Online Library of Liberty: Capital, Interest, and Rent

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

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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.

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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

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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

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