The Distribution of Wealth: A Theory of Wages, Interest and Profits
Kinds of Capital and of Capital-Goods
Capital has been classified as "fixed" and "circulating." These terms properly describe two distinct parts of the permanent fund of true capital, rather than two kinds of capital-goods; and in proper thought and speech the totals are more frequently employed in this way. Thus, a merchant is said to have fifty thousand dollars in fixed capital and two hundred thousand in circulating. In scientific usage, however, these terms have been made to describe two varieties of capital-goods; and here again there has resulted some of that confusion which never fails to result where the two different conceptions that attach themselves to the term capital are used vaguely and interchangeably. It is particular kinds of instruments that, as economists have told us, are fixed capital, and certain other kinds that are circulating. Buildings, machinery and the like represent the former genus; and raw materials, unfinished goods, etc., the latter.
In a rude way, these terms describe the behavior of two different kinds of working instruments; and the scientific nomenclature has something to justify it. The plane that is in the cabinet-maker's hand may be fixed there, in that it does not need to leave the man and betake itself to another owner, in order to do its productive work. But the board that the carpenter is planing may have to change ownership, since the chances are large that the man is working on an article for another person. In this way it comes about that some of the working instruments seem to do what may be rudely described as circulating, and others do not. In reality, however, there is no true circulation in the case of any of these instruments. A table, when it has been finished in the cabinet shop, may go straight to the house of the man who is to use it and stay there. All the circulating that it will have done is thus reduced to a single movement from one proprietor to another. Capital-goods, in fact, with a single exception, do not truly circulate. The exception is money; for coins, bank-notes, etc., necessarily pass from hand to hand indefinitely in performing their functions. A commodity of any other sort circulates as little as it can. There is, indeed, a waste in having it pass from hand to hand: the more directly it can go from the man who makes it to the man who is to use it, the better it is for society. It may be necessary for it to pass through a few changes of ownership in the making—and rather more of such changes are likely to be required where industry is highly organized than where it is not so; but in a given stage of social organization we have given methods of production. With the methods thus given, the less the article circulates the better.
Another distinction—one that was once used by Mr. John Stuart Mill and is still common in economic treatises—asserts that fixed capital, meaning fixed capital-goods, can be used many times; while circulating capital can be used only once. Thus, the carpenter, it is said, may often use his hammer for a while and then lay it aside. He may keep it day after day, year after year, and drive countless nails with it; but, on the other hand, when he has once nailed together the boards that are to make a chest for some customer, he will part with the boards in their new form and will never see them again. The materials are, then, said to be circulating capital, and the hammer, fixed capital.
This distinction is a vague one. What constitutes a "time"—as the term is above employed—in the using of a tool? It is obvious that a man can take a hammer, use it and then lay it aside as many times as he will; but he can treat raw materials in the same way. He can begin working on a board, cease and begin again. To have any value this definition should complete itself—as, in some forms of statement, it does—by saying that goods which constitute circulating capital cannot be used more than once without undergoing a change of character. Under the successive manipulations of the carpenter the rough board becomes, first, a smooth one, and then a part of a chest; while the plane and the hammer remain unchanged, except by unavoidable wear, however often they may he used. If we thus define the "time" that a capital-good is used by some change that takes place in the condition of it, we shall have attained a measure of truth. The goods that embody fixed capital can, in fact, be used repeatedly without any change in their economic status, while those that embody circulating capital acquire a new economic status at every use. If we describe the character of this change of condition that such goods undergo, we shall make the essential and clear distinction between the one genus of capital-goods and the other.
There are two opposite ways in which capital-goods aid production. Some things, like artisans' tools, help to fit for use the matter furnished by nature. They have an active, rather than a passive function to perform, for they impart utilities to other things. Machines that transform matter, vehicles that move it and buildings that protect it—all come in this category; and so do all appliances that, in the war between man and nature, range themselves on the side of man and help him to subjugate resisting elements to his use. These instruments constitute the active variety of concrete capital.
