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

Fetter, Frank A.
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Murray N. Rothbard, ed.
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Kansas City: Sheed Andrews and McMeel, Inc.
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Collected essays, 1897-1937. First published as a collection in 1977.
15 of 26

Part 1, Essay 11
Reformulation of the Concepts of Capital and Income in Economics and Accounting

Reprinted from Accounting Review 12 (March 1937).



Examination of a considerable sample of current accounting literature discloses a much divided opinion as to the relationship between economic and accountancy concepts and theory. Occasionally some accountant deplores the fact that "accountants have seldom had much training in economics" and expresses the hope that in the future public accountants may be more thoroughly educated in that subject.*66 The more frequently recurring emphasis, however, is that "the point of view of the accountant differs sharply from that of the economist, and that consequently, the terms, concepts, and principles of economics cannot reasonably be transferred, unmodified, to the field of accounting."*67


The general attitude of accountants seems to be that the economic concepts may be valid in their own field, but that they cannot be adopted and applied to accounting purposes.*68 I maintain, on the contrary, that there is no necessary conflict between the conceptions and terms in economics and accountancy. It is true that economics ought to deal with some aspects of public, or social, policy which lie outside the field of accountancy, but economics also has to do, as has accountancy, with the price system and the problems of capital, profits, and income in connection with private individual and corporate enterprises, and much of the current economics does this exclusively to the neglect of the social aspects.*69 Our first thesis, then, is this: If and when accountants and economists are talking about the same things, namely problems of private enterprise, investment, prices, capital, and income, they should talk the same language among themselves, with each other, and with the public. Words are the symbols of thought, the circulating medium of ideas, and the penalty for confusion in our language must be confusion in our own thinking, magnified further in the minds of the public.


For my part, I concede that economics is primarily to blame for the confusion existing today in both fields of study. The principal economic terms now in use were taken uncritically from popular speech by the earlier writers with little regard either to etymology or to logical consistency. These terms have long been used in special restricted senses in the discussion of contemporary issues without recognition of other misleading associations of ideas. Often in the same paragraph or chapter where the terms are formally defined in one sense, they are used by the author himself in a different sense. In many modern economic texts definitions of this sort still linger as the sacred "idols of the forum" and "of the theater," as Sir Francis Bacon called the errors arising from human language and from traditional doctrines and methods. It is to this arsenal of rusty weapons that the accountants have mostly continued to resort in search of much needed arms of economic theory, whose defectiveness is quickly revealed under hard usage in their hands. Economists often with impunity may be arm-chair theorists; accountants are on the firing line of business, and their weapons of theory feel the full shock of the battle. Their efforts to find consistent and useful terms and concepts have in some respects been hindered rather than helped by their reliance upon the older economic authority. Not until economists of the Marshallian, Neo-Ricardian, school have more fully recognized their errors and reformed their terminology, can the accountants hope to derive much help from many of the current economic texts.


It should be observed also that the close contact of accountants with the hard realities of business has made more difficult for them the task of formulating logical and consistent concepts for their own use. Consider particularly the necessity they are under of protecting their clients by conforming with the requirements laid down in legislative statutes regarding the maintenance of "legal capital" (or "stated capital") and regarding the permissible distribution of dividends. Such statutes, often varying and conflicting in different jurisdictions, carelessly and inconsistently drafted or later so interpreted by the courts, frequently force the accountants to bend logical terminology to legal and practical requirements. As Hatfield says:*70 "The accountant can not disregard the decisions of the courts, or he may find that he has led his clients into an action for which they may be held liable." But surely it is the highest duty of both accountants and economists, while meeting the legal and practical demands of the moment, to point the way towards truer economic conceptions in the law instead of merely passively submitting to its sometimes blundering dictation. That, indeed, is the ideal of this session.



Regarding the important place of the concepts of capital and income both in economics and in accountancy there is no dispute. Not long ago an accountant in a thoughtful article*71 on "The maintenance of capital" declared: "The fundamental purpose of accounting consists of an attempt to distinguish clearly between capital and income." Another accountant has recently said:*72 "The primary and central problem of business and hence of accounting and finance, will always be income." Here the emphasis is on income but the context rightly implies that the conceptions of capital and income are so interwoven that the determination of one is impossible without that of the other. This is implied also in the generally accepted view that the fundamental divisions, or classifications, of accounting are the balance sheet and the income sheet.


