The Positive Theory of Capital

CHAPTER I

INTRODUCTORY

IN expounding the theory of capital as Instrument or Tool or Means of Production we have to describe and explain the emergence and effects of capital in the economic production of goods. What we have to say on this matter groups itself round two questions: How does capital originate? and what is the nature of its productive work? The first question has to do with the theory of the formation or accumulation of capital; the second, with the productive function of capital.

The reader who has waded with us through the dozen theories and dozen definitions of capital will scarcely be surprised at meeting a similar divergence of opinion on the question we have now to consider. Of course there is no dispute about the fact that capital is, in the highest degree, useful to production. But I am much afraid that this is the only proposition on which our economists are quite agreed. So soon as the further question is asked: In what does this usefulness consist, or what character does the co-operation of capital in itself bear?—agreement is at an end. One finds the utility of capital in putting labour in motion;1 another, in saving or supplanting labour;2 a third, in performing labour;3 a fourth praises it as giving man the mastery over the powers of nature;4 and a fifth, as enabling the labourer to “put an interval between the beginning and the end of an enterprise.”5 Some, like Lauderdale, see in it an independent, original factor of production along with land and labour; others, like Gide, call it an independent but still merely derivative factor. Kleinwächter looks on it simply as a “condition”; Carey, again, as an “instrument” or “tool” of production. Indeed, our theorists cannot even agree as to the way in which that useful auxiliary of production comes into existence If we ask the question concretely: How is a plane, or a plough, or a steam-engine made?—they would probably be able, with perfect certainty, to give minute information as to how those concrete portions of capital come into existence. But whenever they have to generalise what they have observed, they divide into hostile camps. Capital originates in saving, says one; no, says another, it must be produced; while a third proclaims that it originates in the two together.

It is a much greater cause for wonder that economists came to no agreement in these and similar questions than that they remained apart in their theories of interest. The task here was quite different, and essentially easier. In the interest theory the difficulty is to give the proper explanation of facts which are really much entangled, while here there is almost nothing to do but to describe the facts correctly; and facts, moreover, with which everybody is quite familiar. As we have said, every one knows how a plane or a steam-engine comes into existence. Similarly every one has a sufficiently exact idea what and how a plane, a machine, a plough, a raw material, does in production. It was only necessary to leave out everything peculiar in those cases, and to describe in appropriate words everything universal and typical in them, and the theory of the formation and function of capital would almost have been written.

The reason why economists failed in this simple task was that they did not allow the facts to speak for themselves. Instead of simply describing them as they were, explanations were read into them and added to them; one feature was pushed into the foreground, another kept in the background, a third was quite overlooked, while perhaps a fourth was entirely absent, but was read into them. “When every man had thus imported his own particular views bodily into the facts, it was, of course, no wonder that everybody got something different out of them.

To my mind the most important duty of the theorist in such a case is to avoid the faults we have just condemned. To make certain of this we shall make a clear distinction, even in outward form, between the statement of the facts and the interpretation of them. The next chapter, therefore, will delineate and describe the process of capitalist production. When a solid basis of fact has thus been obtained, the interpretation and construction will follow in the chapters on the productive function of capital, and on the theory of the formation of capital6

7 Adam Smith, book ii. chap v.

8 Lauderdale, Enquiry, p. 161, passim.

9 Lauderdale, ibid. So also J. B. Say, “Il faut, pour ainsi dire, que les capitaux travaillent de concert avec l’industrie” (Traité, i. 3).

10 Strasburger, Hildebrand’s Jahrbücher, vol. xvii. (1871), p. 325; and Carey.

11 Jevons, Theory of Political Economy, second edition, 1879, p. 243.

12 In economic literature the clearest views as to the nature of capitalist production are, in my opinion, to be found in Rodbertas, Jerons, and Carl Menger. The works of Rodbertas, where they are not directly disfigured by the influences of his one-sided Socialist standpoint, are of quite classical accuracy and clearness. Unfortunately there are certain features which very sensibly mar what he has said. This is true in particular of his omission to notice the share which the valuable natural powers take in production, and the influence of time—two things which, obviously, could not easily be fitted into the “exploitation” theory he maintained so vigorously, and so were suppressed. We shall see this more fully later on. Carl Menger, again, by his arrangement of goods according to “rank” (Grundsätze, p. 7), and his statement of the laws which connect together goods of various ranks, has given at once a brilliant proof of his clear insight into the developed phenomena of production, and an invaluable tool to the hands of succeeding investigators.

