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.
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Part 1, Essay 9
Clark's Reformulation of the Capital Concept

Reprinted from Jacob H. Hollander, ed., Economic Essays Contributed in Honor of John Bates Clark (New York: Macmillan Co., 1927).



The eightieth anniversary of the birth of John Bates Clark, our honored master in social philosophy, calls renewed attention to those economic issues in the discussion of which he has had a most vital part.


As a humble contribution to the volume which his fellow economists here bring as token of their regard, I would essay to review Clark's reformulation of the capital concept, and to trace its continuing influence upon economic opinion. No one can say what its total effect ultimately will be, but we may now form some judgment of its logic and of its aptness in practical discussion, and of the measure of acceptance which it has up to the present attained in America and England.


It is almost forty years since the publication of Clark's monograph entitled Capital and Its Earnings.*1 Hardly larger than a magazine article (merely 61 pages of text) it is yet one of the important milestones in the history of American economic theory, and likewise marks significantly new interests and a new stage of development in Clark's own thought. He was then in his forty-second year and had, since the age of thirty, been contributing toward "the reformulating of certain leading principles of economic science," through occasional magazine articles. These were "republished with varying amounts of revision and the discussion extended" in his first book, The Philosophy of Wealth, in 1885. While the work of that decade shows Clark to be, in his own words, "in revolt against the spirit of the old political economy," unsatisfied with its "defective" premises and its "degraded conception" of human nature (mere selfishness), and discontented with the actual relation of "capital" (the employing class) with "labor" (the wage earning class), it gives no hint or warning of the author's purpose to replace with a new conception the conventional notion of capital as an economic factor of production. That came in 1888 seemingly out of a clear sky.


Let us first restate, as briefly as we can, just what the thought was, and then seek to account for its appearance at that time. The more essential points in which Clark departed from the then prevalent views of capital may be reduced to five. He said:

(a) The conventional capital concept is ambiguous, meaning both "pure" capital and concrete "capital goods."
(b) "Pure capital" is a fund of value.
(c) Land in all its forms is a part of concrete capital.
(d) All concrete goods yield rents.
(e) All pure capital yields interest.


(a) Clark declared that economic science had and was using two unlike conceptions of capital, while believing that it had but one. Hence ambiguity, confusion, "logomachies." Clark would frankly accept both concepts, clarify them, and distinguish them by somewhat different names. One is the abstract, the other is the concrete concept. The abstract conception, paradoxically, is the one "employed in business a hundred times where the concrete conception is employed once";*2 whereas "the actual practice of economic science has been to first define capital in the concrete, and then, in the problems connected with it, to tacitly substitute again and again the abstract conception."


(b) Clark calls capital in the abstract sense "pure capital," which is a "fund," a "single entity" common to all the concrete forms of capital. This fund or entity is expressly declared to be "effective social utility," but this mysterious notion is repeatedly spoken of more simply though somewhat puzzlingly as "the value that a business man invests" in the various instruments and materials he uses. This is the value conception of capital in contrast with the concrete goods conception as defined by the conventional definition of the older political economy.


(c) Clark classed as concrete capital not merely the artificial, humanly "produced means of production," but all instruments and materials, including land and all other natural agents.


(d) Clark correspondingly widened the meaning and application of the term rent beyond that of the orthodox English economics, making it apply to the "sums earned by outward and material instruments of production" of any and every kind, i.e., the earnings of concrete capital. The rent law is universal.


(e) Clark called the earnings of "pure capital" interest, and he conceived of this as rent (value) expressed as a percentage of the value of the abstract capital. Thus interest, as Clark wished to express it, did not consist of uses, yields, earnings, or incomes other than those composing rents, but simply was rent, expressed as a price in relation to the price of the instruments that embody the fund.


That these ideas appeared at that time to be radical novelties in American and English economic theory, is evident. The vigor and incisiveness of their statement helped them to command immediate attention even from those who were not ready to accept them as true. It must have been obvious that their acceptance would involve sweeping changes in the structure of the then accepted theory of distribution, with its sharp division between (natural) land and (artificial) capital as factors of production, and between rent (of land) and interest (on capital) as forms of "earnings" or incomes. Clark himself began at once to shape and build a structure of distributive theory but faintly forecast in his earlier essays, and increasingly to this day these ideas have exercised an influence upon theoretical opinion.



Ideas departing so far from prevalent opinion rarely if ever spring as pure inventions of the moment from one mind. Nor does a change in the content and direction of an individual's thought, as marked as that of Clark at that time, occur without some influence from other thinkers or from environing conditions. But to trace such influences to their sources seems, in the case of Clark, at first unusually difficult. His literary style is didactic rather than polemical, and his thought seems to move along positive lines hardly at all conscious either of his forerunners or of hostile opinions, once he has formulated his own views. His writings give slight internal evidence of the sources of his thought. In the monograph in question the only references to the opinions of others are in minor matters, in three cases dissenting (from Ricardo, J. S. Mill and Sydney Webb) and in three approving (A. Smith, S. N. Patten, and Clark's co-worker, Giddings). The sources or the starting points of Clark's own thought must be sought more widely in the circumstances of his life and of his surroundings.


