to writers so far apart as Böhm-Bawerk, J. B. Clark and Alfred Marshall, and his treatment of this particular question betrays some of the discordant results. He seems to accept both the old view and in part that of Clark. He defines capital as “the product of past industry used as aids to further production.”23 Yet he cites, apparently with approval, the business man's use of capital as “the complex of capital goods, used in connection with each branch of production, measured in terms of money,”24 a valuation investment concept. But he does not, as did Clark, include land among “capital goods”; these are purely artificial things, “products of past industry,”25 thus plainly differing with the business usage cited. Seager was insistent on keeping sharply distinct the two classes of concrete goods (land and capital goods) which represent “man's part in production and nature's part.”26 Soon, however, Seager is found talking about buying land, quite in the sense in which the business man speaks of the purchase of other goods, as an “investment” involving the “capitalization of rents.”27

6.

MARSHALL'S ECLECTIC CAPITAL CONCEPT

In the first edition of his Principles (1890), Alfred Marshall was well aware of the issue before us, and gave it a good deal of attention. He showed acquaintance with J. B. Clark's work of two years earlier,28 with Böhm-Bawerk, Newcomb,29 and the several German economists above named, who contrasted capital as ownership and as means of production.30 Marshall listed with approval a veritable catalog of definitions mutually inconsistent, but admitted that the divergent usage “has been a great stumbling block to many readers” and “appears to land the science in confusion.” He comforts himself, however, with the thought that “the difficulty is much less serious than it seems at first sight.”31 The plan by which he hopes to minimize the confusion, if not avoid it, is to adopt two standard definitions, one each for individual and social capital respectively (apparently following Böhm-Bawerk), and then (apparently forgetting that he himself has two) “to supplement his standard definition by an explanation of the bearing of each of several elements of capital on the point at issue.” His definition of individual capital is “that portion of a person's external goods by which he obtains his livelihood”; and of social capital is “those things made by man, by which the society in question obtains its livelihood.” The latter consists, first, of goods in a form to satisfy wants directly (“consumption capital”) and, secondly, of production goods (“auxiliary capital.”) He recognizes that individual capital “is most commonly taken to include land and other free gifts of nature,” but this is to be left “to be decided by an interpretation clause in the context wherever there is room for misunderstanding on the point.” He evidently here thinks of “capital” (either individual or social) as consisting of concrete goods rather than of their value or the purchasing power they embody; and both his “standard definitions” make capital consist of the external goods themselves. Later, in a chapter headed “The growth of wealth,”32 he discusses it as if it were identical with “the accumulation of capital” and to “the annual investment of wealth.” It is almost needless to say that when he comes to discuss capital in business, it is in terms of investment and its monetary expression, while interest or earnings are percentages of a principal sum.33

In the successive revisions of his text, terminating with the 8th (1920) Marshall's discussion of this subject steadily increased in length and elaboration without gaining in clarity and consistency. On the whole, though, the change is in the direction of a greater preference for, and emphasis upon the individual concept (and its valuation expression) as compared with the social concept. The individual concept is now cited in the index as the “standard use” of the term,34 and appears with this comment: “This definition of capital from the individual or business point of view is firmly established in ordinary usage; and it will be assumed throughout the present treatise whenever we are discussing problems relating to business in general.” He concludes this chapter with admonitions to economists to “forego the aid of a complete set of technical terms,” and not to assign “a rigid exact use to a word” as this “confuses business men”—astonishing counsel to budding would-be scientists.

Marshall's view as to the relation of land to capital is not easy to fix, but on the whole it seems to be that land is among the (concrete) things comprising individual but not social capital. E.g., he says: “This illustrates the fact that land from the point of view of the individual cultivator is simply one form of capital.”35 Speaking more generally of manufacturers and traders as well as of farmers he says: “It is to be remembered that land is but a particular form of capital from the point of view of the individual producer.”36 Though Marshall here distinctly excluded land from capital from the social point of view;37 nevertheless, only three pages later, still speaking of the social point of view, he says: “In purely abstract, and especially in mathematical, reasoning the terms Capital and Wealth are used as synonymous almost perforce, except that ‘land’ proper may for some purposes be omitted from capital.” Are we to understand then, that for most purposes, land is by Marshall included in capital, at least land “proper,” whatever that may mean, which here seems to mean “in the scientific sense,” if it means anything?

The reader must take his choice among these contradictions, for his bewilderment will only be enhanced by further search amid the mazes of Marshall's tome. But, though Marshall's formal definitions of capital run in terms of concrete agents, there is no doubt that whenever he comes to discuss individual capital in problems relating to business in general he resorts to a valuation concept. The resources of an individual “are in the form of general purchasing power.”38 He declares that the idea of interest is strictly applicable only to fluid capital, evidently meaning readily available purchasing power. “The rate of interest is a ratio and the two things which it connects are both sums of money.”39 Thus it appears that after many contradictory assertions and formal definitions that reaffirm the older Ricardian scheme, Marshall really uses capital in nearly all his discussions of price and of business problems in his later editions as an individual (acquisitive) concept, expressed in (market) valuation terms. Yet unsuspecting students still are led to seek in Marshall a source of theoretical illumination instead of a smoke cloud.

7.

THE YALE ECONOMISTS

The influence of Clark's views of capital showed itself at Yale within the following decade in the writings of A. T. Hadley and of his younger colleague, Irving Fisher. Hadley published in 189540 a noteworthy article marked by an insight and a clarity in nearly every feature in advance of its date, and by a realism in advance of Clark's abstraction of an entity of pure capital. Hadley recognized both the broad social and the narrow individual conception of wealth, and the broad and the narrow conception of capital. “Individual wealth is more accurately designated as property.” “The capital of an individual is more accurately designated as an investment.” “A title to property is not necessarily productive as held by Clark.” Here Hadley briefly, but in essence, anticipated what Veblen (and in part Davenport) developed many years later regarding the contrast between acquisition and production, while avoiding Veblen's exaggeration of the contrast and his caricature of the profit motive. Hadley's text Economics published the next year, reproduced in its first chapter (on Public and Private Wealth) the substance of this article, but with certain additions (unfortunate, in our view) involving, as Hadley says,41 “a combination of the ideas of Knies and Newcomb,” but for which he acknowledges his chief indebtedness to be due to his colleague, Dr. Irving Fisher.

The essential addition due to Fisher was a distinction between capital and income as “modes of measuring” which Hadley had come to believe “is almost as important as the distinction between public and private wealth”42 which he had presented in his essay of the year before. This new distinction is, however, certainly more than a mere detail; it introduces into Hadley's earlier clear and simple thought of capital as the value of rights of individual ownership, a different idea of a stock of wealth43 as contrasted with a flow of wealth. The latter was pretty clearly Fisher's own idea at that time, as appeared in his contemporary articles.44 In these Fisher presented this distinction between a “stock,” or a “fund,” and a “flow,” or a “stream,” as the one essential test of capital, as he conceived it. He is intent (not as was Hadley) on distinguishing capital as valuation from wealth as objects (for he thinks of both simply as material) but in distinguishing income as a flow of things from wealth as a fund, reservoir or stock of things. There is not a hint in Fisher's definitions that capital consists of “rights” expressed in terms of monetary valuation, or financially, or of its being a sum of purchasing power, a business investment concept. Fisher specifically objects to Clark's expression of the amount of true capital in terms of price, instead of by physical measurements. However, as soon as he attempts to discuss the percentage rate of flow, he assumes the measurement of both stocks and streams in monetary terms, for in no other way could a percentage appear. Fisher's contrast was that between a stock and a stream of the “very same commodities.”45 The present writer soon afterward46 sought to show that this view was untenable in that it overlooked the durative nature of many of the objects comprised in Fisher's material “capital,” and involved the erroneous assumption that all indirect agents eventually appear in substance as direct (enjoyable) goods. However, when Fisher next expounded his definition, though he referred in no way to this criticism, he introduced alongside of the old distinction a new one designed to obviate the difficulty with the unfortunate result that his unified conception is converted into the dualistic conception already foreshadowed by Hadley. This is the passage:47

Capital is a fund and income a flow. This difference between capital and income is, however, not the only one. There is another important difference, namely, that capital is wealth, and income is the service of wealth. We have, therefore, the following definitions: A stock of wealth existing at an instant of time is called capital. A flow of services through a period of time is called income.

Now it must be said of these dualistic definitions that they are quite useless for the purpose in view. Fisher's own work on capital and income deals mainly with financial conceptions untouched in these definitions, incomes as price-quanta, discounted and summed up in capital (also a price quantum) conceived of as the present worth of claims to future monetary incomes, no matter whence or how derived (even from intangible rights). And the definitions are at least in part tautological, for while it would be logically possible (even though theoretically useless) to have a fund of wealth (material goods) and to contrast it with a flow of the same goods, it is not possible to conceive of a literal stock of services at an instant of time; it is possible only to conceive of their present worth as a financial fund at an instant of time. Services (taken in the sense of uses either of wealth or of human beings) may conceivably be delayed or hastened, but they are in their very nature a flow; they cannot be heaped up and constitute a stock of services. They can at most, as they occur, be “incorporated” in durable forms of wealth. If this is so, then why this elaborate contrast between a flow of services and a fund of something quite different? It is the vestigial remains of the older conception that Fisher has been obliged to discard.