• 1See my Capital and Interest, 1890, p. 111.
• 2The English word “Cattle,” as Knies (p. 7) has rightly remarked, has nothing in common derivatively with our conception.
• 3Capital and Interest, book i. chaps, ii. and iii.
• 4Strasburger, Hildebrand’s Jahrbücher, vol. xvii. (1871), p. 325; and Carey.
• 5P. 219 (German edition, p. 266). See also my Hechte und Verhältnisse, p. 51. Innsbruck, 1881.
• 6See Mill’s Principles, i. 1. 2.
• 7When we are told that capital assists in the production of wealth, and then again that it assists in the obtaining of wealth for its owner, we are apt to jump to the conclusion that the two phenomena are intimately and essentially connected, and that the one is the immediate result of the other—that capital can bring wealth to its owner because capital assists in the production of wealth. As a fact, Political Economy has taken up this idea only too readily and too completely. Captivated by the deceptive symmetry that exists between the three great factors of production—Nature, Labour, Capital—and the three great branches of income—Rent, Wage, and Interest—the science, from Say’s day till the present, has taught that these three branches of income are nothing else than the payment for the three factors of production, and that Interest in particular is nothing else than the compensation which capital receives for its productive services when the product is divided out among society. Propounded by various interest theories in various forms this idea has found its most concise and, at the same time, its most naive expression, in the well-known “Productivity theories”—those theories which explain interest directly as the natural fruit of a productive power peculiar to and resident in capital.
• 8Originally the word Capital (Capitale from Caput) was used to signify the Principal of a money loan (Capitalis pars debiti) in opposition to the Interest. This usage; already foreshadowed in the Greek formation κεϕάλαιον, became firmly established in mediæval Latin, and appears to have remained the prevailing one for a very long time, even pretty far down in the new era. Here, therefore, Capital meant the same thing as “an interest-bearing sum of money.”
• 9In the meantime the disputes which had arisen over the legitimacy or illegitimacy of loan interest brought about an essential deepening and widening of the conception. It had become apparent that the interest-bearing power of “barren” money was at bottom a borrowed one—borrowed from the productive power of things that the money could buy. Money only gave the exchange form—to a certain extent the out-ward garb—in which the interest-bearing things passed from hand to hand. The true “stock” or parent stem which bore interest was not money but the goods that were got for it. In these circumstances the obvious course was so to change the conception that, besides embracing the representative thing, money, it would embrace the represented thing, goods. And, indeed, popular language seems to have made this change before science did. At least, as early as the year 1678, in a glossary of that year, besides the meaning of a sum of money there appears this further interpretation of the word capital, “Capitale dicitur bonum omne quod possidetur.” But science was not long behind in sanctioning the adoption of the conception. We find it substantially in Hume in his essay on Interest, when he shows that the rate of interest altogether depends, not on the amount of money, but on the amount of riches or stocks available; the only thing wanting is that he should have formally called these riches or stocks “real capitals.” This formal change was finally made by Turgot: “Whoever,” he says in his Réflexions sur la Formation et la Distribution des Richesses, “gets possession of more goods in a year than he requires to use, can lay past the surplus and accumulate it. These accumulated goods are what people call Capital…. It is absolutely the same whether this sum of goods, or this Capital, consists of a mass of metal, or of other things, since money represents every kind of goods, just as, on the other side, all other kinds of goods represent money.” Thus Turgot gave the second reading in historical succession to the conception of capital.
• 10The reader who has waded with us through the dozen theories and dozen definitions of capital will scarcely be surprised at meeting a similar divergence of opinion on the question we have now to consider. Of course there is no dispute about the fact that capital is, in the highest degree, useful to production. But I am much afraid that this is the only proposition on which our economists are quite agreed. So soon as the further question is asked: In what does this usefulness consist, or what character does the co-operation of capital in itself bear?—agreement is at an end. One finds the utility of capital in putting labour in motion; another, in saving or supplanting labour; a third, in performing labour; a fourth praises it as giving man the mastery over the powers of nature; and a fifth, as enabling the labourer to “put an interval between the beginning and the end of an enterprise.” Some, like Lauderdale, see in it an independent, original factor of production along with land and labour; others, like Gide, call it an independent but still merely derivative factor. Kleinwächter looks on it simply as a “condition”; Carey, again, as an “instrument” or “tool” of production. Indeed, our theorists cannot even agree as to the way in which that useful auxiliary of production comes into existence If we ask the question concretely: How is a plane, or a plough, or a steam-engine made?—they would probably be able, with perfect certainty, to give minute information as to how those concrete portions of capital come into existence. But whenever they have to generalise what they have observed, they divide into hostile camps. Capital originates in saving, says one; no, says another, it must be produced; while a third proclaims that it originates in the two together.
• 11The theory of the use of goods I have already gone into at length in Capital and Interest. I there showed that material goods are nothing else than such distinct forms of matter as admit of the natural powers residing in them being directed to human advantage. I showed how the “use” they afford is realised through concrete activities of these natural powers, and, therefore, by real forth putting of power. I showed how a use (Gebrauch or Nutzung) cannot be made of them otherwise than by taking the peculiar forms of the energy of the good at the proper moment, supplying the conditions necessary to render them available where they previously existed in an unavailable form, and then bringing these forms of energy into proper connection with that object in which the useful effect is to take place. On these considerations I based the conception of the “Material Services” (Nutzleistungen) which I believe to be the only one that corresponds with facts, and rejected certain shadowy ideas which connected the old theory of interest with the word “Uses” of goods. What remains for us here is, on the same lines, to lay down certain fundamental ideas as to the origin of material goods.
• 12If we look more closely at the way in which man assists natural processes, we find that his sole but ample contribution consists in the moving of things. “Putting objects in motion” is the idea which gives the key to all human production and its results;—to all man’s mastery over nature and its powers. And this is so simply because the powers reside in the objects. Now when man by his physical powers—the power of moving things—is able to dictate where the object shall be, he obtains a control over the place at which a natural power may become effective; and this means broadly a control over the way and over the time in which it may become effective.