The first possibility might seem to be close at hand in the fact that Clark was an American. A scholarly study has recently shown*3 that with few exceptions writers on economics in the United States from Raymond in 1820 to Perry in 1877 (including Phillips, Wayland, Vethake, M. Wilson, Cardoza, Tucker, Carey, and Amasa Walker) defined capital as privately owned means of production, emphasized its valuation or price aspect, and included land among the concrete goods in which this value was embodied. Some of the exceptions serve to prove the rule, for these exceptions were men of English training or faithful disciples drawing their ideas directly from Ricardian text books. Such unorthodox views arose naturally in America where were lacking the artificial feudal limitations upon the sale of land, and where landholders were not marked off socially from capitalist merchants as a separate class. Here land was readily bought and sold and was from the earliest settlement the chief object of investment with a view to speculative profit. This environment had prompted one American writer after another (apparently without mutual influence) to develop conceptions radically different from those of the English school. It might have likewise prompted Clark quite independently to his very similar thought. And there were particular circumstances at the time Clark was writing, namely, the active discussion of Henry George's single tax proposal, which undoubtedly had directed Clark's attention strongly to this problem of the capital concept. Of this, more later.


But if Clark got this thought either directly or indirectly from American economists, it is not evident in his writings. The generation of young economists who in the seventies and early eighties brought a new spirit into American economic studies, did not develop the indigenous traditions, but unfortunately neglected them and turned to Germany for the new sources of their inspiration. At the same time there was in some quarters (e.g., Dunbar, Macvane, Laughlin, Sumner) a reactionary movement toward a new affirmation of Ricardian "orthodoxy" as reformulated in the work of J. S. Mill. Even Francis A. Walker did not develop his father Amasa's more original American treatment, but built his, scheme of distributive theory on the older foundations of "land, labor and capital." There was thus, in the thinking of both the rival schools of thought of that time, a lack of reality and of rootage in the solid earth of our own economic conditions. American economic theorizing suffered then and still suffers from this defect. Clark's reformation of the capital concept, though couched in excessively abstract phrases, was the most vital attempt made in that period to find that reality. It was a new and distinct declaration of independence for American economic thinking.



Almost equally lacking in Clark's writings are any suggestions that the ideas now under discussion were derived from German sources; but that such is the case can hardly be doubted in view of all the circumstances. Clark was a student in Germany in 1876-1877 and was for a considerable period at Heidelberg under Karl Knies. Clark's writings in the first ten years after his return, mostly embodied in his Philosophy of Wealth, evidence the deep influence of the ideas of the historical school and of the economic-ethical doctrines then current in Germany. Knies himself had published in 1873 Das Geld subtitled also "a discussion of capital" a second, enlarged edition of this was dated 1885. In this work appears a conception of capital strikingly like the one of Clark which we are examining. This conception had become traditional in German economics after the original work of Professor F. B. W. Hermann*4 first began to exercise an influence upon German thought. Hermann based his capital concept on property,—though it cannot be said that he succeeded in clearly distinguishing the thought of the value of property from the thought of the concrete goods. He included not only land within the concept of capital, but also immaterial goods or legal rights to income, even though the claims were upon persons and to services, and not to material goods. Probably the greatest change made by Hermann was to extend the definition of capital beyond artificial, produced, goods and to include as capital anything (or at least its value) that is the durable foundation of a use that has value.


Very similar ideas were developed by Carl Rodbertus in the thirties and forties, most significant because of the great influence they exercised upon later thinkers in the period of developing German state socialism after 1870. Especially Adolf Wagner acknowledged his profound indebtedness to Rodbertus.*5 To Wagner is due the much wider circulation and influence in the last quarter of a century of these ideas which he restarted and endorsed.*6 Wagner credits Rodbertus with "the essential distinction between capital in the purely economic sense as any stock of material agents and means of production, and capital in the historico-legal sense as capital-possessions." He cites the statement of Knies that political economy uses capital in two senses, as concrete means of production, and as a stock of goods acquired by an owner. Both Wagner and Knies recognize the double meaning of capital as a tool in economic processes (technological sense) and as a source of private income (acquisitive sense), the distinction on which so much of the thought of Thorstein Veblen as well as of Karl Marx, seems to have been based. When Knies says approvingly that what has been called capital is "fundamentally nothing but a mere abstraction,"*7 the expression might be the original of Clark's "entity," "this abstract conception of capital."*8


Clark, in common with all other Americans pursuing graduate economic studies in Germany, must have become familiar with these ideas. Yet why did no trace of them ever appear in the writings of other students returning from Germany, or even in Clark's writings, until 1888? Is not the explanation to be found in the fact that Americans went abroad with minds already cast in the mold of the Ricardian-Mill "orthodox" scheme of distributive theory, and these concepts persisted. It was possible for these students to acquire a zeal for displacing (or for supplementing) deductive methods with historical studies, and in favor of state activity vs. laissez-faire, without any essential change in the old conceptions of the economic factors and shares in distribution. This is well illustrated by H. C. Adams, R. T. Ely, and many others besides Clark. The more difficult question to answer is: Why did Clark ever, and why did he alone, break through this crust of conventional ideas, and in 1888 advance the views, received as complete novelties, with which his name has ever since been linked.