The idea of a “fund” as a financial sum, estimate, or valuation, at an instant of time, has become confused with the idea of a “fund” as a heap or store of physical goods existing at an instant of time. The phrases of Fisher's definitions form a superficial, verbal bond of connection between the old conception and the new one, while in fact the essential distinction has become that not between income as a flow and capital as a fund (of the “very same” material things) but that between a valuation of services (incomes) when accruing separately throughout time and the valuation of those same services when discounted and summed up at an instant of time. Capitalization thus does involve a comparison of a financial fund (the single present worth) and a flow (a series of future worths) of the very same things, namely, valuations of services. Only through the common element, valuation, do capital as a valuation fund and income as a valuation flow become comparable.48

The text of Fairchild, Furniss and Buck, emanating from Yale, starts in the old paths, formally defining capital as a third factor of production, produced instruments of production. The tool, the indirect agent, seems to be the typical capital in mind in the historical survey, and the older definitions are repeated.49 “Land, labor and capital” are presented in the familiar roles of the three factors of productions.50 But the first time that there is any real occasion to use the capital concept, a simple footnote makes kindling wood of these museum pieces and the reader is informed that “In the present discussion we shall use the term capital including land as well as man-made instruments. The term is generally so used in discussions of investments.”51 Thereafter capital appears as a fund of value, an investment fund, expressed in terms of dollars. Yet from time to time the discarded notion of the difference between land and man-made capital instruments is weakly reëchoed.52 The treatment of interest and capital seems pretty nearly in accord with that of Fisher.

8.

OTHER REPRESENTATIVE OPINIONS

Professor Seligman, a colleague of Clark's at Columbia, took an advanced position on the concept of value, as well as on the various related questions of rent, capitalization, etc. He declares repeatedly: “capital is capitalized income,” and makes use almost exclusively of a valuation concept in that sense. Professor J. R. Turner too makes use54 consistently of an advanced valuation concept of capital. These views and those of the writer55 are in large measure in accord.

Ely as early as 189356 began with a dual capital concept as “every product which is used or held for the purpose of producing or acquiring wealth,” but almost immediately speaks of capital from the individual standpoint as “any economic good” (not merely products) held “for the purpose of gaining wealth.” Later editions, though repeating old definitions, give increasing emphasis to the individual, valuation conception, which finally becomes the only one actually used. “The business world...speaks of the total investment—the amount of money ‘tied up’ in a business unit—as its capital. This is the better and more common usage.”57

Professor Fred M. Taylor58 speaks approvingly of “one new way of conceiving of capital” as a “fund of value...rather than things themselves”; and adds: “Even those who doubt the soundness of this distinction are almost compelled to use it more or less on account of the ambiguities in which current controversies have involved the word capital.”

Professor Bye59 in his formal definition follows Fisher: “a stock of wealth in existence at a given time,” including land as “natural capital,” and “intangible property rights or titles to wealth as a part” of an individual's capital. He thus glides insensibly into the value conception of “net property rights,” “net worths,” etc.60 Still the ghosts of the older conceptions of “natural” land and “produced” capital haunt almost every paragraph of the later chapter entitled “Income from artificial capital.”

Professor O. F. Boucke61 endeavors to give impartial recognition to the two different main concepts (besides several minor variations), capital “as technical aids used in production, or as any source whatsoever of incomes.”62 The latter idea is later expressed as “a sum of money or its equivalent,” a “capital value” concept which includes such things as the “value of patents or copyrights, or of personal reputations,” etc.63 Thereafter, whenever capital is referred to in connection with credit, interest, or any sort of business problems, this value concept seems to be the one preferred.

Professor L. D. Edie64 likewise starts by repeating the older definitions and distinctions based on the concrete goods notion, noticing, only to chide, the business man's thought of his business capital as money, or as “borrowed money on credit.”65 But he cannot long escape recognizing “capital values,” and “capital is, from this viewpoint, not merely a mass of physical goods, but this plus a mass of property rights, good will, and other intangible assets.” He adds: “To be realistic, our use of the term capital must harmonize with prevailing business facts” and declares that, “This modern view is amplified later in the present chapter.”66 A peculiarity of this author's view is that he seems to admit the valuation concept of capital only under the corporate form of organization.

9.

CLARK'S MESSAGE STILL VITAL

It would be too great a task to pursue our inquiries further into the mass of recent business texts that touch upon this subject. It is a paradox that the more emphatically an author professes to have written for students of business, the more remote from actual business usage his conception of capital is likely to be. How long must it continue to be a sort of ritual for the writer of economic text books to at first repeat piously old definitions from which all vital meaning has departed (if they ever had any) only to throw them aside later when the time comes to use them. Must every year the minds of thousands of beginning students of economics be crammed with this useless intellectual lumber? In what other field of study could such a practice continue? The way to consistency and clearness has been clearly shown by the labors of the past generation. Ambiguity must be banished from economic terminology. Wealth and capital are not the same or even related as genus and species. Capital is essentially an individual acquisitive, financial, investment ownership concept. It is not coextensive with wealth as physical objects, but rather with legal rights as claims to uses and incomes. It is or should be a concept relating unequivocably to private property and to the existing price system. Social capital is but a mischievous name for national wealth. The so-called, misnamed, “interest problem” is not to be conceived of as correlated with a narrow class of artificial goods but rather as the time-value element permeating all cases of valuation of groups of uses differing in time. The admission of these and a number of logically related truths is partially, haltingly, inconsistently implied in much of the current treatment of the fundamentals. When will it be made frankly and clearly? When will the dead hand of Ricardianism be lifted from our economic texts?

John Bates Clark in his young manhood struck straight and telling blows for a newer, truer and more realistic conception of distributive theory. He did not attain an ultimate goal, but he advanced in the right direction, showing the way to us. The sincerest tribute that we, and that men of younger generations, can render to him is to seek and to find the truths implicit in the work of the notable era of which he was so large a part.

NOTES

Capital

Capital is a word derived from the adjective form capitalis (Latin root caput, head), meaning principal, chief. Its various meanings as a substantive are explained as the “several elliptical uses of the adjective” (Oxford Dictionary). As first used in commerce capital meant an interest bearing sum of money. The manifold derivative meanings are all of two types, the one implying ownership of a valuable source of income, the other the stock of physical goods constituting the income source. The one idea was from the first characteristically individual, acquisitive and commercial, that of any financial fund having a monetary expression; the other idea was characteristically impersonal and technological, that of the physical goods used to extract, transport, create or alter goods: ships, stores of merchandise, money, tools, machines, houses and, usually but not always, lands.

By a simple association of ideas the original thought of capital as a “fund” for investment was generally connected with lending by the class of passive capitalists, but capital as a “stock” of instruments was connected with borrowing by active enterprisers for the purpose of buying the physical instruments of trade and manufacture. This contrast disappeared, however, when the active enterpriser was pictured as neither borrower nor lender but one who “invests” (clothes) his purchasing fund in the physical equipment in his own possession. Thus the business as a whole might be thought of either as the sum or fund of purchasing power invested, or as the mass of goods which, although not bought with borrowed funds, embodied the owner's business fund.

These two types of capital concepts are so distinctive in essential
thought and practical application that confusion inevitably resulted from the use of one word to designate both. This confusion occurred not later than the early years of the seventeenth century, when capital was defined by Cotgrave in 1611 as “wealth, worth; a stocke, a man's principall, or chiefe, substance.” Here the idea of “worth,” implying a valuation, is thoroughly mixed with that of substance, no doubt in the sense of material things in possession. “Capital” thus used is a superfluous and confusing synonym of wealth, goods and stock.

This transition and duplication of terms was confirmed by association of the words capital and stock. The latter, an old Germanic root word, developed in English manifold meanings. The term stock was used in business in the sixteenth century as “a collective term for the implements and the animals employed in the working of a farm, an industrial establishment, etc.”; and at the same time as “a capital sum to trade with or to invest.” Even earlier, in the fifteenth century, stock meant “a sum of money set aside to provide for certain expenses; a fund,” but this became obsolete.

As English trading companies developed after the fifteenth century, the terms joint stock, capital stock, stock and capital were used with little clear distinction. Adam Smith (Wealth of Nations, bk. v, ch. i, pt. iii, art. i) says of the East India Company, chartered in 1600 by Queen Elizabeth: “In the first twelve voyages which they fitted out for India, they appear to have traded as a regulated company, with separate stocks, though only in the general ships of the company. In 1612, they united into a joint-stock.” This and other similar examples indicate that at first the “stocks” meant the physical merchandise composing the cargo, and a joint stock company was one in which these stocks were held jointly instead of severally. But Smith refers at once to the “capital” of the joint stock company as so many thousand pounds sterling. His treatment of capital as a whole manifests all the errors that have accompanied the use of this elusive term ever since: the employment of the term as meaning both investment fund and goods bought with it or sometimes “talents” or “skill” acquired by means of it, and as denoting both value and a stock of physical agents, etc. Incidentally Smith suggests a thought that was destined to grow until a certain kind of “circulating” capital, subsistence for laborers, came to be looked upon by J. S. Mill and others as the very essence of the capital concept.

In the three quarters of a century after 1776 the changes in machine production and transportation and in financial and commercial organization were epoch making. Not only did factories owned by individuals and by partnerships increase greatly in size and resources, but great corporations building and operating factories, canals, railroads, steamships, commercial enterprises and banks were chartered and their shares widely distributed to subscribers. At the same time the functions of banks and the agencies for investment of capital funds grew apace. These changes put into the foreground of attention the thought of capital as investment, both active and passive. Whether as cause or as effect this change was accompanied by the ever increasing attention given to commercial profits as contrasted with national welfare (or rather profit was assumed, in the doctrine of laissez faire, to be identical with welfare). It was during this period too that the word stock was increasingly displaced by “capital.” In Ricardo's work (Principles of Political Economy, 1817) this transition is perhaps half completed. His “profits” is still from the first word “the profits of stock,” and the phrase recurs occasionally, but his training and interests account for his few references to “stock” as physical agents used in technical processes, and for his many references to employers’ investment expressed with the pounds sterling symbol. The emphasis is different from that of Smith, but the confusion of two meanings remains.