It is remarkable, therefore, that clear and tenable definitions of these fundamental terms are almost impossible to find either in economic or in accountancy texts. The authors seem to shrink from defining what is not really clear in their own minds. There is much talk of specific forms or phases of "capital" but rarely any generic use of the term capital. Thus free and almost reckless use is made of the terms "stated capital," "legal capital," "capital of the enterprise," "owners' capital," "capital stock," "capital charges," (or "charges to capital") "capital accounts," "capital assets," "capital owned," "physical capital," "fixed capital," "circulating capital" and (repeatedly, but without definition) "true capital," and "true economic capital,"—whatever that may mean to the writers—, but never a clean-cut essential definition of "capital" itself. The occasional, partial, or most nearly explicit definitions are mutually conflicting, some identifying capital with what most writers call the "assets" as a whole,*73 and what Paton would prefer to call "properties";*74 while others identify capital with what usually seems to be called "net worth" or "proprietorship."*75



It is rash to hope that order can be brought at once into this chaos of terminology; but let us at least try to make a beginning. There is no obscurity about the origin of the term "capital." It made its appearance first in medieval Latin as an adjective capitalis (from caput, head) modifying the word pars, to designate the principal sum of a money loan. The principal part of a loan was contrasted with the "usury"—later called interest—the payment made to the lender in addition to the return of the sum lent. This usage, unknown to classical Latin, had become common by the thirteenth century and possibly had begun as early as 1100 A.D., in the first chartered towns in Europe. The use of money was long confined almost entirely to the towns, and the lending of money occurred mostly between merchants, and only rarely between merchants and others. The chartered towns with their merchant guilds and markets and fairs were at first merely little islands of money economy, commerce, and contractual prices, dotting the wide sea of feudalism where prevailed conditions of status with customary dues and services, and where the use of money and the monetary expression either of wealth or of incomes, were scarcely known. Both the use of money and its lending by merchants to each other and to the feudal nobles became much more common during the Crusades which recurred at intervals for nearly two centuries (from 1096 to 1270). For centuries the rural-feudal and the urban-commercial conceptions of wealth and income continued to grow apart. The more static feudal conceptions of landed property and customary dues began to come into violent conflict with the more dynamic ideology of contractual prices and capital values in the world of commerce, with the gravest consequences in politics, religion, and social relations.


Sometime in this period the adjective capitalis, by an easy transition, came to be used elliptically in common speech as a substantive, dropping the words pars. At the same time, doubtless very gradually, the meaning of "capital" was widened in the marketplace to include besides actual money loaned, the monetary value of wares sold on credit, and still more generally the worth of any other credit (receivable) expressed in terms of money.


The next inevitable expansion of the meaning of capital made it include the estimated value of merchant's stock of goods and of agents (such as tools, shops, ships, lands, etc.) employed in his business by himself as well as when loaned to another for an agreed interest or rental. Included with these as "capital" was the monetary valuation of debts and bills receivable and of valuable rights of all kinds pertaining to the business. All these were resources, or assets (to use a later term) which might be sold for money and which were thus alternative forms of business investment, the equivalents in their money's worth of a principal sum loaned at interest. Each such asset item was at first a separate "capital," invested in a specific way, or form, and collectively they were long spoken of in the plural as "the capitals"; but gradually the net sum of all the separate items after deducting debts, or liabilities, came to be called a person's capital (in the singular number). The first authentic example of this usage (which had doubtless become common) is a somewhat confused definition of date 1611: "Capital: wealth, worth; a stocke, a man's principall or cheif substance."*76 Here the notion of capital as the physical store of goods, called also "wealth," "stocks," or "substance," is mingled with that of capital as a valuation (worth), constituting a man's principal in a financial sense.