The important eras of human thought, we are assured by philosophers, rarely, if ever, are initiated by entirely new ideas, but by the rediscovery and restatement of old ones. Therein consists the more effective originality. It has been said, perhaps extremely, that the first time a new thought is expressed or an invention is made, the world simply pays no attention to it. Not until it is repeated independently and rediscovered a hundred times, and then only under peculiarly favoring conditions, does the world look up and say: yes, there is something in it, but nothing original—indeed it is very old. Until the world has received an idea in this way, its rediscovery for the hundredth time is as original as its discovery the first time, and its mere restatement by one aware of its earlier origin and rejection, calls, for that very reason, for as great vigor of thought, and for faith and conviction.



The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion. Started in 1879 by the publication of Henry George's book on Progress and Poverty, it gained within a few years the most remarkable vogue in popular interest. It attracted at once the attention of leading economists. Professor W. G. Sumner attacked it in 1881 in magazine articles.*9 Professor Francis A. Walker, who seems to have been stirred to indignant protest particularly by George's proposal to confiscate land values, made it the subject of a series of lectures at Harvard in 1883, published under the title of Land and Its Rent. But Clark, until after the publication of his first book The Philosophy of Wealth,*10 and apparently until 1888, gave it no mention in his published writings. The chief theoretical pillar of George's doctrine was the Ricardian rent theory, and Walker, even while assailing George, had avowed himself to be "a Ricardian of the Ricardians," declaring that "Ricardo's rent doctrine can no more be impugned than the sun in heaven."*11 He would have none of Bastiat and Carey, who had sought to reduce the origin of all land values to labor. Yet Walker somewhat unconventionally treated capital in the aspect of value as "a capital sum" to be invested*12 as well in land, "in the soil," as in agricultural improvements, and not as any particular group or kind of economic agents. No formal definition of capital in the old terms of "produced" means of production appears, yet Walker is not conscious of any departure from "the general body of orthodox economic doctrines," the "validity" of which he thinks he is merely confirming.*13


Events were just at that time crowding each other fast in the single tax propaganda. Progress and Poverty was translated into many languages and was said to have had a larger sale than any other book ever written by an American. In 1886 George was nominated and ran for the mayoralty of New York City, and of the three candidates he polled the second-highest number of votes. In 1887 George was a candidate for the Secretaryship of New York State but was defeated. No other economic subject at the time was comparable in importance in the public eye with the doctrine of Progress and Poverty.


At this moment Clark stepped into the arena of discussion armed with a new weapon, a valuation, or investment, concept of capital. His little monograph wears the mien of pure theory, and lingers for a time as its author himself says "in a region of abstract thought." But having in mind the circumstances just described, one can hardly fail to see on almost every page reflections of the contemporary single-tax discussion. In the brief preface is expressed the hope that "it may be found that these principles settle questions of agrarian socialism." Repeatedly the discussion turns to "the capital that vests itself in land," declared to be "a form of investment neither more nor less lucrative than others." On the ethics of confiscation Clark concludes that morally as well as legally "pure capital when invested in land, has the same rights that elsewhere belong to it." And as to confiscating all land values by the single tax, he exclaims: "would it be robbery? No; it would be the quintessence of robbery."


Two years later at the "Single Tax debate" at Saratoga, Clark developed in a very interesting way his ideas of pure capital as seeking investment in whatever form the State has said it may take. He sees it as a policy of expediency for the public welfare in the long run. The State "has said that it [capital] may go into land. For ends of its own it has so decided; and the ends are good."


But Clark felt that he had got hold of a deeper truth, more than a mere argument on a current issue. This monograph represents in most respects a completely new start toward a systematic theory of distribution which has little in common with his views in The Philosophy of Wealth, excepting "effective utility" (the marginal principle). It is needless to restate the argument of this well-nigh classical essay. Though brief, it is rich in ideas, and any one who has not read it will be well repaid by its careful study.