J. S. Mill, however (Principles of Political Economy, 1848), scarcely uses the word stock after the definition of capital as “this accumulated stock of the produce of labor.” But the “function of capital is production,” the goods mentioned are all physical and usually their function is described as technological. He is soon, however, hopelessly confused in attempts to distinguish between capital to the individual and capital to the nation. The “capital” employed in production is “worth ten thousand pounds.” The chapter on “increase of capital” is mostly concerned with “the produce of past labor”—physical objects; but that on “the profits of capital or stock” treats mainly a “rate” of profits on a valued investment. Mill stumbles at length into the notion that all advances “have consisted of nothing but wages,” a large portion as direct payment and the rest as “previous advances” which “consist wholly of wages.” Nothing could be more explicit—or more erroneous as an explanation of the origin of capital values—ignoring as it does every influence from scarcity of natural materials, from monopoly, from previous profits, from manifold speculative influences and from recapitalization (the revaluation of agents). Mill's capital concept at this point is the fruit of his labor theory of value—herein, however, he has substituted wages for Ricardo's quantity of labor, thereby better concealing the difficulty due to various qualities and values of labor.

The capital concept remained in the circle of English “liberal” price economists as Mill had left it until the late eighties. Among them Marx's conception of capital as an agency of exploitation found no echoes. Yet unquestionably there was here an aspect of truth, one which at that time and since then has been given wide recognition in Germany. Capital both with Marx and with Mill involved the confusion of acquisition and “production,” Marx seeing chiefly the acquisitive and Mill the technical aspect. Classification of capital as one of the three factors of production implies its physical nature and its technological function. Its yield (profit, or interest, as by preference it began to be called) was assumed to be coordinate in nature with rent (of land) and wage (of laborer); yet profits (or interest) as a rate percent of an investment manifestly does not fit into this scheme, and there is a consequent confusion in the theory of incomes.

The psychological school after 1870 made earnest attempts to revise the prevailing capital concept. Jevons, in his incomplete studies of capital (e.g. The Theory of Political Economy, 1871, ch. vii; also appendices i-ii in 4th ed. London 1911), offered some original suggestions, but in the end adopted Mill's subsistence (food for laborers) concept. Böhm-Bawerk (Kapital undKapitatzins, 2 vols., 1884–89) as a disciple of Menger sought to make the theory of capital his peculiar domain, but after beginnings which pointed toward a value investment concept and after painstaking studies of earlier views he adopted the conventional confused concept of “capital in general” as “a group of [physical] products which serve as means to the acquisition of goods.” This foredoomed him to a productivity theory of interest—the very thing he had attempted to avoid. He also developed a sort of subsistence theory of capital investment in connection with his periods of production in “the roundabout process.” J. B. Clark, while engaged in controversy over the single tax, detected the duality of the “orthodox” Mill-Ricardian capital concept and proposed (Capital and Its Earnings, 1888; also The Distribution of Wealth, 1899) to match it with twin terms, “capital-goods” or physical agents including land, and “pure capital” as the (supposedly) permanent fund of value resident in them. Yet in accounting for “the genesis of capital” (physical) and for the capital value Clark too lapsed inconsistently into the old labor theory of value.

Clark's eclectic terminology of “capital goods” and “pure capital,” although an unfortunate compromise, has had wide vogue. His reformulation served to stimulate much further discussion, some futile and some fruitful. Partly no doubt this discussion, partly the rapid changes in business organization, notably incorporation, banking, financial investment and more refined accounting, have caused the trend in recent economic texts toward the more general usage of capital in the valuation, property, investment sense of the terms.

The history of the capital concept helps to explain the early and still persistent confusion of money (a part) with capital (as the whole, of a person's fund of purchasing power) and this, in mercantilist doctrine, with wealth in general. The discussion of the ethical justification of interest (first in the original sense of a premium for a money loan, then in the widened sense of any income from private property) easily became confused because of the ambiguity of “capital.” The conservative justified acquisition through capital ownership by pointing to the value of the technological uses of physical wealth; the communist denied to wealth any valuable technological uses, attributing all value to labor and depicting private property as merely a tool of exploitation used by employers to rob the workers of the “surplus value” they had created.

Economic as well as ethical interest theory has suffered from this ambiguity. All use and productivity theories are attempts to explain the rate of premium (or yield) from a financial fund (capital value) by reference to the rent or usance value of a stock of indirect technical agents, without a theory of capitalization to explain first the value of the capital sum or principal.

The terms fixed and circulating capital are distorted expressions of the truth that various kinds and various portions of investments are more or less readily saleable, confused with the technological truth that various physical agents are more or less durable in nature.

The definition of capital determines in turn the meaning more or less vaguely attached to such phrases as capitalistic system, the growth of capitalism and the capitalistic age. Some see in capitalism essentially the use of labor saving machines (perhaps also power driven); this is a technological conception of capitalism. Others, more eclectic, see in capitalism essentially the wage system where the employer owns all the physical agents. But consistently with the value concept capitalism is merely the price system, the commercial exchanging organization of industry, where valuations, incomes and property take on the financial expression.

It is necessary to distinguish certain popular uses of the term capital, notably “nominal capital” of a corporation as the total face value of shares of stock outstanding, taken at par (or sometimes the total authorized); this, however, can mean only number of shares in the now frequent cases of shares with no par value. Sometimes nominal capital is used to mean the total denomination value of all securities, even bonds, and “capital of a corporation” as denoting these taken at their market value. None of these is properly called “capital” but rather “nominal value [or market value respectively] of corporation shares or securities.” Capital as applied to corporations is rather a figure of speech than a consistent scientific term, inasmuch as a corporation (a person only by legal fiction) has revenues and receipts rather than “incomes,” and assets (physical or intangible sources of revenues) rather than capital.

While recognizing divergent usage, we may define capital as the market value expression of individual claims to incomes, whether they have their sources in the technical uses of wealth or elsewhere. This is essentially an individual acquisitive, financial, investment, ownership concept. It is a “fund” only in the financial sense, not a stock of wealth. It is the sum, in terms of dollars, of the present worths of various legal claims. It therefore includes the worth of all available and marketable intangibles, such as credits, promises, good will, franchises, patents, etc. as well as the worth of claims to the uses of physical forms of wealth. Their summation as a financial fund is the resultant of a capitalization process. Physical objects of value are not capital, being sufficiently designated as goods, wealth or agents.

Capital as here defined is a conception of individual riches having real meaning only within the price system and in the market place where it originated, and developing with the spread of the financial calculus in business practise.

Consult: Cannan, Edwin, “Early History of the Term Capital” in Quarterly Journal of Economics, vol. xxxv (1920–21) 469–81, and comments on it by R. D. Richards and H. R. Hatfield in Quarterly Journal of Economics, vol. x1 (1925–26) 329–38 and 547–48; Cannan, Edwin, A History of the Theories of Production and Distribution (3rd ed. London 1924); Böhm-Bawerk, Eugen von, Kapital und Kapitalzins, 2 vols. (4th ed. Jena 1921), tr. by W. Smart as Capital and Interest (London 1890), and The Positive Theory of Capital (London 1891); Davenport, H. J., Value and Distribution (Chicago 1908); Spiethoff, A., “Die Lehre vom Kapital” in Die Entwicklung der deutschen Volkswirtschaftslehre im neunzehnten Jahrhundert, 2 vols. (Leipsic 1908) vol. i, no. iv; Passow, Richard, Kapitalismus (2nd ed. Jena 1927); Oppenheimer, Franz, Theorie der reinen und politischen Oekonomie, 2 pts. (5th ed. Jena 1923–24) pt. ii, p. 565–606; Fisher, Irving, The Nature of Capital and Income (New York 1906); Fetter, F. A., “Recent Discussion of the Capital Concept” in Quarterly Journal of Economics, vol. xv (1900–01) 1–45, and Economic Principles (New York 1915) pt. iv, and “Clark's Reformulation of the Capital Concept” in Economic Essays Contributed in Honor of John Bates Clark (New York 1927) p. 136–56; Veblen, T. B., “On the Nature of Capital” reprinted in The Place of Science in Modern Civilization (New York 1919) p. 324–86.

Reformulation of the Concepts of Capital and Income in Economics and Accounting

1.

Examination of a considerable sample of current accounting literature discloses a much divided opinion as to the relationship between economic and accountancy concepts and theory. Occasionally some accountant deplores the fact that “accountants have seldom had much training in economics” and expresses the hope that in the future public accountants may be more thoroughly educated in that subject.1 The more frequently recurring emphasis, however, is that “the point of view of the accountant differs sharply from that of the economist, and that consequently, the terms, concepts, and principles of economics cannot reasonably be transferred, unmodified, to the field of accounting.”2

The general attitude of accountants seems to be that the economic concepts may be valid in their own field, but that they cannot be adopted and applied to accounting purposes.3 I maintain, on the contrary, that there is no necessary conflict between the conceptions and terms in economics and accountancy. It is true that economics ought to deal with some aspects of public, or social, policy which lie outside the field of accountancy, but economics also has to do, as has accountancy, with the price system and the problems of capital, profits, and income in connection with private individual and corporate enterprises, and much of the current economics does this exclusively
to the neglect of the social aspects.4 Our first thesis, then, is this: If and when accountants and economists are talking about the same things, namely problems of private enterprise, investment, prices, capital, and income, they should talk the same language among themselves, with each other, and with the public. Words are the symbols of thought, the circulating medium of ideas, and the penalty for confusion in our language must be confusion in our own thinking, magnified further in the minds of the public.