The use of the word "capital" in this definition as a synonym both for "worth" or "principal" and for "stock" or "substance" is evidence that already a confusion was present which was destined to plague economics, the law, and accountancy from that day till this. "Capital" in the original sense of the principal of a money loan, later expanded to include the worth of any kind of business asset or investment, is a purely financial conception; but "capital" in the sense of a man's "stock" or "substance" is essentially a physical-goods conception. Still other confusions were foreshadowed. The use of the Anglo-Saxon word "stock," in the definition just quoted, made easy the transition from the term "capital" as a sum of values to the hybrid and ambiguous term "capital stock" as a mass of physical goods,*77 the value of which was the financial investment in the enterprise. Within the next century other confusions appeared as the terms capital and income were extended to relate to corporations, not merely to individuals.


These changes occurred not suddenly but during the seventeenth century. In the definition of date 1611, capital was still something thought of as belonging to "a man," a natural person, and not to a corporation. This individualistic conception of capital had been unquestioned for centuries and still survived at the end of Queen Elizabeth's reign. The complicating notion of corporation capital came within the next hundred years. The English trading companies numerously organized as Merchant Adventurers in the fifteenth century for trading on the Continent had retained this distinctly individualistic conception of capital as the sum invested by a natural person in the hope of profit. The company as such had no permanent investment, and each trading trip was a separate "adventure" for which a stock of goods was provided by subscribers in various proportions each of whom recovered his "capital" and shared in the profits (if any) after each adventure in proportion to his investment.


Temporary shifting investment is not suited to undertakings that must be carried on continuously for long periods to show results. Further, the interests of the public and of creditors require that when the liability of the shareholders is limited the amount of capital subscribed should be a stated amount. In a continuing enterprise this is necessary also, in order to determine the amount to be retained as capital or distributed as profits, and for other purposes, such as taxation, etc. These principles which seem so obvious now were only gropingly arrived at between 1600 and 1657 by the experience of the great companies chartered in England for overseas trade and colonization. The London East India Company, chartered the last day of the year 1600, obtained large powers and privileges. The first voyages, or "adventures," as they were called, were separate enterprises, each new group of adventurers taking over from the last group the assets such as ships, warehouses, etc., at an agreed valuation. Beginning in 1612 several voyages (e.g., those for the years 1613-1616) were treated as a single joint stock, and not until 1657 was this procedure extended by a new charter under which was created "The New General Stock" as a permanent investment.*78


The experience of the East India Company is fairly illustrative of the changes under way at that time. Toward the end of the seventeenth century occurred the incorporation of the Bank of England and other financial companies with permanently subscribed "capital stock." Business corporations were not only legal entities having an artificial existence apart from that of the natural persons who united to form them, but they now had funds permanently committed to them by the subscribers. The concept of capital thereupon entered upon a new stage of ambiguity. Is "capital" the collective name for the financial amount of ownership by the subscribers (natural persons), in other words, the net worth, or proprietorship; or is it a name for the assets owned by the corporation as such; or is it the amount of "capital stock" in the sense of the "legal" or "the stated capital," a nominal sum not corresponding with either of the other conceptions? Or is it some confused mixture of all three? From that day to this, conflicting usage has left the answer in doubt.


The confusion of terms that thus came to prevail in the seventeenth and eighteenth centuries may be inferred from Adam Smith's usage in 1776, which greatly influenced his successors. He used the terms "stock," "capital stock," and "capital" for the most part indiscriminately, but in some cases with evident purpose to distinguish them. "Stock," the term he uses most frequently, is the more general, usually seems to include "capital" and "capital stock" as the things in which the capital "worth" is contained; indeed, stock is usually synonymous with them and sometimes with "wealth." Occasionally, however, the generic term "stock" is broader than "capital stock," including things reserved for consumption. Smith sometimes, too, suggested the distinction that "stock" consists of physical goods, while "capital" is the investment value of goods used to obtain a profit.*79 It appears therefore that (so far as Smith is fairly representative) the conceptions of capital as a stock of physical objects or as monetary investment and as something owned either individually or collectively were pretty thoroughly confused in the seventeenth and eighteenth centuries.