The materials on which implements work, on the other hand, are mechanically passive. They receive utilities, instead of imparting them; they undergo modification, and themselves modify nothing. In the contest between man and nature, they range themselves on the side of nature and maintain a receptive attitude toward man and his active appliances. Cotton is thus passive, while the spindle is active; bar iron is passive, while the roll and the hammer are active; and thus throughout the field of industry the character of the process itself draws a line of demarkation between actively working instruments and passive materials—between man's weapons of offence and nature's subjects for defence, or her elements that are undergoing subjugation. The class of passive instruments includes not merely the crude matter with which industry begins, but the products that pass, in an unfinished state, from one working group to another. It includes not only ore, but iron, and not only wool, but yarn, cloth and even ready-made garments awaiting purchasers. It includes all the stocks of merchandise that, in the hands of dealers, are awaiting the minor utilities of form, place, etc., that are necessary in order to make them entirely ready for final consumption.
This distinction underlies the one usually made between so-called "fixed" and "circulating" capital. Instruments that have been rated as fixed capital—buildings, tools, etc.—have active industrial functions to perform; while those which have been rated as circulating capital have passive ones. Practical thought, however, does not usually apply the terms fixed and circulating to capital-goods, but applies them to different portions of the permanent fund of true capital; and here, again, common usage bears the test of careful analysis. Concrete things, as we have seen, do not circulate in any true sense. They go through a series of hands into the possession of users, and remain there. There is, however, something that truly circulates. True capital passes through an endless series of outward forms. We have called it a permanent fund, and it is so; but it perpetuates itself only by passing continually out of one body into another. It lives by transmigration; and its movement must be as perpetual as its life.
It should be noted, and in current discussions of this subject has often been noted, that the raw materials which enter into a tool make a transition from one variety of concrete capital to the other. The hammer that goes from the hardware merchant's shop to the blacksmith's forge is said to become fixed capital, after having been circulating capital. What is clear is that it thus takes on an active economic function, after having had a passive one. It pounds hot iron and imparts utility to it. The steel that is a capital-good of the passive kind when it is in a bar becomes active when it is in a hammer. At any particular time it is easy to see on which side of the line a thing belongs, for its function distinguishes it—it is either imparting utilities or receiving them. We shall, then, always designate the two kinds of capital-goods, according to their functions, as active and passive.
Some idea of this distinction is probably present in the mind of nearly every one when, keeping the old nomenclature, he makes an effort to say what particular things are "fixed capital" and what things are "circulating capital." Instinctively he selects as an illustration of the former an engine, a tool, a building or something else that is not getting ready to be worn, or eaten or otherwise consumed in the direct gratification of wants. The essential thing about such an article is that it will never "ripen." It will never be like mature fruit, which is good for nothing but to delight a consumer's palate and replenish the wasting tissues of his body. Goods of the active kind never grow any riper in the performing of their functions. At the outset of their careers they are well removed from the possibility of being directly consumed, and they never get any nearer to it. They are always man's active auxiliaries in the onerous operation that he undertakes when he reduces the passive materials of nature to a serviceable condition. The mill will never be eaten, but it will always help a man to get something to eat.
The terms fixed and circulating, however, are not to be discarded, for there is an exact way to use them. We have said that they properly apply to two portions of the fund of permanent capital. There are, in fact, three parts of this general fund, each of which is unlike the others in the matter of circulation. There is one part of the fund of capital that is destined to circulate forever, as rapidly as its owners can make it circulate; there is another part that circulates as slowly as its owners can make it; and there is still another part that does not circulate at all. These two latter portions we may group under the term fixed capital, and call the first part circulating capital.
If a business man were to say, "I have a circulating capital of fifty thousand dollars," he would mean that the fifty thousand dollars are in the shape of goods that he is interested in selling as quickly as he can—finished goods in his warehouse or unfinished ones in his mill. He must put his particular touch on them, thus imparting to them a certain utility, and then make haste to be rid of them. When he is thus rid of them, the capital that they represented will have taken the shape of new goods like them. The oftener this capital shifts its forms, the better it is for the owner. The so-called "nimble sixpence" is profitable. If the man has a fixed capital of fifty thousand dollars, this sum is in forms in which it will stay as long as the man can keep it there. The sooner the shoes in the factory are finished and sold, the better; but the machines that are finishing them are not better for having to be quickly shifted. The "sixpences" that are in them do not gain by being nimble: it is the "slow shillings" that are here the best.