For my part, I concede that economics is primarily to blame for the confusion existing today in both fields of study. The principal economic terms now in use were taken uncritically from popular speech by the earlier writers with little regard either to etymology or to logical consistency. These terms have long been used in special restricted senses in the discussion of contemporary issues without recognition of other misleading associations of ideas. Often in the same paragraph or chapter where the terms are formally defined in one sense, they are used by the author himself in a different sense. In many modern economic texts definitions of this sort still linger as the sacred “idols of the forum” and “of the theater,” as Sir Francis Bacon called the errors arising from human language and from traditional doctrines and methods. It is to this arsenal of rusty weapons that the accountants have mostly continued to resort in search of much needed arms of economic theory, whose defectiveness is quickly revealed under hard usage in their hands. Economists often with impunity may be arm-chair theorists; accountants are on the firing line of business, and their weapons of theory feel the full shock of the battle. Their efforts to find consistent and useful terms and concepts have in some respects been hindered rather than helped by their reliance upon the older economic authority. Not until economists of the Marshallian, Neo-Ricardian, school have more fully recognized their errors and reformed their terminology, can the accountants hope to derive much help from many of the current economic texts.

It should be observed also that the close contact of accountants with the hard realities of business has made more difficult for them the task of formulating logical and consistent concepts for their own use. Consider particularly the necessity they are under of protecting their clients by conforming with the requirements laid down in legislative statutes regarding the maintenance of “legal capital” (or “stated capital”) and regarding the permissible distribution of dividends. Such statutes, often varying and conflicting in different jurisdictions, carelessly and inconsistently drafted or later so interpreted by the courts, frequently force the accountants to bend logical terminology to legal and practical requirements. As Hatfield says:5 “The accountant can not disregard the decisions of the courts, or he may find that he has led his clients into an action for which they may be held liable.” But surely it is the highest duty of both accountants and economists, while meeting the legal and practical demands of the moment, to point the way towards truer economic conceptions in the law instead of merely passively submitting to its sometimes blundering dictation. That, indeed, is the ideal of this session.

2.

Regarding the important place of the concepts of capital and income both in economics and in accountancy there is no dispute. Not long ago an accountant in a thoughtful article6 on “The maintenance of capital” declared: “The fundamental purpose of accounting consists of an attempt to distinguish clearly between capital and income.” Another accountant has recently said:7 “The primary and central problem of business and hence of accounting and finance, will always be income.” Here the emphasis is on income but the context rightly implies that the conceptions of capital and income are so interwoven that the determination of one is impossible without that of the other. This is implied also in the generally accepted view that the fundamental divisions, or classifications, of accounting are the balance sheet and the income sheet.

It is remarkable, therefore, that clear and tenable definitions of these fundamental terms are almost impossible to find either in economic or in accountancy texts. The authors seem to shrink from defining what is not really clear in their own minds. There is much talk of specific forms or phases of “capital” but rarely any generic use of the term capital. Thus free and almost reckless use is made of the terms “stated capital,” “legal capital,” “capital of the enterprise,” “owners’ capital,” “capital stock,” “capital charges,” (or “charges to capital”) “capital accounts,” “capital assets,” “capital owned,” “physical capital,” “fixed capital,” “circulating capital” and (repeatedly, but without definition) “true capital,” and “true economic capital,”—whatever that may mean to the writers—, but never a clean-cut essential definition of “capital” itself. The occasional, partial, or most nearly explicit definitions are mutually conflicting, some identifying capital with what most writers call the “assets” as a whole,8 and what Paton would prefer to call “properties”;9 while others identify capital with what usually seems to be called “net worth” or “proprietorship.”10

3.

It is rash to hope that order can be brought at once into this chaos of terminology; but let us at least try to make a beginning. There is no obscurity about the origin of the term “capital.” It made its appearance first in medieval Latin as an adjective capitalis (from caput, head) modifying the word pars, to designate the principal sum of a money loan. The principal part of a loan was contrasted with the “usury”—later called interest—the payment made to the lender in addition to the return of the sum lent. This usage, unknown to classical Latin, had become common by the thirteenth century and possibly had begun as early as 1100 A.D., in the first chartered towns in Europe. The use of money was long confined almost entirely to the towns, and the lending of money occurred mostly between merchants, and only rarely between merchants and others. The chartered towns with their merchant guilds and markets and fairs were at first merely little islands of money economy, commerce, and contractual prices, dotting the wide sea of feudalism where prevailed conditions of status with customary dues and services, and where the use of money and the monetary expression either of wealth or of incomes, were scarcely known. Both the use of money and its lending by merchants to each other and to the feudal nobles became much more common during the Crusades which recurred at intervals for nearly two centuries (from 1096 to 1270). For centuries the rural-feudal and the urban-commercial conceptions of wealth and income continued to grow apart. The more static feudal conceptions of landed property and customary dues began to come into violent conflict with the more dynamic ideology of contractual prices and capital values in the world of commerce, with the gravest consequences in politics, religion, and social relations.

Sometime in this period the adjective capitalis, by an easy transition, came to be used elliptically in common speech as a substantive, dropping the words pars. At the same time, doubtless very gradually, the meaning of “capital” was widened in the marketplace to include besides actual money loaned, the monetary value of wares sold on credit, and still more generally the worth of any other credit (receivable) expressed in terms of money.

The next inevitable expansion of the meaning of capital made it include the estimated value of merchant's stock of goods and of agents (such as tools, shops, ships, lands, etc.) employed in his business by himself as well as when loaned to another for an agreed interest or rental. Included with these as “capital” was the monetary valuation of debts and bills receivable and of valuable rights of all kinds pertaining to the business. All these were resources, or assets (to use a later term) which might be sold for money and which were thus alternative forms of business investment, the equivalents in their money's worth of a principal sum loaned at interest. Each such asset item was at first a separate “capital,” invested in a specific way, or form, and collectively they were long spoken of in the plural as “the capitals”; but gradually the net sum of all the separate items after deducting debts, or liabilities, came to be called a person's capital (in the singular number). The first authentic example of this usage (which had doubtless become common) is a somewhat confused definition of date 1611: “Capital: wealth, worth; a stocke, a man's principall or cheif substance.”11 Here the notion of capital as the physical store of goods, called also “wealth,” “stocks,” or “substance,” is mingled with that of capital as a valuation (worth), constituting a man's principal in a financial sense.

The use of the word “capital” in this definition as a synonym both for “worth” or “principal” and for “stock” or “substance” is evidence that already a confusion was present which was destined to plague economics, the law, and accountancy from that day till this. “Capital” in the original sense of the principal of a money loan, later expanded to include the worth of any kind of business asset or investment, is a purely financial conception; but “capital” in the sense of a man's “stock” or “substance” is essentially a physical-goods conception. Still other confusions were foreshadowed. The use of the Anglo-Saxon word “stock,” in the definition just quoted, made easy the transition from the term “capital” as a sum of values to the hybrid and ambiguous term “capital stock” as a mass of physical goods,12 the value of which was the financial investment in the enterprise. Within the next century other confusions appeared as the terms capital and income were extended to relate to corporations, not merely to individuals.

These changes occurred not suddenly but during the seventeenth century. In the definition of date 1611, capital was still something thought of as belonging to “a man,” a natural person, and not to a corporation. This individualistic conception of capital had been unquestioned for centuries and still survived at the end of Queen Elizabeth's reign. The complicating notion of corporation capital came within the next hundred years. The English trading companies numerously organized as Merchant Adventurers in the fifteenth century for trading on the Continent had retained this distinctly individualistic conception of capital as the sum invested by a natural person in the hope of profit. The company as such had no permanent investment, and each trading trip was a separate “adventure” for which a stock of goods was provided by subscribers in various proportions each of whom recovered his “capital” and shared in the profits (if any) after each adventure in proportion to his investment.

Temporary shifting investment is not suited to undertakings that must be carried on continuously for long periods to show results. Further, the interests of the public and of creditors require that when the liability of the shareholders is limited the amount of capital subscribed should be a stated amount. In a continuing enterprise this is necessary also, in order to determine the amount to be retained as capital or distributed as profits, and for other purposes, such as taxation, etc. These principles which seem so obvious now were only gropingly arrived at between 1600 and 1657 by the experience of the great companies chartered in England for overseas trade and colonization. The London East India Company, chartered the last day of the year 1600, obtained large powers and privileges. The first voyages, or “adventures,” as they were called, were separate enterprises, each new group of adventurers taking over from the last group the assets such as ships, warehouses, etc., at an agreed valuation. Beginning in 1612 several voyages (e.g., those for the years 1613–1616) were treated as a single joint stock, and not until 1657 was this procedure extended by a new charter under which was created “The New General Stock” as a permanent investment.13

The experience of the East India Company is fairly illustrative of the changes under way at that time. Toward the end of the seventeenth century occurred the incorporation of the Bank of England and other financial companies with permanently subscribed “capital stock.” Business corporations were not only legal entities having an artificial existence apart from that of the natural persons who united to form them, but they now had funds permanently committed to them by the subscribers. The concept of capital thereupon entered upon a new stage of ambiguity. Is “capital” the collective name for the financial amount of ownership by the subscribers (natural persons), in other words, the net worth, or proprietorship; or is it a name for the assets owned by the corporation as such; or is it the amount of “capital stock” in the sense of the “legal” or “the stated capital,” a nominal sum not corresponding with either of the other conceptions? Or is it some confused mixture of all three? From that day to this, conflicting usage has left the answer in doubt.