Further, Adam Smith introduced the terms fixed and circulating capital, distinguishing them by the criterion of change of ownership; and forty years later the Ricardians, without realizing the difference, distinguished these terms by the criterion of durability versus physical destruction by a single use. These confused terms are still retained in most of the economic texts, and are given too respectful attention by the accountants, who, however, find them troublesome and unworkable.*80


In the period from Smith to John Stuart Mill (1776-1848) other confusions appeared. The then current labor-theory of value was grafted upon the physical-goods concept of capital and for the first time capital was defined as "produced means of production used for further production." This still remains the standard definition of capital in most of the economic texts. By "produced" was meant "produced by labor," but what, in turn, that meant was never clearly defined. Misled by an abnormal and temporary situation in England at that time, the Ricardians magnified to supreme theoretical importance a fallacious distinction between land (in the sense of natural, that is "unproduced," agents) and "capital" (as consisting of "artificial" or labor-produced agents) used for further production. "Land" (in that broad sense) even when used in business for profit was by definition excluded from the concept of capital, as also was the money valuation of natural agents. This conception of capital, apparently unknown before the so-called classical economics, was deemed by the Ricardians to be one of their most important contributions to theory. I need not argue in this presence, however, that it is of no possible use to accountants, and they have wisely discarded it, still mistakenly believing, however, that it is the best that recent economics has to offer. Although the Ricardian and neo-Ricardian definition of capital as "produced means of production" is framed explicitly in terms of physical goods, it was always in practice almost immediately abandoned (as is done by the Marshallians today) for a valuation, investment conception, including the value of national agents. The discussion of capital in all the conventional economic texts is permeated with this ambiguity.


While the corporation was swiftly becoming the dominant type of manufacturing and commercial organization after 1870, the new subjective, or psychological, schools of value theory appeared nearly simultaneously in several lands and began a needed revision of some of the fundamentals in economic theory. For a time thought was stimulated in right directions in regard to value and price, but quickly became entangled in the phrases of utilitarian psychology, already discredited in philosophic circles. Jevons in England and the Austrian school stopped short of any lasting contribution to better concepts of capital and income. The Austrian Böhm-Bawerk—in some respects one of the greatest of economic dialecticians—undertook to make himself master in that particular domain; yet he finally reverted to the most sterile version of the Ricardian definition of capital as "produced goods" which we have just described. He thus doomed to failure his own hopeful effort to construct a new "positive theory" of capital and interest, and ended in an anti-climax of a productivity theory of interest. In contrast, the American John Bates Clark recognized the ambiguity in the old concept of capital in which stocks of physical goods are confused with their monetary valuation, but, he left his task far from completed. He stopped half way with a confusing terminology of "capital goods" and "true" capital, and he, as well as Böhm-Bawerk, retained a false labor-theory and cost theory of the genesis of capital. However, by his valuation concept of capital Clark notably advanced the truth, and some traces of his influence appear in every American economic text of the last quarter century, as I have elsewhere sought to show.*81 Nevertheless, the Ricardian definition of capital—reinforced rather than weakened by Böhm-Bawerk's great influence—has continued to hold the field with the powerful support of the Marshallians, still so largely dominating the economic theory of price throughout the British Commonwealth and in the United States.


A few of those who had been influenced by the earlier psychological thought were not content with the opportunism and illogical compromises which were the most evident results of the Austrian and Clarkian labors on the capital concept. These students of theory—chiefly American, but including notably Edwin Cannan of England—have persisted in their endeavors to develop a logical value concept of capital, usable alike by economists and by accountants. The story in detail of their various discussions, contributions and not yet completely harmonized results is far too long to be told here. I must therefore limit myself to a brief summary of what I deem to be the valid conclusions.


The concept of capital is coextensive with exchange and the price system and is not to be confused with wealth. "Capital" should be defined to mean the monetary summation and expression of enterpriser's purchasing power. It is essentially a financial concept, relating to business investment, and includes the present market valuation of all legal rights to income possessed by natural persons. The business entity as such, whether incorporated or not, has assets, but no capital, the net worth of which (i.e., assets minus other liabilities) is the capital of the collective investors. The so-called "capital" of a corporation is at most a quasi, fictitious, or pseudo capital, created by and corresponding to the legal fiction of the separate corporate entity. The corporation owns the assets but the shareholders own the capital. The same thing cannot be owned at the same time and in the same sense by two different owners. A corporation is not a capitalist. A sufficient proof of this to accountants should be the simple fact that "capital" always appears on the liability side of the balance sheet. The corporation owes the capital, it does not own it. The shareholders own it.