Of the fixed capital of fifty thousand dollars some is, perhaps, invested in land, and this will never wear out; some is in buildings, and these will wear out slowly; and some is in tools and machines, which will wear out more rapidly; but the essential fact about them is, that it is not good for production to have them wear out at all. This sum of fifty thousand dollars may be forced to change many of its forms of investment; but the change is unwelcome to the owner, and he will put it off as long as he can. He must, however, come to it in the end. All capital, except the part that is invested in land, lives by transmigration. It must eventually cast off one set of bodies and put on others. Not even in a massive building will capital stay forever, since even this will perish by degrees. It may be replaced by degrees, so long as the structure is kept in repair; but even this involves a shifting of the substance of it, and ultimately it will be destroyed and replaced altogether. Capital, then, does some circulating, even when it is embodied in substantial and active tools of production. The thing that separates fixed capital from circulating, it thus appears, is not the absolute length of time that the fund stays in one set of bodies: it is the fact that, in the one case, the operation of circulating is productive, and the man causes the movement to go on as rapidly as be can; while in the other case the circulating is not productive, but wasteful. The fact that a mill wears out, and has to be reconstructed or altogether replaced, does not, of itself, contribute to production. It is not a welcome fact in the experience of the owner of the mill, and he permits it to occur only so far as it is unavoidable.*14
We are now prepared to test the relation of capital of every kind, as well as of capital-goods of every kind, to wages. The separation of these two problems will save us from encountering difficulties that have often baffled inquirers and made absurdities plausible. In particular, we shall avoid all difficulty connected with either the wages-fund doctrine itself or any of the collateral fallacies that have attached themselves it.
Is there any capital that is simply a "fund for the maintenance of labor"? Is it true, as Adam Smith said, and as a hundred others have repeated, that the natural way to originate capital is to heap up food enough to live on for a long period and then, during that period, to make something useful, like a boat, a hut or a tool? Is stored food the original capital? By our test, capital, if it is in what can be called food at all, must be in food-stuff that is really a raw material of industry. Wheat is a capital-good of the passive kind, for it receives utilities; and so do flour in the grinding, bread in the kneading, meat in the baking, etc. If it is not raw materials, but food in the full sense of the term,—something which neither receives utilities itself nor imparts them to other commodities, and which has nothing further before it but to be eaten,—it is not capital at all. The traditional way of studying the subject of capital has put before the mind, as the first and most typical form of it, something which has nothing to do but to exhaust itself in satisfying consumers' wants. If such a thing is to be rated as a capital-good at all, this can only be by that curious and perverse conception of the laborer as an engine, and food as the fuel that keeps it running. Meat is as coal for this wealth-creating machine.
One obvious difficulty here is on the teleological side: What is the end of the whole economic process? We have said that it is utilization. It is the gratification that shows itself in the nervous sensations, and the higher sensibilities of the consumer. If, afterward, the consumer works, this labor is not to be considered as impelled by the food that he has eaten; it is induced by the further food that he will afterward obtain and eat, and by very much besides mere nutriment that he will otherwise enjoy. The food that is to follow labor is one of the lures to labor and, in that sense, is the cause of it. The food that precedes the work is, in any normal teleology, the cause of nothing except an effect in the person of the eater. With the eating, one economic cycle ends; for the activities that have fallen within that cycle have produced their consummate effect. When, with the opening of another day, more labor begins, it is the starting of a new cycle; and this will end, as the former one ended, when the man consumes the fruits of it.
This, however, is not the most conclusive reason why food, as such, should not be regarded as a capital-good, or as a form of investment of any part of the permanent fund of capital. It may, indeed, be possible to carry through an entire study of economic science the conception of phenomena arranged in an abnormal order; and it may even be possible to do something in the way of solving practical problems, while one is working under the disadvantage of having his theories colored by an illogical teleology; but the conclusive objection lies in the fact that no such store of food for laborers anywhere exists. The recurrence of the winter season makes it necessary, indeed, to store raw materials for food during the time when the earth does not produce them. The material so stored belongs to the passive variety of capital-goods: in other words, it embodies some of the circulating variety of permanent capital. It receives utilities until it is finally made into food proper and served on the table. Wheat gets "time utility" by being stored in the elevators until it is wanted for grinding; and its value is all the while increasing, as it is when it gets form utilities in the grinding, place utilities in the carrying and further form utilities in the baking.