The confusion of terms that thus came to prevail in the seventeenth and eighteenth centuries may be inferred from Adam Smith's usage in 1776, which greatly influenced his successors. He used the terms “stock,” “capital stock,” and “capital” for the most part indiscriminately, but in some cases with evident purpose to distinguish them. “Stock,” the term he uses most frequently, is the more general, usually seems to include “capital” and “capital stock” as the things in which the capital “worth” is contained; indeed, stock is usually synonymous with them and sometimes with “wealth.” Occasionally, however, the generic term “stock” is broader than “capital stock,” including things reserved for consumption. Smith sometimes, too, suggested the distinction that “stock” consists of physical goods, while “capital” is the investment value of goods used to obtain a profit.14 It appears therefore that (so far as Smith is fairly representative) the conceptions of capital as a stock of physical objects or as monetary investment and as something owned either individually or collectively were pretty thoroughly confused in the seventeenth and eighteenth centuries.

Further, Adam Smith introduced the terms fixed and circulating capital, distinguishing them by the criterion of change of ownership; and forty years later the Ricardians, without realizing the difference, distinguished these terms by the criterion of durability versus physical destruction by a single use. These confused terms are still retained in most of the economic texts, and are given too respectful attention by the accountants, who, however, find them troublesome and unworkable.15

In the period from Smith to John Stuart Mill (1776–1848) other confusions appeared. The then current labor-theory of value was grafted upon the physical-goods concept of capital and for the first time capital was defined as “produced means of production used for further production.” This still remains the standard definition of capital in most of the economic texts. By “produced” was meant “produced by labor,” but what, in turn, that meant was never clearly defined. Misled by an abnormal and temporary situation in England at that time, the Ricardians magnified to supreme theoretical importance a fallacious distinction between land (in the sense of natural, that is “unproduced,” agents) and “capital” (as consisting of “artificial” or labor-produced agents) used for further production. “Land” (in that broad sense) even when used in business for profit was by definition excluded from the concept of capital, as also was the money valuation of natural agents. This conception of capital, apparently unknown before the so-called classical economics, was deemed by the Ricardians to be one of their most important contributions to theory. I need not argue in this presence, however, that it is of no possible use to accountants, and they have wisely discarded it, still mistakenly believing, however, that it is the best that recent economics has to offer. Although the Ricardian and neo-Ricardian definition of capital as “produced means of production” is framed explicitly in terms of physical goods, it was always in practice almost immediately abandoned (as is done by the Marshallians today) for a valuation, investment conception, including the value of national agents. The discussion of capital in all the conventional economic texts is permeated with this ambiguity.

While the corporation was swiftly becoming the dominant type of manufacturing and commercial organization after 1870, the new subjective, or psychological, schools of value theory appeared nearly simultaneously in several lands and began a needed revision of some of the fundamentals in economic theory. For a time thought was stimulated in right directions in regard to value and price, but quickly became entangled in the phrases of utilitarian psychology, already discredited in philosophic circles. Jevons in England and the Austrian school stopped short of any lasting contribution to better concepts of capital and income. The Austrian Böhm-Bawerk—in some respects one of the greatest of economic dialecticians—undertook to make himself master in that particular domain; yet he finally reverted to the most sterile version of the Ricardian definition of capital as “produced goods” which we have just described. He thus doomed to failure his own hopeful effort to construct a new “positive theory” of capital and interest, and ended in an anti-climax of a productivity theory of interest. In contrast, the American John Bates Clark recognized the ambiguity in the old concept of capital in which stocks of physical goods are confused with their monetary valuation, but, he left his task far from completed. He stopped half way with a confusing terminology of “capital goods” and “true” capital, and he, as well as Böhm-Bawerk, retained a false labor-theory and cost theory of the genesis of capital. However, by his valuation concept of capital Clark notably advanced the truth, and some traces of his influence appear in every American economic text of the last quarter century, as I have elsewhere sought to show.16 Nevertheless, the Ricardian definition of capital—reinforced rather than weakened by Böhm-Bawerk's great influence—has continued to hold the field with the powerful support of the Marshallians, still so largely dominating the economic theory of price throughout the British Commonwealth and in the United States.

A few of those who had been influenced by the earlier psychological thought were not content with the opportunism and illogical compromises which were the most evident results of the Austrian and Clarkian labors on the capital concept. These students of theory—chiefly American, but including notably Edwin Cannan of England—have persisted in their endeavors to develop a logical value concept of capital, usable alike by economists and by accountants. The story in detail of their various discussions, contributions and not yet completely harmonized results is far too long to be told here. I must therefore limit myself to a brief summary of what I deem to be the valid conclusions.

The concept of capital is coextensive with exchange and the price system and is not to be confused with wealth. “Capital” should be defined to mean the monetary summation and expression of enterpriser's purchasing power. It is essentially a financial concept, relating to business investment, and includes the present market valuation of all legal rights to income possessed by natural persons. The business entity as such, whether incorporated or not, has assets, but no capital, the net worth of which (i.e., assets minus other liabilities) is the capital of the collective investors. The so-called “capital” of a corporation is at most a quasi, fictitious, or pseudo capital, created by and corresponding to the legal fiction of the separate corporate entity. The corporation owns the assets but the shareholders own the capital. The same thing cannot be owned at the same time and in the same sense by two different owners. A corporation is not a capitalist. A sufficient proof of this to accountants should be the simple fact that “capital” always appears on the liability side of the balance sheet. The corporation owes the capital, it does not own it. The shareholders own it.

The cost-of-production theory, still lingering in most of the textbooks, looks to the past to account for present valuations; it must be replaced by a consistent theory of the capitalization process.17

4.

The terminology of income is no more satisfactory than is that of capital. Economists and accountants, at least by implication, seem initially to agree that income is something related to capital so closely that the determination of one involves that of the other. This thought is reflected in the title of this session. Yet surprisingly little use is made of the term income in accounting texts, and that is often in strange new meanings, loosely related to the concept of capital, and income is not defined beyond the generous suggestion of other ambiguous terms as synonyms. A few examples are given in the note.18

The word “income” is broadly self-defining, as anything that comes in, and at one time or another it has been used in many senses that are now obsolete or archaic, including such an unfamiliar idea as that of calling a person an income when he entered a room (that is, a new comer). The earliest recorded use of the word income (in an Anglo-Saxon version of the Bible in 1000 A.D.) was as a verb, meaning to enter. The meaning of the noun income that is now deeply rooted in popular speech and is most usual in its application to business and economic purposes appears to be that of any sort of goods (or valuable rights) coming into the possession of a person, with the further implication that this is something additional and available, for consumers’ use without depletion of a formerly existing physical stock, or of a financial capital fund, as the case may be. This is now the generic meaning in current economics where, however, various specific terms such as “real income,” “income in goods,” “income in kind,” “labor income,” “funded income,” and “psychic income” have indispensable uses in connection with, and often in contrast with, “pecuniary income.” However, there has recently been a tendency in business and popular speech toward narrowing this concept to include only incomes expressed in terms of money.19 At the same time “income” has largely displaced the term profits in the accountants’ treatment of the business entity, and particularly of the business corporation.

The result of these several shifts of meaning, so unequally and variously accepted in different circles and applications, has been to create a greater confusion in the term income than ever has reigned before, with practical consequences of importance both to economics and to accountancy. Few appreciate how completely until of late the term income had been limited in its application to individuals nor how recently it has been applied to business corporations. In the numerous quoted examples collected in The Oxford Dictionary, none until late in the nineteenth century clearly implies that an income could accrue to anybody but a natural person. The shift in usage has come only since the recent great increase of business corporations. The Accountants’ Committee on Terminology (p. 68) speaking of the usage of terms that “it is believed are now well established” makes the following just observation: “Income, while sometimes used by corporations, frequently as applied to net earnings, applies more particularly to the compensation or profits received by a person.” This idea, however, is immediately contradicted in definitions of more specific forms of income, as gross, net, from investments, miscellaneous, operating, non-operating, etc., all of which are evidently treated as applying in accounting to corporations as well as to any other impersonal business entity.

In economic usage the term income is still, in greater part, applied broadly to things accruing to individuals and available for consumption; whereas profits are peculiarly the impersonal yield of any business no matter what the type of ownership. In conformity with earlier and long established usage it would not be permissible to speak of the “income” of a corporation. A corporation if successful has profits which when distributed are incomes to the receivers; but a corporation is a creature of the law once vividly described as having “neither a body to be kicked nor a soul to be damned.” As such it has no capacity to enjoy and can have no “income” except in a recently distorted sense of the word. It can hardly be doubted that in most cases where accountants now use the term “income” to designate the surplus accruing to the impersonal business entity or to some special branch of its operation, the term profits would be more proper; and usually in the other cases neither income nor profits is a fitting term.

It may be ungracious to suggest that accountants and business men have largely themselves to blame if now they are unable to find any tenable difference in the meanings of income, earnings, profits, revenues, etc. They have made their task more difficult by the careless use of terms. With a wealth of words from which to choose to fashion a logical system of terminology, each term with a clear distinctive meaning, accountants have lost themselves in a maze of terms: income, gain, profits, earnings, revenue, receipts, increase in equities, increase in wealth, accrual of wealth, periodic return, benefit or advantage, surplus from the earnings, dividends, rents and interest payments, etc. Confusion is then multiplied by limiting adjectives such as gross, net, pure, economic, from operation, sales, investments, other incomes, etc. Every canon of sound terminology is violated; each term is applied to two or more ideas, and each idea is expressed by several different terms. The client, the reader, and the public never can know just what any of these terms means in a particular corporation report and must seek, often vainly, to discover from the context whether the term income means before this, or after that, or what not. Even the most enlightened of accountants is driven to exclaim in despair: “the average income sheet is a hodge-podge of illogical, non-illuminating classifications.”20 Is this not a truly intolerable situation?