The cost-of-production theory, still lingering in most of the textbooks, looks to the past to account for present valuations; it must be replaced by a consistent theory of the capitalization process.*82



The terminology of income is no more satisfactory than is that of capital. Economists and accountants, at least by implication, seem initially to agree that income is something related to capital so closely that the determination of one involves that of the other. This thought is reflected in the title of this session. Yet surprisingly little use is made of the term income in accounting texts, and that is often in strange new meanings, loosely related to the concept of capital, and income is not defined beyond the generous suggestion of other ambiguous terms as synonyms. A few examples are given in the note.*83


The word "income" is broadly self-defining, as anything that comes in, and at one time or another it has been used in many senses that are now obsolete or archaic, including such an unfamiliar idea as that of calling a person an income when he entered a room (that is, a new comer). The earliest recorded use of the word income (in an Anglo-Saxon version of the Bible in 1000 A.D.) was as a verb, meaning to enter. The meaning of the noun income that is now deeply rooted in popular speech and is most usual in its application to business and economic purposes appears to be that of any sort of goods (or valuable rights) coming into the possession of a person, with the further implication that this is something additional and available, for consumers' use without depletion of a formerly existing physical stock, or of a financial capital fund, as the case may be. This is now the generic meaning in current economics where, however, various specific terms such as "real income," "income in goods," "income in kind," "labor income," "funded income," and "psychic income" have indispensable uses in connection with, and often in contrast with, "pecuniary income." However, there has recently been a tendency in business and popular speech toward narrowing this concept to include only incomes expressed in terms of money.*84 At the same time "income" has largely displaced the term profits in the accountants' treatment of the business entity, and particularly of the business corporation.


The result of these several shifts of meaning, so unequally and variously accepted in different circles and applications, has been to create a greater confusion in the term income than ever has reigned before, with practical consequences of importance both to economics and to accountancy. Few appreciate how completely until of late the term income had been limited in its application to individuals nor how recently it has been applied to business corporations. In the numerous quoted examples collected in The Oxford Dictionary, none until late in the nineteenth century clearly implies that an income could accrue to anybody but a natural person. The shift in usage has come only since the recent great increase of business corporations. The Accountants' Committee on Terminology (p. 68) speaking of the usage of terms that "it is believed are now well established" makes the following just observation: "Income, while sometimes used by corporations, frequently as applied to net earnings, applies more particularly to the compensation or profits received by a person." This idea, however, is immediately contradicted in definitions of more specific forms of income, as gross, net, from investments, miscellaneous, operating, non-operating, etc., all of which are evidently treated as applying in accounting to corporations as well as to any other impersonal business entity.


In economic usage the term income is still, in greater part, applied broadly to things accruing to individuals and available for consumption; whereas profits are peculiarly the impersonal yield of any business no matter what the type of ownership. In conformity with earlier and long established usage it would not be permissible to speak of the "income" of a corporation. A corporation if successful has profits which when distributed are incomes to the receivers; but a corporation is a creature of the law once vividly described as having "neither a body to be kicked nor a soul to be damned." As such it has no capacity to enjoy and can have no "income" except in a recently distorted sense of the word. It can hardly be doubted that in most cases where accountants now use the term "income" to designate the surplus accruing to the impersonal business entity or to some special branch of its operation, the term profits would be more proper; and usually in the other cases neither income nor profits is a fitting term.