But read to-day, even by the most friendly critic, the argument reveals certain defects, partly arising out of its original polemical impulse, and partly due to the influence of the older conceptions upon Clark's thought. As to the latter, traces of the labor theory of value remain in the confusion between the process of evaluating "concrete instruments," including natural land, and the "personal sacrifices incurred in the service of society" in bringing concrete instruments into existence. When "the fruit of twenty years of labor" is exchanged for a piece of unimproved land, the value in the land is declared to embody "the fruit of personal sacrifice" of the buyer.*14 But whence came the value of the land before it was sold? Again, though including the most imperishable land among the things which embody pure capital, Clark sees the "concrete forms of capital" as constantly vanishing. "The bodily tissue of capital lives by destruction and replacement." In truth, Clark had not developed a consistent capitalization concept, or made a clear distinction between, on the one hand, technical production as the source and origin of what he called "capital goods," and, on the other hand, financial valuation of rights, incomes, claims (to land and also to personal services, good will, privileges, etc., as well as to "artificial" concrete goods) as a source of his "pure capital."


Nevertheless, his great achievements in this matter were that he brought out into the open the old ambiguity between "capital value" and certain concrete things called capital, and that he presented "capital" as essentially an investment concept; and that he gave a broader reading to the idea of rent. These notions have been apples of discord, and even yet professional opinions have not attained to unity upon them. It is of interest to observe the position taken toward the value concept of capital by some representative economists.



Böhm-Bawerk's conclusions on the capital concept were surprisingly old-fashioned. Beginning with a new conception of the so-called "interest problem" as that of differences of the value of goods because of time, he wrecked his attempt at the very first by his conception of capital (goods) as limited to produced means of production. For if, as he believed, "capital" and interest are coextensive facts, he cannot explain with such a capital concept the manifold time differences that appear everywhere, in land uses, legal rights, financial incomes, human services, etc. On no other point did Böhm-Bawerk differ with Clark so categorically as on this; he would have none of the valuation concept of capital.*15 Not even the most conservative of his contemporary neo-Ricardians were so uncompromising on this point. Yet not for a single page does he succeed in avoiding the valuation concept of capital when once he begins to use one. His capital is always an investment sum, expressed as so many kronen, pounds sterling, or dollars.


Professor Taussig devoted large space in his text to the discussion of the capital concept, returning to it again and again, evidently troubled and more or less impressed by nearly every count in the newer criticism on this subject. It seems a just characterization to say that Taussig's general conclusions and position resemble somewhat those of Marshall, outlined below, but show certain significant differences. First, he is somewhat more definitely conscious that the adoption of the valuation concept involves a radical break with the older doctrines. Secondly, he therefore more explicitly (though with various concessions and doubts) adheres to the older formal definition of capital in terms of concrete goods, and to the older idea of the two-fold division of the "instruments of production and the different sorts of return to their owners" (i.e., land and capital, rent and interest, respectively).*16 Third, he, much more explicitly than Marshall, reaffirms a pretty bald labor-theory-of-value to account for the origin and distinctiveness of capital (concrete),*17 conceived of as "artificial" in contrast with land as "natural." In accord with this thought, he (probably unique in this regard) denies "productivity" alike to capital and to land, and thinks labor alone can properly be said to be productive, more so to be sure if applied "through the use of tools" than without them, more applied "on some land...than on other land," but in any case it is always labor alone that has "productivity."*18 Fourth, far more than Marshall, he struggles to escape from the meshes of the inevitable valuation concept. He sees, as Marshall did not, that he is being trapped into a repudiation of the older views. He was forced to recognize that "the ordinary business method of measurement" of capital is "in terms of value." He confesses that the old distinctions between rent and interest "find no response in the world of affairs."*19 Earlier*20 he had recognized that it was "often convenient to measure and record capital in terms of value and price,—as so much money," and he had even issued fair warning that he would "sometimes" so far conform "to everyday terminology" as to speak of capital in terms of its "value or price." (Of course, he always does express capital in those terms whenever he discusses investment of capital and interest as a rate per cent of return—no one can do, otherwise.) Yet he explicitly rejects the "valuation principle"*21 and indicates what he thinks are its absurdities.*22


Professor Seager, a colleague of Clark's at Columbia, acknowledges in the preface of his text his indebtedness to writers so far apart as Böhm-Bawerk, J. B. Clark and Alfred Marshall, and his treatment of this particular question betrays some of the discordant results. He seems to accept both the old view and in part that of Clark. He defines capital as "the product of past industry used as aids to further production."*23 Yet he cites, apparently with approval, the business man's use of capital as "the complex of capital goods, used in connection with each branch of production, measured in terms of money,"*24 a valuation investment concept. But he does not, as did Clark, include land among "capital goods"; these are purely artificial things, "products of past industry,"*25 thus plainly differing with the business usage cited. Seager was insistent on keeping sharply distinct the two classes of concrete goods (land and capital goods) which represent "man's part in production and nature's part."*26 Soon, however, Seager is found talking about buying land, quite in the sense in which the business man speaks of the purchase of other goods, as an "investment" involving the "capitalization of rents."*27



