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The Concept of Capital

THE MOST FREQUENT MISTAKE that is made not only in the classification but also in the definition of capital, consists in the stress laid on the technical instead of the economic standpoint. (Against this practice see also J.F.E. Lotz, Handbuch der Staatswirthschaftslehre,iErlangen, 1837, I, 60ff., and F.B.W. v. Hermann, Staatswirthschaftliche Untersuchungen,tMünchen, 1874, pp. 221ff.) The classification of goods into means of production and consumption goods (goods of higher order and goods of first order) is scientifically justified, but does not coincide with a classification of wealth into capital and non-capital. The opinion of those who use the term “capital” to refer to all items of wealth that yield a permanent income seems to me to be equally untenable. For if the concept of wealth is stretched to include labor power, and if the concept of income is extended to include the services of consumption goods to their owners (see Hermann, op. cit.,ipp. 582ff. and G. v. Schmoller, “Die Lehre vom Einkommen in ihrem Zusammenhang mit den Grundprincipien der Steuerlehre,” Zeitschrift für die gesammte Staatswissenschaft,iXIX (1863), 53ff. and 76ff.), a consistent extension of this doctrine leads one to the proposition that labor power (see already N.F. Canard, Principes d’économie politique, Paris, 1801, p. 9, and J.B. Say, Cours complet d’économie politique pratique, Paris, 1840, p. 144), land (see Ehrenberg, Die Staatswirthschaft nach Naturgesetzen, Leipzig 1819, p. 13; J.A. Oberndorfer, System der Nationalökonomie, Landshut, 1822, p. 207; “Lord Lauderdale on Public Wealth,” The Edinburgh Review, IV, no. 8, [July, 1804], 364; Hermann, op. cit.,ipp. 221ff.; and L. v. Hasner, System der politischen Oekonornie, Prague, 1860, p. 294), and finally also all consumption goods of any durability (Hermann, op. cit., pp. 225–226) must all be called capital.

     Correctly understood, however, capital consists only of those quantities of economic goods that are available to us in the present for future periods of time and are capable of being applied to uses whose nature and economic character I have discussed at length in the text of the present work (p. 152). This means that the following conditions must be met simultaneously: (1) the time period during which an economizing individual has command of the necessary quantities of economic goods must be long enough to permit a production process (in the economic sense of the term, p. 157) to take place; and (2) the amounts and kinds of the available quantities of goods must be such that through them, the economizing individual has either direct or indirect command of the complementary goods of higher order that are necessary for the production of goods of lower order. Hence quantities of economic goods that are at the command of economizing individuals for such short time periods or in such amounts, kinds, or forms that their productivity is lost are not capital.

     The most important difference between capital on the one hand and items of wealth that yield an income (land, buildings, etc.) on the other is that the later are concrete durable goods whose services themselves have both goods character and economic character, whereas capital represents, directly or indirectly, a combination of economic goods of higher order (i.e., complementary quantities of these goods) whose services also have economic character and therefore yield income, but whose productivity is of an essentially different nature than that of durable wealth that is not capital. Almost all the theoretical difficulties that have arisen in the theory of capital can be traced to the linguistic confusion involved in including both of the above sources of income in the concept capital.

     The fact that under developed trading conditions capital is usually reckoned in terms of money and also most frequently offered in the convenient form of money to persons requiring it, has resulted in capital generally being interpreted in ordinary life as a sum of money. It is plain that this concept of capital is much too narrow, and that a particular form of capital has been elevated to the status of the genus itself. On the other hand, the opposite error has been made by those who do not regard money capital as true capital at all, but only as representing it. The first of the two views is analogous to that of the mercantilists who regarded only money as “wealth,” while the latter view is that of a number of opponents of mercantilism who have gone too far in their opposition and do not even accord sums of money the status of true wealth. (Among more recent writers, see, above all, Michel Chevalier, Cours d’économie politique,tParis, 1866, III, 584ff., and H.C. Carey, Principles of Social Science, Philadelphia, 1858, II, 337.) In reality, money capital is only one convenient form of capital that is especially suitable for use under advanced trading conditions. (See H. Brocher, “Zwei Worte über Kapital und Geld,” Jahrbücher für Nationalökonomie und Statistik, VII (1866), 33–37.) Karl Knies emphasizes this fact most effectively in his Die politische Oekonomie vom Standpunkte der geschichtlichen Methode (Braunschweig, 1853, p. 87): “Wir finden bei allen einzelnen Nationen in sofern eine Analogie der Entwicklung, als überall das Capital seine wirthschaftliche Kraft erst nach der Einführung und der verbreiteteren Anwendung des Metallgeldes stärker entwickeln, seine ausgedehntere Macht erst auf den höheren Culturstufen entfalten kann.”[2] Money does, of course, facilitate the transfer of capital from one hand to another, and especially also the transfer of capital goods and the transformation of capital into any desired form (its application to any desired use), but the concept of money is entirely foreign to the concept of capital. (See E. Dühring, “Kritik des Kapitalbegriffs und seiner Rolle in der Volkswirthschaftslehre,” Jahrbücher für Nationalökonomie und Statistik, V [1865], 318–343, and F. Kleinwächter, “Beitrag zur Lehre vom Kapitale,” ibid., IX [1867], 369–421).

[1]To Chapter III, Section 3. See note 15 of Chapter III.—TR.

[2]“We find that the development of all nations was analogous to this extent, that capital was everywhere able to develop its economic power strongly only after the introduction and widespread use of metallic money and to reveal its more extensive power only at higher levels of civilization.”

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