It may be ungracious to suggest that accountants and business men have largely themselves to blame if now they are unable to find any tenable difference in the meanings of income, earnings, profits, revenues, etc. They have made their task more difficult by the careless use of terms. With a wealth of words from which to choose to fashion a logical system of terminology, each term with a clear distinctive meaning, accountants have lost themselves in a maze of terms: income, gain, profits, earnings, revenue, receipts, increase in equities, increase in wealth, accrual of wealth, periodic return, benefit or advantage, surplus from the earnings, dividends, rents and interest payments, etc. Confusion is then multiplied by limiting adjectives such as gross, net, pure, economic, from operation, sales, investments, other incomes, etc. Every canon of sound terminology is violated; each term is applied to two or more ideas, and each idea is expressed by several different terms. The client, the reader, and the public never can know just what any of these terms means in a particular corporation report and must seek, often vainly, to discover from the context whether the term income means before this, or after that, or what not. Even the most enlightened of accountants is driven to exclaim in despair: "the average income sheet is a hodge-podge of illogical, non-illuminating classifications."*85 Is this not a truly intolerable situation?


The conception of income as a surplus has likewise taken on a new complexity with the advent of the corporation as the dominant form of business organization with which the accountant has to deal and to which the economist must adjust his thinking. Let us test our previous definition in the simplest conditions of which anthropology gives any account, namely, the ceaseless search for food by the primitive man always on the verge of starvation. Then anything that he finds that is fit to eat, wear or enjoy in any way is essentially income, that is, newly acquired goods available for use. If it is not eaten or otherwise used but is laid aside ("saved") for use in a later period, it becomes part of a store (or stock). This is wealth but not capital. Income (in goods) in succeeding periods is to be reckoned as a current surplus over and above the stock, that is, an addition to the amount in store. The simplest conception of accumulative saving makes it follow income; that is, saving is the act of refraining from the present use of an income of goods in the period when it occurs. Then conservative saving sets in, to maintain the existing stock by continually refraining from its consumption. Both types of saving of physical goods imply comparisons of current incomes with stocks in successive periods, and the factor of time-preference is introduced into the individual's whole system of valuations. In simple self-sufficing economies the comparisons of incomes and of stocks of goods in successive periods are all in physical terms, and their relative valuations are expressed "in kind," that is, by a sort of barter relationship. As soon, however, as money trade begins and the valuations of goods begin to be expressed in terms of prices, there enters the capital value concept. The comparison of current incomes with the value of existing stocks is expressed in terms of price. The value of the present income is compared with the capital sum, or present worth, of the anticipated incomes which the stock or fund contains or represents. Accounting may be defined as the capitalistic calculus in modern business, in other words, the calculus of capital and income. This complex calculation may be the bane of the accountant's existence—but, happy thought—it is what makes necessary his services and generous fees. No capital, no accountants!



It is indeed rash for a layman in accounting to offer even a suggestion to the accountants, but in the light of the foregoing it would seem that they should begin by making far more generous use of the simpler, descriptive categories of receipts and disbursements classifying them and balancing them for different purposes before beginning to use any such terms as revenues, earnings, profits, or income. The term revenues might, perhaps, in accord with the usage in public finance, be reserved for those receipts, such as rents, royalties, interest, dividends from outside investments, etc., that do not strictly result from the operations of the enterprise itself, but are derived from sources outside. Then, and not till then, should come the more detailed study of receipts and disbursements in various departments of the business provisionally treated as minor separate entities, such as transportation operation, manufacturing, merchandising, etc. The several "balances," "results" or "earnings" (if that term be preferred, despite its original root meaning which was limited to incomes from human labor) would then be ready to be summated algebraically with revenues, taxes, capital changes, etc., to arrive at a figure for current "profits" of the enterprise as a whole. Current profits added to previous profits and capital values would yield the figure for the accumulated net worth, or proprietorship, of the collective enterprisers. Then, and not till then, would appear the term income as the amount accruing or distributed to the several investors, the return to each on his capital in the enterprise.


We cannot enter here into the difficult question of costs and overhead costs, or into that of adjusting capital values to the purchasing power of the dollar unit in periods of rapid changes in the general price level, although these, too, are problems of capital theory.


The accountant has the hard task of analyzing and recording true market valuations, expressed in terms of prices and the monetary standard. He cannot escape the difficulties by tying capital value to original cost. That "cost" is at best simply evidence of what the directors of the enterprise thought the things were worth when bought at some time in the past—either as a whole plant or as successive items. Original cost did not infallibly reflect either good sense or good morals in the past; still less does it accurately tell what things are worth now. The other horn of the dilemma is to reevaluate the assets, with all of the chances of human error, exaggerated hopes, or intentional misstatement that such a process affords. The same chances were present, however, in original cost, as sad experience often shows. Moreover, where could there be a greater range for error in individual judgment, or for intentionally conservative misstatement, or for downright deception, than in present estimates of depreciation, depletion, and obsolescence? We cannot get far in sound accountancy unless we postulate that the accountant, like Quintilian's ideal orator, is "an honest man." And this, we are assured, is the noblest work of God.