In the first edition of his Principles (1890), Alfred Marshall was well aware of the issue before us, and gave it a good deal of attention. He showed acquaintance with J. B. Clark's work of two years earlier,*28 with Böhm-Bawerk, Newcomb,*29 and the several German economists above named, who contrasted capital as ownership and as means of production.*30 Marshall listed with approval a veritable catalog of definitions mutually inconsistent, but admitted that the divergent usage "has been a great stumbling block to many readers" and "appears to land the science in confusion." He comforts himself, however, with the thought that "the difficulty is much less serious than it seems at first sight."*31 The plan by which he hopes to minimize the confusion, if not avoid it, is to adopt two standard definitions, one each for individual and social capital respectively (apparently following Böhm-Bawerk), and then (apparently forgetting that he himself has two) "to supplement his standard definition by an explanation of the bearing of each of several elements of capital on the point at issue." His definition of individual capital is "that portion of a person's external goods by which he obtains his livelihood"; and of social capital is "those things made by man, by which the society in question obtains its livelihood." The latter consists, first, of goods in a form to satisfy wants directly ("consumption capital") and, secondly, of production goods ("auxiliary capital.") He recognizes that individual capital "is most commonly taken to include land and other free gifts of nature," but this is to be left "to be decided by an interpretation clause in the context wherever there is room for misunderstanding on the point." He evidently here thinks of "capital" (either individual or social) as consisting of concrete goods rather than of their value or the purchasing power they embody; and both his "standard definitions" make capital consist of the external goods themselves. Later, in a chapter headed "The growth of wealth,"*32 he discusses it as if it were identical with "the accumulation of capital" and to "the annual investment of wealth." It is almost needless to say that when he comes to discuss capital in business, it is in terms of investment and its monetary expression, while interest or earnings are percentages of a principal sum.*33


In the successive revisions of his text, terminating with the 8th (1920) Marshall's discussion of this subject steadily increased in length and elaboration without gaining in clarity and consistency. On the whole, though, the change is in the direction of a greater preference for, and emphasis upon the individual concept (and its valuation expression) as compared with the social concept. The individual concept is now cited in the index as the "standard use" of the term,*34 and appears with this comment: "This definition of capital from the individual or business point of view is firmly established in ordinary usage; and it will be assumed throughout the present treatise whenever we are discussing problems relating to business in general." He concludes this chapter with admonitions to economists to "forego the aid of a complete set of technical terms," and not to assign "a rigid exact use to a word" as this "confuses business men"—astonishing counsel to budding would-be scientists.


Marshall's view as to the relation of land to capital is not easy to fix, but on the whole it seems to be that land is among the (concrete) things comprising individual but not social capital. E.g., he says: "This illustrates the fact that land from the point of view of the individual cultivator is simply one form of capital."*35 Speaking more generally of manufacturers and traders as well as of farmers he says: "It is to be remembered that land is but a particular form of capital from the point of view of the individual producer."*36 Though Marshall here distinctly excluded land from capital from the social point of view;*37 nevertheless, only three pages later, still speaking of the social point of view, he says: "In purely abstract, and especially in mathematical, reasoning the terms Capital and Wealth are used as synonymous almost perforce, except that 'land' proper may for some purposes be omitted from capital." Are we to understand then, that for most purposes, land is by Marshall included in capital, at least land "proper," whatever that may mean, which here seems to mean "in the scientific sense," if it means anything?


The reader must take his choice among these contradictions, for his bewilderment will only be enhanced by further search amid the mazes of Marshall's tome. But, though Marshall's formal definitions of capital run in terms of concrete agents, there is no doubt that whenever he comes to discuss individual capital in problems relating to business in general he resorts to a valuation concept. The resources of an individual "are in the form of general purchasing power."*38 He declares that the idea of interest is strictly applicable only to fluid capital, evidently meaning readily available purchasing power. "The rate of interest is a ratio and the two things which it connects are both sums of money."*39 Thus it appears that after many contradictory assertions and formal definitions that reaffirm the older Ricardian scheme, Marshall really uses capital in nearly all his discussions of price and of business problems in his later editions as an individual (acquisitive) concept, expressed in (market) valuation terms. Yet unsuspecting students still are led to seek in Marshall a source of theoretical illumination instead of a smoke cloud.



The influence of Clark's views of capital showed itself at Yale within the following decade in the writings of A. T. Hadley and of his younger colleague, Irving Fisher. Hadley published in 1895*40 a noteworthy article marked by an insight and a clarity in nearly every feature in advance of its date, and by a realism in advance of Clark's abstraction of an entity of pure capital. Hadley recognized both the broad social and the narrow individual conception of wealth, and the broad and the narrow conception of capital. "Individual wealth is more accurately designated as property." "The capital of an individual is more accurately designated as an investment." "A title to property is not necessarily productive as held by Clark." Here Hadley briefly, but in essence, anticipated what Veblen (and in part Davenport) developed many years later regarding the contrast between acquisition and production, while avoiding Veblen's exaggeration of the contrast and his caricature of the profit motive. Hadley's text Economics published the next year, reproduced in its first chapter (on Public and Private Wealth) the substance of this article, but with certain additions (unfortunate, in our view) involving, as Hadley says,*41 "a combination of the ideas of Knies and Newcomb," but for which he acknowledges his chief indebtedness to be due to his colleague, Dr. Irving Fisher.