The conception of income as a surplus has likewise taken on a new complexity with the advent of the corporation as the dominant form of business organization with which the accountant has to deal and to which the economist must adjust his thinking. Let us test our previous definition in the simplest conditions of which anthropology gives any account, namely, the ceaseless search for food by the primitive man always on the verge of starvation. Then anything that he finds that is fit to eat, wear or enjoy in any way is essentially income, that is, newly acquired goods available for use. If it is not eaten or otherwise used but is laid aside (“saved”) for use in a later period, it becomes part of a store (or stock). This is wealth but not capital. Income (in goods) in succeeding periods is to be reckoned as a current surplus over and above the stock, that is, an addition to the amount in store. The simplest conception of accumulative saving makes it follow income; that is, saving is the act of refraining from the present use of an income of goods in the period when it occurs. Then conservative saving sets in, to maintain the existing stock by continually refraining from its consumption. Both types of saving of physical goods imply comparisons of current incomes with stocks in successive periods, and the factor of time-preference is introduced into the individual's whole system of valuations. In simple self-sufficing economies the comparisons of incomes and of stocks of goods in successive periods are all in physical terms, and their relative valuations are expressed “in kind,” that is, by a sort of barter relationship. As soon, however, as money trade begins and the valuations of goods begin to be expressed in terms of prices, there enters the capital value concept. The comparison of current incomes with the value of existing stocks is expressed in terms of price. The value of the present income is compared with the capital sum, or present worth, of the anticipated incomes which the stock or fund contains or represents. Accounting may be defined as the capitalistic calculus in modern business, in other words, the calculus of capital and income. This complex calculation may be the bane of the accountant's existence—but, happy thought—it is what makes necessary his services and generous fees. No capital, no accountants!

5.

It is indeed rash for a layman in accounting to offer even a suggestion to the accountants, but in the light of the foregoing it would seem that they should begin by making far more generous use of the simpler, descriptive categories of receipts and disbursements classifying them and balancing them for different purposes before beginning to use any such terms as revenues, earnings, profits, or income. The term revenues might, perhaps, in accord with the usage in public finance, be reserved for those receipts, such as rents, royalties, interest, dividends from outside investments, etc., that do not strictly result from the operations of the enterprise itself, but are derived from sources outside. Then, and not till then, should come the more detailed study of receipts and disbursements in various departments of the business provisionally treated as minor separate entities, such as transportation operation, manufacturing, merchandising, etc. The several “balances,” “results” or “earnings” (if that term be preferred, despite its original root meaning which was limited to incomes from human labor) would then be ready to be summated algebraically with revenues, taxes, capital changes, etc., to arrive at a figure for current “profits” of the enterprise as a whole. Current profits added to previous profits and capital values would yield the figure for the accumulated net worth, or proprietorship, of the collective enterprisers. Then, and not till then, would appear the term income as the amount accruing or distributed to the several investors, the return to each on his capital in the enterprise.

We cannot enter here into the difficult question of costs and overhead costs, or into that of adjusting capital values to the purchasing power of the dollar unit in periods of rapid changes in the general price level, although these, too, are problems of capital theory.

The accountant has the hard task of analyzing and recording true market valuations, expressed in terms of prices and the monetary standard. He cannot escape the difficulties by tying capital value to original cost. That “cost” is at best simply evidence of what the directors of the enterprise thought the things were worth when bought at some time in the past—either as a whole plant or as successive items. Original cost did not infallibly reflect either good sense or good morals in the past; still less does it accurately tell what things are worth now. The other horn of the dilemma is to reevaluate the assets, with all of the chances of human error, exaggerated hopes, or intentional misstatement that such a process affords. The same chances were present, however, in original cost, as sad experience often shows. Moreover, where could there be a greater range for error in individual judgment, or for intentionally conservative misstatement, or for downright deception, than in present estimates of depreciation, depletion, and obsolescence? We cannot get far in sound accountancy unless we postulate that the accountant, like Quintilian's ideal orator, is “an honest man.” And this, we are assured, is the noblest work of God.

NOTES

[1.]We will note later his abandonment of this idea, calling the rent of land “interest” (Positive Theory, 355) and ascribing interest to all consumption goods, even those not included in capital. Ibid., 350.

[2.]Positive Theory, p. 24, ff.

[3.]Ibid., p. 42, ff.

[4.]Ibid., p. 27.

[5.]Ibid., p. 31, ff.

[6.]Positive Theory, pp. 43–59.

[7.]Ibid., p. 31.

[8.]Ibid., p. 38.

[9.]Positive Theory, p. 59.

[10.]Ibid., p. 60.

[11.]Ibid., Preface, p. xxiii.

[12.]E.g., Horace White on “Böhm-Bawerk on Capital,” Political Science Quarterly, vii. 133–148; General Walker, “Böhm-Bawerk's Theory of Interest,” in Quarterly Journal of Economics, vi. 399–416.

[13.]“The Genesis of Capital,” Yale Review, ii. 302–315; “The Origin, of Interest,” Quarterly Journal of Economics, ix. 257.

[14.]Publications of American Economic Association, iii. (1888).

[15.]Positive Theory, pp. 33, 34.

[16.]Yale Review, ix. 307.

[17.]Publications of American Economic Association, iii. 91.

[18.]Yale Review, ii. 308.

[19.]Quarterly Journal of Economics, ix. 257.

[20.]Quarterly Journal of Economics, ix. 116.

[21.]Ibid., 380.

[22.]Ibid., 263.

[23.]Positive Theory, pp. 17–23.

[24.]Quarterly Journal of Economics, ix. 258.

[25.]Yale Review, ii. 304.

[26.]A fuller discussion of this point is given later, p. 49.

[27.]Yale Review, ii. 307.

[28.]Publications of American Economic Association, iii. 95, 112.

[29.]Yale Review, ii. 309.

[30.]Ibid., 303, 304.

[31.]Yale Review, ii. 309. I must dissent from Clark's opinion that the term “abstinence” is, in the discussion of value theories, to be applied only to the first act of saving. See this view in Quarterly Journal, ix. 260, 261. In a more useful sense it is a power of choice that is continuously present during the foregoing of the right to consume wealth, at every moment during which a man could convert the principal of interest bearing capital into a source of present enjoyment.

[32.]This point is treated more fully later, p. 57.

[33.]Yale Review, ii. 309.

[34.]Ibid., 312.

[35.]This has already been observed by Fisher, Economic Journal, vi. 530.

[36.]Yale Review, ii. 309.

[37.]See further on this, infra, pp. 44–45.

[38.]Quarterly Journal of Economics, ix. 124, 125.

[39.]Yale Review, ii. 312.

[40.]This is a somewhat different presentation of Böhm-Bawerk's argument in Quarterly Journal of Economics, ix. 125–128.

[41.]Yale Review, ii. 310, 311.

[42.]Böhm-Bawerk appears to have very much the same conception of products ripening into consumption goods, in his circles of production periods. See Positive Theory, 93, 106–108.

[43.]Yale Review, ix. 312.

[44.]Yale Review, ii. 307.

[45.]Ibid.

[46.]Publications of American Economic Association, iii. 11.

[47.]Yale Review, ii. 308.

[48.]Quarterly Journal of Economics, ix. 275.

[49.]This article was in the editor's hands before the appearance of Professor Clark's latest work, The Distribution of Wealth. The views of the author on the capital concept there expressed show no essential change from those here examined, and the criticism stands as first written.

[50.]In three articles, Economic Journal, vi. 509; vii. 199, 511 (1896–97.)

[51.]Ibid., vi. 513.

[52.]Ibid., p. 514.

[53.]Economic Journal, vi. 515.

[54.]Ibid., p. 530.

[55.]E.g., at the very outset, Economic Journal, vi. 515.

[56.]See as to Clark, supra, p. 43.

[57.]Economic Journal, vi. 514, ff.

[58.]Economic Journal, vi. 534.

[59.]Supra, p. 39.

[60.]Quarterly Journal of Economics, ix. 253.

[61.]Especially in Positive Theory, 339–349.

[62.]I should add, if the income is estimated as a percentage of the capital value.

[63.]Positive Theory, p. 44.

[64.]Ibid., p. 45.

[65.]Here we develop some of the thoughtful suggestions of Fisher, though differing with his view in ways already suggested. See Economic Journal, vii. 525.

[66.]Positive Theory, p. 40.

[67.]Ibid., p. 61. He says here, flatly contradicting his own words just quoted: “Substantially, [the conception of social capital] is a quite independent conception. In every essential respect (in definition, in scientific employment, and in scope) it stands on entirely independent principles.”

[68.]Ibid., p. 22.

[69.]Positive Theory, pp. 55, 56.

[70.]Ibid., p. 56.

[71.]Commons, Distribution of Wealth, p. 29.

[72.]Marshall, 2d ed., p. 198.

[73.]Positive Theory, pp. 339–357.

[74.]Ibid., p. 55.

[75.]Ibid., p. 357.

[76.]Ibid., p. 355. The explanation given by Böhm-Bawerk is open to serious criticism.

[77.]Capital and Interest, passim, but particularly pp. 237–387.

[78.]Positive Theory, p. 33.

[79.]Positive Theory, p. 53.

[80.]Capital and Interest, p. 341.

[81.]Ibid., p. 341.

[82.]Ibid., p. 387.

[83.]Positive Theory, p. 99.

[84.]Capital and Interest, p. 341.

[85.]Capital and Interest, p. 338.

[86.]Positive Theory, p. 55.