Notes for this chapter

Prof. A. C. Littleton in the Accounting Review, September, 1935, p. 270.
Prof. W. A. Paton, Accounting (1924), p. 22. It is to be remarked that the author bases this statement on his belief that "the economist in general deals with the general or social point of view," whereas "the accountant takes the point of view of the individual enterprise." The fact is, however, that the greater part of the discussions of capital and income in the current economic texts is as completely concerned with the individual enterprise and as fully overlooks "the social point of view" as is done by the accountants. Much current economics is pervaded by a confusion of individual and social conceptions. See note 4 below, and related text.
A recent text, Porter and Fiske, Accounting, 1935, pp. 15-16, contrasts the economists' concept of capital which, it says, is "ordinarily" limited to "material wealth" with that of the accountants which includes property rights and claims. Let it be noted, however, that the authors somewhat vaguely imply in the adverb "ordinarily" their awareness that this concept is not universally or consistently employed in economics; and they incidentally recognize the growing influence of the unorthodox school to which I belong when they say: "The sharp distinction drawn by older economists between land and capital has tended to break down and to result in grouping the two as a single factor."

Another leading accountancy text (Hatfield, Accounting, p. 173 n) repeatedly refers to some unquestionable contrast between the economic and the accounting definition of capital without, however, anywhere defining capital either in the economic or in the accounting sense. The author does, however, imply his meaning; for example, when referring to one definition of "capital stock" frequently used in statutes, he quotes an explanation of it as meaning "not the shares of which the nominal capital is composed but the actual capital, that is, the assets with which the corporation carries on its corporate business." Whereupon the author comments: "This corresponds to the economic, not to the accounting definition of capital." I take this to mean that the author believes the economist's definition of capital to be "the assets" of the corporation, and the accountant's definition as "the capital account of a corporation"—explained in his text as "a nominal sum, the par value of the capital stock." In another passage—the phrase: "using capital in the economic, but not in the accounting, sense" [p. 375] carries the same implication, that "invested capital" in the economic sense includes all assets of the corporation whether financed by stocks or by bonds, whereas capital in the accounting sense means only the amount represented by shares of stock, the "capital stock," or perhaps "the stated capital." See below, notes 8 and 10, two other conceptions of "capital" that are held by accountants.