The essential addition due to Fisher was a distinction between capital and income as "modes of measuring" which Hadley had come to believe "is almost as important as the distinction between public and private wealth"*42 which he had presented in his essay of the year before. This new distinction is, however, certainly more than a mere detail; it introduces into Hadley's earlier clear and simple thought of capital as the value of rights of individual ownership, a different idea of a stock of wealth*43 as contrasted with a flow of wealth. The latter was pretty clearly Fisher's own idea at that time, as appeared in his contemporary articles.*44 In these Fisher presented this distinction between a "stock," or a "fund," and a "flow," or a "stream," as the one essential test of capital, as he conceived it. He is intent (not as was Hadley) on distinguishing capital as valuation from wealth as objects (for he thinks of both simply as material) but in distinguishing income as a flow of things from wealth as a fund, reservoir or stock of things. There is not a hint in Fisher's definitions that capital consists of "rights" expressed in terms of monetary valuation, or financially, or of its being a sum of purchasing power, a business investment concept. Fisher specifically objects to Clark's expression of the amount of true capital in terms of price, instead of by physical measurements. However, as soon as he attempts to discuss the percentage rate of flow, he assumes the measurement of both stocks and streams in monetary terms, for in no other way could a percentage appear. Fisher's contrast was that between a stock and a stream of the "very same commodities."*45 The present writer soon afterward*46 sought to show that this view was untenable in that it overlooked the durative nature of many of the objects comprised in Fisher's material "capital," and involved the erroneous assumption that all indirect agents eventually appear in substance as direct (enjoyable) goods. However, when Fisher next expounded his definition, though he referred in no way to this criticism, he introduced alongside of the old distinction a new one designed to obviate the difficulty with the unfortunate result that his unified conception is converted into the dualistic conception already foreshadowed by Hadley. This is the passage:*47

Capital is a fund and income a flow. This difference between capital and income is, however, not the only one. There is another important difference, namely, that capital is wealth, and income is the service of wealth. We have, therefore, the following definitions: A stock of wealth existing at an instant of time is called capital. A flow of services through a period of time is called income.


Now it must be said of these dualistic definitions that they are quite useless for the purpose in view. Fisher's own work on capital and income deals mainly with financial conceptions untouched in these definitions, incomes as price-quanta, discounted and summed up in capital (also a price quantum) conceived of as the present worth of claims to future monetary incomes, no matter whence or how derived (even from intangible rights). And the definitions are at least in part tautological, for while it would be logically possible (even though theoretically useless) to have a fund of wealth (material goods) and to contrast it with a flow of the same goods, it is not possible to conceive of a literal stock of services at an instant of time; it is possible only to conceive of their present worth as a financial fund at an instant of time. Services (taken in the sense of uses either of wealth or of human beings) may conceivably be delayed or hastened, but they are in their very nature a flow; they cannot be heaped up and constitute a stock of services. They can at most, as they occur, be "incorporated" in durable forms of wealth. If this is so, then why this elaborate contrast between a flow of services and a fund of something quite different? It is the vestigial remains of the older conception that Fisher has been obliged to discard.


The idea of a "fund" as a financial sum, estimate, or valuation, at an instant of time, has become confused with the idea of a "fund" as a heap or store of physical goods existing at an instant of time. The phrases of Fisher's definitions form a superficial, verbal bond of connection between the old conception and the new one, while in fact the essential distinction has become that not between income as a flow and capital as a fund (of the "very same" material things) but that between a valuation of services (incomes) when accruing separately throughout time and the valuation of those same services when discounted and summed up at an instant of time. Capitalization thus does involve a comparison of a financial fund (the single present worth) and a flow (a series of future worths) of the very same things, namely, valuations of services. Only through the common element, valuation, do capital as a valuation fund and income as a valuation flow become comparable.*48


The text of Fairchild, Furniss and Buck, emanating from Yale, starts in the old paths, formally defining capital as a third factor of production, produced instruments of production. The tool, the indirect agent, seems to be the typical capital in mind in the historical survey, and the older definitions are repeated.*49 "Land, labor and capital" are presented in the familiar roles of the three factors of productions.*50 But the first time that there is any real occasion to use the capital concept, a simple footnote makes kindling wood of these museum pieces and the reader is informed that "In the present discussion we shall use the term capital including land as well as man-made instruments. The term is generally so used in discussions of investments."*51 Thereafter capital appears as a fund of value, an investment fund, expressed in terms of dollars. Yet from time to time the discarded notion of the difference between land and man-made capital instruments is weakly reëchoed.*52 The treatment of interest and capital seems pretty nearly in accord with that of Fisher.