Wherever there is intermittent production, a store is, of course, needed to insure continuous consumption. The tank that is pumped full once a day may discharge an unbroken stream during all the day; and in this way a store of such goods as are produced only at intervals may, in felicitous words suggested by President A. T. Hadley, "translate an intermittent flow of production into a continuous flow of consumption." In a similar way, a store of such goods may be accumulated by a slow and continuous production, and may then be used up by one quick act of consumption. The reservoir may be filled by a constant trickling stream, and may empty itself once a day in a single rush through the flood-gate. Fireworks may be made during the year and used on the Fourth of July. Here a continuous flow of production is translated into an intermittent consumption; and many kinds of goods that are usable only during one part of the year illustrate this process.
It is a store of a different kind to which the theory under consideration refers. Independently of any question as to whether production is continuous or intermittent, the view has been presented that capital is originally and typically a store to be drawn on for the sustaining of labor. With production and consumption going on steadily and at uniform rates from day to day, this feeding of men from a store must, as has been said, take place.
The storing that raw food-stuffs undergo, by reason of the periodicity of agriculture, is, in its nature, in sharp contrast with that different kind of storing which Adam Smith and many others have cited as a typical mode of originating capital. This supposed store is made distinctly for "laborers," and it is made only by capitalists. The object of it is the using of the laborer as a piece of productive machinery. It is supposed to take place not at all because of the periodicity of the harvesting season, but because of the relation of capital to labor. Some one gets capital in the form of food, in order that he may feed a day laborer and thus obtain capital in some other form. The laborer is a transporter of capital-goods; and such a storing of food as this, if it were necessary at all, would be necessary even if the season were such that we could plant wheat every day of the year and harvest some of it every day in the year.*15
Let A, again, be the raw material that will become successively A', A'' and A''', and in the last-named condition will be ready for consumers' use. Let the B's and the C's represent other articles in parallel stages of the producing process. There are men, both laborers and capitalists, who make the raw material, A; there are other men who transform A into A'; and each one of the transformations that follow is effected by one class of producers, with the needed tools, buildings and other appliances. There is a series of productive establishments, organized in a similar way, engaged in producing B and in transmuting it successively into B', B'' and B'''. There is a similar series of producers creating and transforming the material, C. Each group consists of laborers, capitalists and entrepreneurs. A''', B''' and C''' are goods in their final forms, quite ready for consumers' use; and this, in logical consistency, requires that they shall be at the very last point in their economic careers at which they are capital-goods at all. They are now in the retail shops waiting for purchasers. If they take one step more, they will cease to be capital-goods altogether and will become consumers' goods. Society, as the great producing organism, will have given them up, and individuals, as consumers, will have them. There is, then, no form of capital that is not an instrument in the hands of producing society. When the A''', the B''' and the C''' are taken by individuals, as such, they thus become consumers' wealth.
If we adhere to our static hypothesis, and suppose that the quantity of capital and the quantity of labor remain unchanged, that the methods of industry remain the same, etc., all income must be regarded as ripened capital-goods of the passive variety. No one gets any income except what comes in the form of A''', B''' and C''', fully ripened; for taking capital-goods as a part of one's income would be merely adding to capital, and this would be a dynamic process. Things which up to the point at which they become income have been receiving utilities, and so have been embodiments of circulating capital, make up every one's returns. Where, then, is the independent and specially stored food-fund for laborers? Nowhere; the difficulty in recognizing it as a variety of capital lies in the fact that it does not exist. The food, clothing and other income goods, for laborers as well as for other persons, consist in the ever-ripening A''', B''' and C'''. The material tissue of circulating capital wastes, as some of it ripens into income, but it is at the same time replenished by industry.
It is most remarkable that the theory which assumes that goods are somewhere stored for the use of laborers should not notice the fact that, if this were indeed true, there would have to be a similar storage of income goods for the use of capitalists. The capitalist who is helping to make the raw material, A, must have his daily income in the shape of A''', etc. He is making raw goods and using ripe ones every day; and his position is exactly analogous to that of the laborers who are working with him. Neither he nor they can eat, wear or otherwise use the crude stuff that they are getting out of the ground. Three distinct productive periods must elapse before this identical material will be usable, yet they must live in the interim. They must all, capitalists and laborers alike, have a supply of A''', B''', and C'''. Must it be stored for them, to supply their needs until their own raw stuff shall be ripened? We have answered that question. Of the instantly emerging A''', B''' and C''', a share goes instantly to the capitalists and the laborers at A. In neither case is any waiting necessary. The point that we are now insisting on is that, if a store were needed to supply the wants of the laborers in the sub-group that makes A, it would be needed, for precisely the same reason, to supply the wants of the capitalist at A. The static hypothesis that capital is not increasing means, as we have just said, that the whole net income of the capitalist class is used up daily in the form of consumers' goods. It means, also, that capital is not diminishing; and that, therefore, only the income of the capitalist, and not his permanent fund of productive wealth, is available to supply his wants. He has, indeed, an ultimate safeguard against starvation, which the laborer lacks; for by changing his plan of life he can use up his capital. But naturally he does not do this, and the static hypothesis requires that he shall not do it. In this condition, he needs a store of subsistence goods, if the laborers need one. For the reasons that have been fully stated, however, neither of them needs such a store.