The writer has discussed this contrast in two articles in the American Economic Review, Vol. x, pp. 467 and 719: "Price economics versus welfare economics."
Accounting, 1927, p. 294.
H. W. Sweeney, in the Accounting Review, December, 1930, p. 277.
A. C. Littleton, "Contrasting Theories of Profit," Accounting Review, March, 1936, p. 15.
E.g., Porter and Fiske, Accounting, 1935, p. 16: "Business capital and business assets are synonymous. Business assets consist of the material goods, claims and property rights applied to the business project.... Assets are capital." And again, p. 544: "The term capital...refers to the assets employed in the business and not to that portion of the claim against the assets vested in the stockholders." See also quotation from Hatfield in note 3 above, where he calls this the "economic" definition, in contrast to that of the accountants, which, he says, is merely the stated capital, "a nominal sum."
Paton, Accounting Theory, 1922, p. 37.
E.g., Kester, Accounting Theory and Practice, 3d. ed., 1930, Vol. I, p. 290. "From an accounting viewpoint, the capital of any business enterprise is the excess of its assets over its liabilities." The same view is expressed in these words by a legal student of accounting and disciple of Hatfield: "Capital should be defined as the difference, in value between the total assets and the total liabilities of a business at a given moment of time." (Prosper Reiter, Profits, Dividends and the Law, 1926, p. 5.)
Quoted in The Oxford Dictionary.
The Germanic word "stock" had the root meaning of "stick" and hence main stem (as of a tree), hence, figuratively, a collection of physical things viewed as a fund of goods and resources constantly renewed—all of which meanings still persist in good use in various contexts. Evidently the "capital" of individual subscribers meant something quite different from "capital" in the sense of the "capital stock" of the whole enterprise, the latter corresponding rather to the physical aspect of what today are generally called assets.
The writer is indebted to Prof. Stanley E. Howard for the opportunity to consult an unpublished manuscript further developing this subject.
Thus he says: "The stock which is lent at interest is always considered as a capital by the lender.... The borrower may use it either as a capital or a stock reserved for immediate consumption." Wealth of Nations, Book II, Ch. 4. Cannan ed., p. 332. The word "stock" as used by Smith suggests a collection of useful things, and "capital" seems only meant to suggest that these things are used in business as a source of income, either to individuals or to the whole nation. In the latter case the thought of their money valuation is lacking. Such phrases occur as "the capital stock of the society," "the stock of the country," "the wealth of the society," "the capital of a great nation" and "the capital stock of Great Britain" (Ibid., Book I, Ch. 9, pp. 94, 95) with no hint of distinction; but also occurs the phrase, "the capital of a private man" Ibid., p. 93).
The preliminary report (1931) on Accounting Terminology says (p. 31) of "circulating capital": "This expression appertains to economics rather than to accounting"; and of "fixed capital": "A rather vague term, used in economics more than in accounting." In further comment the Committee uncritically accepts both mutually inconsistent criteria of the distinction between fixed and circulating capital, saying of fixed capital: "It has been defined as wealth used in the production of commodities, the efficacy of which is exhausted by a single use," and in the next line: "The term 'circulating' is derived from the circumstance that this portion of capital requires to be constantly renewed by the sale of the finished articles and repurchase of raw materials, etc." The former makes the criterion a physical quality (durability), the latter makes it a financial quality (continuous and ready saleability, i.e., liquidity).

It is to be observed, however, that the older economic distinction between fixed and circulating capital survives in slightly altered, and perhaps equally troublesome, form in the accountants' attempt to divide assets into fixed and current. For example, the Accountants' Handbook (14th printing, 1934, p. 151) calls this "the most satisfactory basis of asset classification," adding: "This is founded on the economists' distribution of all capital goods into fixed and circulating capital, and has genuine economic and operating significance." The confusion of technical and financial criteria is plainly evident in the context.

In my essay on "Clark's Reformulation of the Capital Concept," in Essays in Honor of John Bates Clark [see above].
A capitalization theory is completely wanting in Clark's treatment, and was lost sight of by the Austrians after a promising beginning in its recognition. By this is meant the process of estimating capital as the present worth of the proprietorship of sources to future incomes, which is not to be confused with the very different process of issuing various kinds of shares in nominal amounts, as the term capitalization is often used in statute law and elsewhere
A recent text (Porter and Fiske, 1935, p. 327) declares in the chapter on "Income—its nature and determination," that "it is impossible to find a universal definition of income" and then proceeds at once to discuss profits as synonymous with it, as if that solved the problem. (E.g., 327, 338.) A veteran in academic accounting having, as he says, "vainly tried to find any accepted differentiation between" the terms income and profits and finding no aid in the preliminary report of the accountants' Committee on Terminology (1931) explains that in his "treatise, therefore, the words are used indiscriminately." (Hatfield, Accounting, 1927, pp. 214-242.) A writer in the June, 1936, Accounting Review, (G. A. D. Prienreich, p. 130), still further complicates the problem by announcing that "the terms 'income' and 'profits' are synonymous with 'earnings' for all purposes germane to the present discussion," and a moment later discouragingly adds: "Apparently discussion will be facilitated by avoiding the use of the term 'income.'" Thus he disposes of half the subject matter of this paper, and we may feel tempted to emulate his discretion by pitching the other half out of the window. But what then becomes of "the fundamental purpose of accounting"—"to distinguish clearly between capital and income?"
See Oxford Dictionary to this effect.
Paton, Accounting Theory, p. 53.

Part 2, Essay 1. The "Roundabout Process" in the Interest Theory

End of Notes

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