Professor Seligman, a colleague of Clark's at Columbia, took an advanced position on the concept of value, as well as on the various related questions of rent, capitalization, etc. He declares repeatedly: "capital is capitalized income," and makes use almost exclusively of a valuation concept in that sense. Professor J. R. Turner too makes use*53 consistently of an advanced valuation concept of capital. These views and those of the writer*54 are in large measure in accord.


Ely as early as 1893*55 began with a dual capital concept as "every product which is used or held for the purpose of producing or acquiring wealth," but almost immediately speaks of capital from the individual standpoint as "any economic good" (not merely products) held "for the purpose of gaining wealth." Later editions, though repeating old definitions, give increasing emphasis to the individual, valuation conception, which finally becomes the only one actually used. "The business world...speaks of the total investment—the amount of money 'tied up' in a business unit—as its capital. This is the better and more common usage."*56


Professor Fred M. Taylor*57 speaks approvingly of "one new way of conceiving of capital" as a "fund of value...rather than things themselves"; and adds: "Even those who doubt the soundness of this distinction are almost compelled to use it more or less on account of the ambiguities in which current controversies have involved the word capital."


Professor Bye*58 in his formal definition follows Fisher: "a stock of wealth in existence at a given time," including land as "natural capital," and "intangible property rights or titles to wealth as a part" of an individual's capital. He thus glides insensibly into the value conception of "net property rights," "net worths," etc.*59 Still the ghosts of the older conceptions of "natural" land and "produced" capital haunt almost every paragraph of the later chapter entitled "Income from artificial capital."


Professor O. F. Boucke*60 endeavors to give impartial recognition to the two different main concepts (besides several minor variations), capital "as technical aids used in production, or as any source whatsoever of incomes."*61 The latter idea is later expressed as "a sum of money or its equivalent," a "capital value" concept which includes such things as the "value of patents or copyrights, or of personal reputations," etc.*62 Thereafter, whenever capital is referred to in connection with credit, interest, or any sort of business problems, this value concept seems to be the one preferred.


Professor L. D. Edie*63 likewise starts by repeating the older definitions and distinctions based on the concrete goods notion, noticing, only to chide, the business man's thought of his business capital as money, or as "borrowed money on credit."*64 But he cannot long escape recognizing "capital values," and "capital is, from this viewpoint, not merely a mass of physical goods, but this plus a mass of property rights, good will, and other intangible assets." He adds: "To be realistic, our use of the term capital must harmonize with prevailing business facts" and declares that, "This modern view is amplified later in the present chapter."*65 A peculiarity of this author's view is that he seems to admit the valuation concept of capital only under the corporate form of organization.



It would be too great a task to pursue our inquiries further into the mass of recent business texts that touch upon this subject. It is a paradox that the more emphatically an author professes to have written for students of business, the more remote from actual business usage his conception of capital is likely to be. How long must it continue to be a sort of ritual for the writer of economic text books to at first repeat piously old definitions from which all vital meaning has departed (if they ever had any) only to throw them aside later when the time comes to use them. Must every year the minds of thousands of beginning students of economics be crammed with this useless intellectual lumber? In what other field of study could such a practice continue? The way to consistency and clearness has been clearly shown by the labors of the past generation. Ambiguity must be banished from economic terminology. Wealth and capital are not the same or even related as genus and species. Capital is essentially an individual acquisitive, financial, investment ownership concept. It is not coextensive with wealth as physical objects, but rather with legal rights as claims to uses and incomes. It is or should be a concept relating unequivocably to private property and to the existing price system. Social capital is but a mischievous name for national wealth. The so-called, misnamed, "interest problem" is not to be conceived of as correlated with a narrow class of artificial goods but rather as the time-value element permeating all cases of valuation of groups of uses differing in time. The admission of these and a number of logically related truths is partially, haltingly, inconsistently implied in much of the current treatment of the fundamentals. When will it be made frankly and clearly? When will the dead hand of Ricardianism be lifted from our economic texts?


John Bates Clark in his young manhood struck straight and telling blows for a newer, truer and more realistic conception of distributive theory. He did not attain an ultimate goal, but he advanced in the right direction, showing the way to us. The sincerest tribute that we, and that men of younger generations, can render to him is to seek and to find the truths implicit in the work of the notable era of which he was so large a part.

