Capital, Interest, and Rent: Essays in the Theory of Distribution

Reprinted from
encyclopedia of the social science, s.v., “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.

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.

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.

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.

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.

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.

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.