Capital, Economics
CAPITAL, ECONOMICS (i.e. capital stock or fund), in economics, generally, the accumulated wealth either of a man or a community, that is available for earning interest and producing fresh wealth. In social discussion it is sometimes treated as antithetical to labour, but it is in reality the accumulated savings of labour and of the profits accruing from the savings of labour. It is that portion of the annual produce reserved from consumption to supply future wants, to extend the Sphere of production, to improve industrial instruments and processes, to carry out works of public utility, and, in short, to secure and enlarge the various means of progress necessary to an increasing community. It is the increment of wealth or means of subsistence analogous to the increment of population and of the wants of civilized man. Hence J.S. Mill and other economists, when seeking a graphic expression of the service of capital, have called it "abstinence." The labourer serves by giving physical and mental effort in order to supply his means of consumption. The capitalist, or labourer-capitalist, serves by abstaining from consumption, by denying himself the present enjoyment of more or less of his means of consumption, in the prospect of a future profit. This quality, apparent enough in the beginnings of capital, applies equally to all its forms and stages; because whether a capitalist stocks his warehouse with goods and produce, improves land, lends on mortgage or other security, builds a factory, opens a mine, or orders the construction of machines or ships, there is the element of self-deprival for the present, with the risk of ultimate loss of what is his own, and what, instead of saving and embodying income productive form, he might choose to consume. On this ground rests the justification of the claims of capital to its industrial rewards, whether in the form of rent, interest or profits of trade and investment.
To any advance in the arts of industry or the comforts of life, a rate of production exceeding the rate of consumption, with consequent accumulation of resources, or in other words, the formation of capital, is indispensable. The primitive cultivators of the soil, whether those of ancient times or the pioneers who formed settlements in the forests of the New World, soon discovered that their labour would be rendered more effective by implements and auxiliary powers of various kinds, and that until the produce from existing means of cultivation exceeded what was necessary for their subsistence, there could be neither labour on their part to produce such implements and auxiliaries, nor means to purchase them. Every branch of industry has thus had a demand for capital within its own circles from the earliest times. The flint arrow-heads, the stone and bronze utensils of fossiliferous origin, and the rude implements of agriculture, war and navigation, of which we read in Homer, were the forerunners of that rich and wonderful display of tools, machines, engines, furnaces and countless ingenious and costly appliances, which represent so large a portion of the capital of civilized countries, and without the pre-existing capital could not have been developed. Nor in the cultivation of land, or the production simply of food, is the need of implements, and of other auxiliary power, whether animal or mechanical, the only need immediately experienced. The demands on the surplus of produce over consumption are various and incessant. Near the space of reclaimed ground, from which the cultivator derives but a bare livelihood, are some marshy acres that, if drained and enclosed, would add considerably in two or three years to the produce; the forest and other natural obstructions might also be driven farther back with the result, in a few more years, of profit; fences are necessary to allow of pasture and field crops, roads have to be made and farm buildings to be erected; as the work proceeds more artificial investments follow, and by these successive outlays of past savings in improvements, renewed and enhanced from generation to generation, the land, of little value in its natural state either to the owner and cultivator or the community, is at length brought into a highly productive condition. The history of capital in the soil is substantially the history of capital in all other spheres. No progress can be made in any Sphere, small or large, without reserved funds possessed by few or more persons, in small or large amounts, and the progress in all cases is adventured under self-deprival in the meanwhile of acquired value, and more or less risk as to the final result.
Capital is necessarily to be distinguished from money, with which in ordinary nomenclature it is almost identical. Wealth may be in other things than money; oxen, wives, tools, have at different stages of civilization represented the recognized form of capital; and modern usage only treats capital as meaning the command of money because money is the ordinary form of it nowadays. The capital of a country can scarce be said to be less than the whole sum of its investments in a productive form, and possessing a recognized productive value.
Adam Smith's distinction of "fixed" and "circulating" capital in the Wealth of Nations (book ii. c. i.) cannot fail to be always useful in exhibiting the various forms and conditions under which capital is employed. Yet the principal phenomena of capital are found to be the same, whether the form of investment be more or less permanent or circulable. The machinery in which capital is "fixed," and which yields a profit without apparently changing hands, is in reality passing away day by day, until it is worn out, and has to be replaced. So also of drainage and other land improvements. When the natural forests have been consumed and the landowners begin to plant trees on the bare places, the plantations while growing are a source of health, shelter and embellishment - they are not without a material profit throughout their various stages to maturity - and when, at the lapse of twenty or more years, they are ready to be cut down, and the timber is sold for useful purposes, there is a harvest of the original capital expended as essentially as in the case of the more rapid yearly crops of wheat or oats. The chief distinction would appear to rest in the element of time elapsing between the outlay of capital and its return. Capital may be employed in short loans or bills of exchange at two or three months, in paying wages of labour for which there may be return in a day or not in less than a year or more, or in operations involving within themselves every form of capital expenditure, and requiring a few years or ninety-nine years for the promised fructification on which they proceed. But the common characteristic of capital is that of a fund yielding a return and reproducing itself whether the time to this end be long or short. The division of expenditure or labour (all expenditure having a destination to labour of one kind or another) into "productive" and "unproductive" by the same authority (book ii. c. 3) is also apposite both for purposes of political economy and practical guidance, though economists have found it difficult to define where "productive expenditure" ends and "unproductive expenditure" begins. Adam Smith includes in his enumeration of the "fixed capital" of a country "the acquired and useful abilities of all the inhabitants"; and in this sense expenditure on education, arts and sciences might be deemed expenditure of the most productive value, and yet be wanting in strict commercial account of the profit and loss. It must be admitted that there is a personal expenditure among all ranks of society, which, though not in any sense a capital expenditure, may become capital and receive a productive application, always to be preferred to the grossly unproductive form, in the interest both of the possessors and of the community.
The subject in its details is full of controversies, and a discussion of it at any length would embrace the whole field of economics. The subject will be found fully dealt with in every important economic work, but the following may be specially consulted: - J.S. Mill, Principles of Political Economy; J.E. Cairns, Some Leading Principles of Political Economy; F.A. Walker, Political Economy; A. Marshall, Principles of Economics; E. Bohm v. Bawerk, Capital and Interest; K. Marx, Capital; J.B. Clark, Capital and its Earnings; see also the economic works of W.H. Mallock (Critical Examination of Socialism, 1908, etc.) for an insistence on the importance of "ability," or brain-work, as against much of modern socialist theorizing against "capitalism."
Note - this article incorporates content from Encyclopaedia Britannica, Eleventh Edition, (1910-1911)