[87.]Ibid., p. 98.

[88.]Ibid., p. 117.

[89.]E.g., ibid., pp. 89 and 106.

[90.]The italics are my own.

[91.]Positive Theory, p. 65.

[92.]Ibid., p. 65.

[93.]Positive Theory, p. 65.

[94.]See supra., p. 37.

[95.]Positive Theory, pp. 33, 34.

[96.]Ibid., pp. 58, 59.

[97.]See other definitions of capital as concrete in Positive Theory, pp. 22, 65, and passim.

[98.]One of which differs both from the social and the private capital; three, therefore, including both of them.

[99.]Positive Theory, p. 344.

[100.]Ibid., p. 348.

[101.]Charles A. Tuttle, in Annals of the American Academy of Political and Social Science, i. 615, ff.

[102.]Such a view is taken by Irving Fisher, Economic Journal, vii. 206.

[1.]The Nature of Capital and Income, by Irving Fisher, Ph.D., Professor of Political Economy, Yale University. Pp. xxi+427. New York: The Macmillan Co., 1906.

[2.]The Nature of Capital and Income, p. 52.

[3.]Op. cit., p. 52. The italics in all the quotations in this review follow exactly the original texts.

[4.]Op. cit., pp. 58, 324, et passim.

[5.]“What is Capital?” Economic Journal, Vol. VI (1896), p. 514.

[6.]Ibid., p. 514.

[7.]Ibid., p. 516.

[8.]Ibid., p. 527.

[9.]Loc. cit., p. 528.

[10.]Ibid., p. 533.

[11.]Ibid., p. 534.

[12.]Ibid., Vol. VII, p. 199. So desirous was the author to emphasize the idea of stock as the essence of the capital concept, that he framed a definition doubly tautological: “stock of wealth existing at an instant of time.” In any applicable sense of the word stock, the stock of wealth must be both existing and at an instant of time. “Stock of wealth” tells it all.

[13.]Quarterly Journal of Economics, Vol. XV (1900), p. 19.

[14.]Three articles in Economic Journal, Vols. VI and VII (1896 and 1897).

[15.]Ibid., Vol. VII, p. 511.

[16.]Op. cit., Vol. VI, p. 514.

[17.]Ibid., p. 516.

[18.]Ibid., Vol. VI, p. 527.

[19.]Ibid., p. 516.

[20.]Ibid., p. 526.

[21.]Ibid., Vol. VII, p. 530.

[22.]The Nature of Capital and Income, p. 106.

[23.]See Quarterly Journal of Economics, Vol. XV, p. 19. Further comment on Fisher's present use of the value relation is found above, p. 106.

[24.]Economic Journal, Vol. VI, p. 530.

[25.]Ibid., Vol. VII, p. 199.

[26.]Nature of Capital and Income, p. 66.

[27.]“Recent Discussion of the Capital Concept,” Quarterly Journal of Economics, Vol. XV, p. 19.

[28.]Economic Journal, Vol. VI, p. 514.

[29.]Ibid., p. 532.

[30.]Ibid., p. 534.

[31.]Ibid., Vol. VII, pp. 512, 522.

[32.]Ibid., p. 526.

[33.]Ibid., p. 526.

[34.]Nature of Capital and Income, p. 106.

[35.]Ibid., pp. 105, 106, 112.

[36.]Ibid., pp. 105, 112. In a later summary of enjoyable objective services the money income is not named (p.165), and it is recognized as a different method of reckoning, apparently in conflict with the former view (p. 107).

[37.]Op. cit., p.177. This is the view that was rejected by Fisher in the articles; see above, p. 99.

[38.]Ibid., p. 168.

[39.]It is very questionable whether this is “usually” recognized. Only one reference in support of the statement is given in the footnote p. 165, and that one is to the reviewer's text which cites few precedents for the view.

[40.]Fetter, The Principles of Economics, p. 43 (1904).

[41.]Nature of Capital and Income, p. 177.

[42.]Ibid., p. 176.

[43.]Ibid., p. 177.

[44.]Ibid., p. 149.

[45.]Ibid., p. 326.

[46.]Ibid., p. 232.

[47.]Chap. xiv, passim, especially p. 250.

[48.]It first appeared in criticizing Edwin Cannan, Economic Journal, Vol. VII, p. 532.

[49.]Op. cit., p. 232.

[50.]Ibid., p. 234.

[51.]Op. cit., p. 234.

[52.]Ibid., p. 238.

[53.]Ibid., p. 248.

[54.]Ibid., p. 249.

[55.]Ibid., p. 253.

[56.]Op. cit., p. 230.

[57.]Ibid., p. 177.

[58.]Ibid., p. 230.

[59.]Ibid., p. 232.

[60.]Ibid., p. 235.

[61.]Ibid., p. 184.

[62.]In these cases the word “wealth” would be more fitting than the word “capital.”

[63.]Op. cit., p. 188.

[64.]Ibid., p. 303.

[65.]Ibid.

[66.]Ibid., p. 327. See also above, p. 99, where is shown Fisher's change from this earlier thought to the value concept.

[67.]Economic Journal, Vol. VI, p. 526.

[68.]Economic Journal, Vol. VII, p. 511, note.

[69.]Nature of Capital and Income, Preface, p. viii.

[1.]May, 1883, in Publications of the Amer. Econ. Asso., Vol. III, No. 2.

[2.]Op. cit., pp. 11–12.

[3.]J. R. Turner, The Ricardian Rent Theory in Early American Economics, 1921.

[4.]Staatswirtschaftliche Untersuchungen, etc., Munich, 1832.

[5.]The ideas of Rodbertus on capital are scattered throughout his writings, but perhaps more systematically presented in his work Das Kapital, written 1850–51 but published first in 1885 by A. Wagner and T. Kozak. (Known to the writer only in the French translation, Paris, 1904.)

[6.]See Wagner's Grundlegung, 3rd. ed., 1892, p. 307 ff.

[7.]Knies, op. cit., p. 43.

[8.]Clark, op. cit., p. 11.

[9.]See Dr. A. N. Young, The Single Tax Movement in the United States (1916), passim. Prof. R. T. Ely noticed it in his Recent American Socialism in 1885.

[10.]Largely a republication of a series of articles the publication of which was begun ten years earlier. See preface to first edition.

[11.]Op. cit., p. 86.

[12.]E.g.,op. cit., pp. 33, 34.

[13.]Op. cit., p. 86.

[14.]Op. cit., pp. 55, 66.

[15.]See the discussion, Quarterly Journal of Economics (1895–1896), Vol. 9 (Clark), p. 238; (Böhm-Bawerk), pp. 113, 235, 380; Vol. 10 (Clark), p. 98, (Böhm-Bawerk), p. 121.

[16.]Principles of Economics, 1st ed., 1911, Vol. 2, p. 115.

[17.]E.g., Vol. 1, pp. 72, 75; Vol. 2, p. 119ff.

[18.]Ibid., Vol. 2, pp. 5–8, 58.

[19.]Ibid., Vol. 2, p. 118.

[20.]Vol. 1, pp. 84, 85.

[21.]Ibid., pp. 121–123.

[22.]In part his objections result from his not seeing the full import of the principle; however, his objection to Professor Irving Fisher's view of capitalizing human beings is in my judgment well taken. The reference to my text at this point in the 3rd edition (1921) is misleading. (Vol. 2, p. 126)

[23.]Introduction to Economics (1904), p. 108.

[24.]Ibid., p. 126, and, in revised form, Principles of Economics (1913), p. 14.

[25.]Principles, p. 148.

[26.]Ibid., p. 149.

[27.]Ibid., p. 239.

[28.]E.g., note p. 615; and specific reference to Capital and its Earnings in note, p. 492.

[29.]Ibid., p. 137.

[30.]Ibid., pp. 135–136.

[31.]Ibid., p. 133.

[32.]Ibid., p. 284.

[33.]Ibid., pp. 513, 620 ff., 635, 648, etc.

[34.]8th ed., p. 72. But still, in his last word on the subject (p. 790), Marshall justifies his own adoption of “the two-fold definition of capital.”

[35.]Ibid., p. 170.

[36.]Ibid., pp. 430–431. Also p. 535 et passim.

[37.]Ibid., p. 78.

[38.]E.g., ibid., p. 411.

[39.]Ibid., p. 412.

[40.]Yale Review, Vol. 4, pp. 156–170, “Misunderstandings about economic terms.”

[41.]In a footnote, p. 5.

[42.]It would be a more accurate description of this distinction to say, using Hadley's own phrases: between public wealth as the sum of the “means of enjoyment” or “means of happiness,” in existence, and private capital as the value of individual property rights.

[43.]Material objects by Fisher's definition, Nature of Capital and Income, p. 3.

[44.]Economic Journal, Vols. 6 and 7, 1896, 1897. A number of references to J. B. Clark's ideas occur in the three articles.

[45.]Op. cit., Vol. 6 (1896), p. 514.

[46.]See Quarterly Journal of Economics, Vol. 15 (1900), p. 19.

[47.]The Nature of Capital and Income (1906), p. 52. Italics in the original.

[48.]The thought is hardly to be avoided that some of the peculiar ideas regarding savings and income to which Fisher has adhered so uniquely despite criticism are traceable to this confusion of definitions. We refer especially to his reiterated proposition that “savings are not income.” As a financial fact, there can be no saving and addition to capital value until there is first a property right to an income calculable in monetary terms (a financial present worth) to be saved. Hence to deny that monetary savings are monetary income is in simple common sense to deny a fait accompli; it is to assume the existence of the effect before its cause.

[49.]Elementary Economics (1926), Vol. 1, p. 32 ff.