Notes for this chapter

May, 1883, in Publications of the Amer. Econ. Asso., Vol. III, No. 2.
Op. cit., pp. 11-12.
J. R. Turner, The Ricardian Rent Theory in Early American Economics, 1921.
Staatswirtschaftliche Untersuchungen, etc., Munich, 1832.
The ideas of Rodbertus on capital are scattered throughout his writings, but perhaps more systematically presented in his work Das Kapital, written 1850-51 but published first in 1885 by A. Wagner and T. Kozak. (Known to the writer only in the French translation, Paris, 1904.)
See Wagner's Grundlegung, 3rd. ed., 1892, p. 307 ff.
Knies, op. cit., p. 43.
Clark, op. cit., p. 11.
See Dr. A. N. Young, The Single Tax Movement in the United States (1916), passim. Prof. R. T. Ely noticed it in his Recent American Socialism in 1885.
Largely a republication of a series of articles the publication of which was begun ten years earlier. See preface to first edition.
Op. cit., p. 86.
E.g.,op. cit., pp. 33, 34.
Op. cit., p. 86.
Op. cit., pp. 55, 66.
See the discussion, Quarterly Journal of Economics (1895-1896), Vol. 9 (Clark), p. 238; (Böhm-Bawerk), pp. 113, 235, 380; Vol. 10 (Clark), p. 98, (Böhm-Bawerk), p. 121.
Principles of Economics, 1st ed., 1911, Vol. 2, p. 115.
E.g., Vol. 1, pp. 72, 75; Vol. 2, p. 119ff.
Ibid., Vol. 2, pp. 5-8, 58.
Ibid., Vol. 2, p. 118.
Vol. 1, pp. 84, 85.
Ibid., pp. 121-123.
In part his objections result from his not seeing the full import of the principle; however, his objection to Professor Irving Fisher's view of capitalizing human beings is in my judgment well taken. The reference to my text at this point in the 3rd edition (1921) is misleading. (Vol. 2, p. 126)
Introduction to Economics (1904), p. 108.
Ibid., p. 126, and, in revised form, Principles of Economics (1913), p. 14.
Principles, p. 148.
Ibid., p. 149.
Ibid., p. 239.
E.g., note p. 615; and specific reference to Capital and its Earnings in note, p. 492.
Ibid., p. 137.
Ibid., pp. 135-136.
Ibid., p. 133.
Ibid., p. 284.
Ibid., pp. 513, 620 ff., 635, 648, etc.
8th ed., p. 72. But still, in his last word on the subject (p. 790), Marshall justifies his own adoption of "the two-fold definition of capital."
Ibid., p. 170.
Ibid., pp. 430-431. Also p. 535 et passim.
Ibid., p. 78.
E.g., ibid., p. 411.
Ibid., p. 412.
Yale Review, Vol. 4, pp. 156-170, "Misunderstandings about economic terms."
In a footnote, p. 5.
It would be a more accurate description of this distinction to say, using Hadley's own phrases: between public wealth as the sum of the "means of enjoyment" or "means of happiness," in existence, and private capital as the value of individual property rights.
Material objects by Fisher's definition, Nature of Capital and Income, p. 3.
Economic Journal, Vols. 6 and 7, 1896, 1897. A number of references to J. B. Clark's ideas occur in the three articles.
Op. cit., Vol. 6 (1896), p. 514.
See Quarterly Journal of Economics, Vol. 15 (1900), p. 19.
The Nature of Capital and Income (1906), p. 52. Italics in the original.
The thought is hardly to be avoided that some of the peculiar ideas regarding savings and income to which Fisher has adhered so uniquely despite criticism are traceable to this confusion of definitions. We refer especially to his reiterated proposition that "savings are not income." As a financial fact, there can be no saving and addition to capital value until there is first a property right to an income calculable in monetary terms (a financial present worth) to be saved. Hence to deny that monetary savings are monetary income is in simple common sense to deny a fait accompli; it is to assume the existence of the effect before its cause.
Elementary Economics (1926), Vol. 1, p. 32 ff.
Ibid., p. 40.
Ibid., Vol. 1, p. 355.
E.g., Vol. 2, pp. 163 and 189.
Introduction to Economics, 1919.
As developed in various places; see, among other, Quarterly Journal of Economics, Vol. 15 (1900), pp. 1-45, "Recent Discussion of the Capital Concept"; "The Relations between Rent and Interest," paper read at the New Orleans meeting, with discussion, Publications of the American Economic Association, 3rd series (1904), Vol. 5, pp. 176-240; The Principles of Economics (1904); American Economic Review, Vol. 4 (1914), pp. 68-92; Economic Principles (1915), p. 267: "Capital is a person's investment power as expressed in terms of money, being a person's property rights to income, estimated, as to amount, with reference to market conditions." The definitions given in the references dating 1900 to 1904 followed in part Clark's and Fisher's leads in conceiving of capital more nearly as the valuation expression merely of (material) wealth. In developing after 1904 a more adequate capitalization and "interest" theory, the writer returned with clearer convictions to the conception of capital that he had glimpsed before 1900.
Outlines of Economics.
Outlines of Economics, 4th revised edition (1923), p. 206; see also p. 103 et passim.
Principles (1913), p. 69.
R. T. Bye, Principles of Economics, 1924.
Op. cit., p. 24.
Principles of Economics, 2 Vols., 1925. Ref. to Vol I.
Op. cit., p. 95. These ideas are more elaborately set forth pp. 370-376.
Ibid., p. 381.
Economics, 1926.
Op. cit., p. 247 ff.; also p. 254.
Ibid., p. 255.

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

End of Notes

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