Goods that are receiving utility, on the one hand, and goods that are imparting utility, on the other, exhaust the entire class of capital-goods. As they come and go in their endless succession, they perpetuate the entity to which is here given the distinctive name, capital.
Notes for this chapter
The pure fund of capital may even stay longer in some kinds of passive capital-goods than it does in some active instruments. Emery, for example, is an active agent for polishing metals. While doing its work, it imparts utilities and does not receive them; but it does not last long, and the metal that it is polishing may continue for a much longer time in the condition of a passive instrument. Coal, too, is an active instrument: it is not in the mill for the purposes of receiving any additional utility, but is there for the purpose of helping workmen to impart utility. It transmutes itself into power, and saves muscle; but it perishes quickly. The essential fact is that it is for the interest of the owner to have his emery-wheels last as long as they will, and to have his coal keep up a fire as long as it will. Capital may stay for an instant in steam, and for an hour in the fuel that generates it; but it also stays for weeks in unfinished products. It remains for years in machines, for decades in the buildings that house them, and forever in the land that the buildings now stand on. Fixed capital will always keep its forms as long as it can; while circulating capital will change its forms as quickly as it can.
Professor Cairnes, in his latter-day effort to galvanize the wages-fund doctrine into life, classified all capital as consisting in raw materials, fixed capital and the wages fund. If his terms be understood in the natural way, this classification involves adding together two qualities and one pure quantity in order to get a sum total. The wages fund is a quantitative fraction of all the capital in existence; while raw materials and fixed capital, in the sense in which Professor Cannes uses the terms, are material forms of it—are kinds of capital-goods.
If, however, we interpret all three terms as referring to kinds of wealth, and not to quantities, we encounter another difficulty that is equally fatal. Let us make the terms, wages, found in this connection, mean the kind of goods that laborers consume; and we now have, as the three varieties of capital-goods, raw materials, fixed capital (meaning active instruments of production), and, finally, the commodities that laborers consume. The third kind of capital-goods, however, nowhere exists. Instrumental wealth is all included in the first two classes. Every bit of it is either in the category of active instruments of production, or in that of passive instruments; it is either among the tools that transform, or among bit matter that is in the transforming.
It is clear that Professor Cairnes could not have intended by the term wages fund to designate goods in retail shops; for many of these are destined for the use of other persons than laborers. If they are neither raw materials nor fixed capital, they cannot not find a place anywhere in Professor Cairnes's classification; yet obviously they represent a part of the merchant's capital. A list of varieties of capital that was intended to include the whole of it, could not well omit those parts of the stocks of retail merchants that are designed to be sold to these men who are not laborers. If they are not raw materials, they are not forms of capital at all, according to Professor Cairnes's classification; and if they are raw materials, then the parts of the stocks that workmen will buy come in the same class, and should not be counted a second time as the "wages fund."
Retail stocks are, in fact, passive capital-goods, receiving utilities. Thus, the shoe that is in a box on a merchant's shelves has by no means acquired its full service-rendering power until a foot is found that it fits, and the fabric that lies in a roll upon the counter will not develop its full utility until a customer comes whose taste it shall accurately gratify. All goods that are waiting to be parcelled in proper quantities and delivered at customers' houses, are waiting to have producers' finishing touches put upon them—are consumers' goods in the making, like any other raw materials.
An article by Professor S. N. Patten, in the Quarterly Journal of Economics for January, 1889, discusses admirably the case of food storing that is compelled by the intermittence of agriculture, and makes an acute study of the element, time, in connection with capital and its function.
End of Notes
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