[50.]Ibid., p. 40.

[51.]Ibid., Vol. 1, p. 355.

[52.]E.g., Vol. 2, pp. 163 and 189.

[54.]Introduction to Economics, 1919.

[55.]As developed in various places; see, among other, Quarterly Journal of Economics, Vol. 15 (1900), pp. 1–45, “Recent Discussion of the Capital Concept”; “The Relations between Rent and Interest,” paper read at the New Orleans meeting, with discussion, Publications of the American Economic Association, 3rd series (1904), Vol. 5, pp. 176–240; The Principles of Economics (1904); American Economic Review, Vol. 4 (1914), pp. 68–92; Economic Principles (1915), p. 267: “Capital is a person's investment power as expressed in terms of money, being a person's property rights to income, estimated, as to amount, with reference to market conditions.” The definitions given in the references dating 1900 to 1904 followed in part Clark's and Fisher's leads in conceiving of capital more nearly as the valuation expression merely of (material) wealth. In developing after 1904 a more adequate capitalization and “interest” theory, the writer returned with clearer convictions to the conception of capital that he had glimpsed before 1900.

[56.]Outlines of Economics.

[57.]Outlines of Economics, 4th revised edition (1923), p. 206; see also p. 103 et passim.

[58.]Principles (1913), p. 69.

[59.]R. T. Bye, Principles of Economics, 1924.

[60.]Op. cit., p. 24.

[61.]Principles of Economics, 2 Vols., 1925. Ref. to Vol I.

[62.]Op. cit., p. 95. These ideas are more elaborately set forth pp. 370–376.

[63.]Ibid., p. 381.

[64.]Economics, 1926.

[65.]Op. cit., p. 247 ff.; also p. 254.

[66.]Ibid., p. 255.

[1.]Prof. A. C. Littleton in the Accounting Review, September, 1935, p. 270.

[2.]Prof. W. A. Paton, Accounting (1924), p. 22. It is to be remarked that the author bases this statement on his belief that “the economist in general deals with the general or social point of view,” whereas “the accountant takes the point of view of the individual enterprise.” The fact is, however, that the greater part of the discussions of capital and income in the current economic texts is as completely concerned with the individual enterprise and as fully overlooks “the social point of view” as is done by the accountants. Much current economics is pervaded by a confusion of individual and social conceptions. See note 4 below, and related text.

[3.]A recent text, Porter and Fiske, Accounting, 1935, pp. 15–16, contrasts the economists’ concept of capital which, it says, is “ordinarily” limited to “material wealth” with that of the accountants which includes property rights and claims. Let it be noted, however, that the authors somewhat vaguely imply in the adverb “ordinarily” their awareness that this concept is not universally or consistently employed in economics; and they incidentally recognize the growing influence of the unorthodox school to which I belong when they say: “The sharp distinction drawn by older economists between land and capital has tended to break down and to result in grouping the two as a single factor.”

Another leading accountancy text (Hatfield, Accounting, p. 173 n) repeatedly refers to some unquestionable contrast between the economic and the accounting definition of capital without, however, anywhere defining capital either in the economic or in the accounting sense. The author does, however, imply his meaning; for example, when referring to one definition of “capital stock” frequently used in statutes, he quotes an explanation of it as meaning “not the shares of which the nominal capital is composed but the actual capital, that is, the assets with which the corporation carries on its corporate business.” Whereupon the author comments: “This corresponds to the economic, not to the accounting definition of capital.” I take this to mean that the author believes the economist's definition of capital to be “the assets” of the corporation, and the accountant's definition as “the capital account of a corporation”—explained in his text as “a nominal sum, the par value of the capital stock.” In another passage—the phrase: “using capital in the economic, but not in the accounting, sense” [p. 375] carries the same implication, that “invested capital” in the economic sense includes all assets of the corporation whether financed by stocks or by bonds, whereas capital in the accounting sense means only the amount represented by shares of stock, the “capital stock,” or perhaps “the stated capital.” See below, notes 8 and 10, two other conceptions of “capital” that are held by accountants.

[4.]The writer has discussed this contrast in two articles in the American Economic Review, Vol. x, pp. 467 and 719: “Price economics versus welfare economics.”

[5.]Accounting, 1927, p. 294.

[6.]H. W. Sweeney, in the Accounting Review, December, 1930, p. 277.

[7.]A. C. Littleton, “Contrasting Theories of Profit,” Accounting Review, March, 1936, p. 15.

[8.]E.g., Porter and Fiske, Accounting, 1935, p. 16: “Business capital and business assets are synonymous. Business assets consist of the material goods, claims and property rights applied to the business project.... Assets are capital.” And again, p. 544: “The term capital...refers to the assets employed in the business and not to that portion of the claim against the assets vested in the stockholders.” See also quotation from Hatfield in note 3 above, where he calls this the “economic” definition, in contrast to that of the accountants, which, he says, is merely the stated capital, “a nominal sum.”

[9.]Paton, Accounting Theory, 1922, p. 37.

[10.]E.g., Kester, Accounting Theory and Practice, 3d. ed., 1930, Vol. I, p. 290. “From an accounting viewpoint, the capital of any business enterprise is the excess of its assets over its liabilities.” The same view is expressed in these words by a legal student of accounting and disciple of Hatfield: “Capital should be defined as the difference, in value between the total assets and the total liabilities of a business at a given moment of time.” (Prosper Reiter, Profits, Dividends and the Law, 1926, p. 5.)

[11.]Quoted in The Oxford Dictionary.

[12.]The Germanic word “stock” had the root meaning of “stick” and hence main stem (as of a tree), hence, figuratively, a collection of physical things viewed as a fund of goods and resources constantly renewed—all of which meanings still persist in good use in various contexts. Evidently the “capital” of individual subscribers meant something quite different from “capital” in the sense of the “capital stock” of the whole enterprise, the latter corresponding rather to the physical aspect of what today are generally called assets.

[13.]The writer is indebted to Prof. Stanley E. Howard for the opportunity to consult an unpublished manuscript further developing this subject.

[14.]Thus he says: “The stock which is lent at interest is always considered as a capital by the lender.... The borrower may use it either as a capital or a stock reserved for immediate consumption.” Wealth of Nations, Book II, Ch. 4. Cannan ed., p. 332. The word “stock” as used by Smith suggests a collection of useful things, and “capital” seems only meant to suggest that these things are used in business as a source of income, either to individuals or to the whole nation. In the latter case the thought of their money valuation is lacking. Such phrases occur as “the capital stock of the society,” “the stock of the country,” “the wealth of the society,” “the capital of a great nation” and “the capital stock of Great Britain” (Ibid., Book I, Ch. 9, pp. 94, 95) with no hint of distinction; but also occurs the phrase, “the capital of a private man” Ibid., p. 93).

[15.]The preliminary report (1931) on Accounting Terminology says (p. 31) of “circulating capital”: “This expression appertains to economics rather than to accounting”; and of “fixed capital”: “A rather vague term, used in economics more than in accounting.” In further comment the Committee uncritically accepts both mutually inconsistent criteria of the distinction between fixed and circulating capital, saying of fixed capital: “It has been defined as wealth used in the production of commodities, the efficacy of which is exhausted by a single use,” and in the next line: “The term ‘circulating’ is derived from the circumstance that this portion of capital requires to be constantly renewed by the sale of the finished articles and repurchase of raw materials, etc.” The former makes the criterion a physical quality (durability), the latter makes it a financial quality (continuous and ready saleability, i.e., liquidity).

It is to be observed, however, that the older economic distinction between fixed and circulating capital survives in slightly altered, and perhaps equally troublesome, form in the accountants’ attempt to divide assets into fixed and current. For example, the Accountants’ Handbook (14th printing, 1934, p. 151) calls this “the most satisfactory basis of asset classification,” adding: “This is founded on the economists’ distribution of all capital goods into fixed and circulating capital, and has genuine economic and operating significance.” The confusion of technical and financial criteria is plainly evident in the context.

[16.]In my essay on “Clark's Reformulation of the Capital Concept,” in Essays in Honor of John Bates Clark [see above].

[17.]A capitalization theory is completely wanting in Clark's treatment, and was lost sight of by the Austrians after a promising beginning in its recognition. By this is meant the process of estimating capital as the present worth of the proprietorship of sources to future incomes, which is not to be confused with the very different process of issuing various kinds of shares in nominal amounts, as the term capitalization is often used in statute law and elsewhere

[18.]A recent text (Porter and Fiske, 1935, p. 327) declares in the chapter on “Income—its nature and determination,” that “it is impossible to find a universal definition of income” and then proceeds at once to discuss profits as synonymous with it, as if that solved the problem. (E.g., 327, 338.) A veteran in academic accounting having, as he says, “vainly tried to find any accepted differentiation between” the terms income and profits and finding no aid in the preliminary report of the accountants’ Committee on Terminology (1931) explains that in his “treatise, therefore, the words are used indiscriminately.” (Hatfield, Accounting, 1927, pp. 214–242.) A writer in the June, 1936, Accounting Review, (G. A. D. Prienreich, p. 130), still further complicates the problem by announcing that “the terms ‘income’ and ‘profits’ are synonymous with ‘earnings’ for all purposes germane to the present discussion,” and a moment later discouragingly adds: “Apparently discussion will be facilitated by avoiding the use of the term ‘income.’” Thus he disposes of half the subject matter of this paper, and we may feel tempted to emulate his discretion by pitching the other half out of the window. But what then becomes of “the fundamental purpose of accounting”—“to distinguish clearly between capital and income?”

[19.]See Oxford Dictionary to this effect.

[20.]Paton, Accounting Theory, p. 53.