CAPITAL. In economics, capital may be defined as produced wealth used productively for gain. It is thus distinguished from land and other natural resources, which are not "produced," and from consumers' goods, which are not used productively for gain. The economist's conception of capital is unlike the conceptions which govern the practice of accountants. The reason is that many things which are properly counted as part of the capital of a person or a firm make no part of the aggregate capital of so ciety. A house occupied by a tenant is part of its owner's capital, but it is not for that reason any more a part of the productive apparatus of the community than it would be if it were owned by its occupant. A may include what B owes him in an inventory of his capital, but in the aggregate view A's claim and B's liabil ity cancel. Patents, copyrights, the franchises of public service companies, and other exclusive privileges, or the goodwill of a business undertaking, its established claim upon the preferences of buyers, have similar status. Such things are sometimes called "acquisitive capital," to distinguish them from the things which constitute the true capital of the community.
There is a sense in which a community's whole stock of ac cumulated wealth, including durable goods in the possession of consumers, may be said to be its capital. A consumer who buys durable goods—a house, a piano, a piece of furniture—from which he expects to get a long series of uses, is thereby providing for the future, and so far as a community is supplied with such goods its future wants are in that measure provided for. Whether such accumulations should be called capital is a question of conven ience, not of principle. The distinction between goods which pro vide for future wants and the goods and services which merely provide for the present is doubtless important, but the distinc tion between using goods in production for the market, i.e., in production for gain, and using them as part of one's own equip ment for living is also important, and most economists have pre ferred to emphasize this last distinction by drawing a line be tween capital and consumers' goods. The line cannot be drawn with perfect precision, however. It is impracticable to make a sharp distinction either between the capital which a farmer uses in producing food for the market and the equipment which he uses in producing food for his own household, or between the latter and the equipment which a housewife uses in preparing food for the table. But these are small matters and do not affect the practical utility of the conception of a special category of produced wealth which is used productively for gain.
There is also a sense in which personal qualities, as well as goods, may be said to be capital. Expenditure for education or for any training which makes a man a more efficient producer may properly be regarded as an "investment of capital." The per sonal earnings which are attributable to acquired qualities of skill and efficiency might easily be treated as interest or profits upon "personal capital." Economists have found it more conven ient, however, to adhere in this particular to the practice of the business world, and to treat such earnings as elements in wages. Similarly, while it is important to take account of the motives which lead men to employ capital in improving land (e.g., in fer tilizing or draining it), no useful purpose is served by attempting always to distinguish between the return attributable to the cap ital which has been incorporated in land and the rent of the land itself.
Next in importance to the distinction between instruments and stocks is the distinction between specialized capital and unspecial ized capital. A railway track or a complicated machine is serv iceable only within the narrow range of uses for which it was constructed. Its value depends upon the demand for the special services which it is capable of rendering. Raw materials that enter into different sorts of finished products, tools and machines of standard types, are examples of less highly specialized capital. The difference is one of degree. Most capital is partly special ized, in the sense that it has only a certain range of uses and that it is better adapted to some uses than to others. Money, because it can be used in acquiring goods and services of what ever sort, is sometimes held to be a wholly free and unspecialized form of capital. But is money capital? It is true that stocks of ready money as well as stocks of goods are required for the op erations of industry and trade, and that these stocks are not maintained without expense. But it is also true of some of the most important forms of money (including the notes of banks and of governments and bank deposits subject to cheque) that the holder's capital is offset by the issuer's debit or liability. Further more, the supply of money may be increased without there being any attendant increase of the real wealth of the community or even of the aggregate serviceability of its stocks of money. In short, money may properly be counted as capital if it is recog nized clearly that it constitutes a separate category, with special characteristics of its own.
Nature furnishes free productive agents which, merely because no economy need be practised in our use of them, are not pro ductive in an economic as distinguished from a purely physical sense. Thus in the economic sense the wind is not productive but windmills are. We harness natural forces so as to use them in production, but we attribute the product wholly to the harness. This is inevitable, for the harness is the only factor in the situa tion which we can add or take away or which we can vary as we please, so that the product depends upon it. Capital would not be deemed productive if its supply were not limited, nor would it be deemed scarce if it were not productive. Whether the earnings of capital are attributable to its productivity or to its scarcity is therefore a meaningless question. That a larger (physical) prod uct can be got by using capital does not explain why a specific part of the product has to be attributed to capital and assigned to it as its earnings. The economic productivity of capital, its scarcity, and its earning power are merely different aspects of the way in which the amount of the product depends upon the supply of capital. For an understanding of this relation of dependency be tween product and capital it is necessary to take account both of the productive uses of capital and of the circumstances which limit its supply.
The Uses of Capital.—Consider first the uses of instruments— tools, machines, prime movers, and auxiliary apparatus. Inert and passive in themselves, from the point of view of economics, instruments are goods which are produced and used in the pro ducing of other goods for the reason that such procedure is eco nomical. A conspicuous characteristic of the procedure is that it is indirect or roundabout. There is nothing inherently economical in roundabout methods, but the most economical methods often happen to be roundabout. The degree of roundaboutness which is most economical generally depends upon the amount of a par ticular kind of work which is to be done. And also the making and use of instruments involves an extension of the principle of the division of labour, and the division of labour, as Adam Smith observed, depends upon the extent of the market. The use of capital on a large scale in industry came later than its use in commerce, for the reason that not until there were markets which were able to absorb large outputs of standard types of goods was it profitable to make any extensive use of roundabout meth ods of production. Once established, however, industrial capital ism showed that it had within itself the seeds of its own growth. Cheaper goods, improved means of transport, and the increased advantages of specialization led to larger markets, so that the economies of industrial capitalism grew in a cumulative way. The increasing division of labour, by breaking up complex industrial processes into simpler parts,•not only invited a larger use of in struments, but also prompted the invention of new types of in struments. Along with these changes and holding with respect to them the dual relation of cause and effect, the exploitation of the world's stores of mechanical energy extended enormously the effective range of the use of instruments. Improvements in in dustry and in transport made the world capable of sustaining a larger population. while the growth of population, in turn, by cre ating larger markets, made it profitable for industry to use meth ods of a higher degree of roundaboutness.
The uses of stocks are various. (r) Stocks are held in order to give time for spontaneous or induced changes of a desirable kind to occur. The maturing of wine or tobacco, the fructifying of the seed in the soil, the drying and seasoning of the wood used in cabinet work, are examples of a very large number of processes which either cannot be hastened or cannot advanta geously be hastened beyond a certain point. (2) Stocks have to be held in order that the products of agriculture and of other seasonal industries may be spread throughout the year in accord ance with the requirements of consumers. (3) The technical requirements of production make it necessary that stocks of "goods in process" be held. (4) At various points in the linked chains of agencies through which goods pass on their way from the producer of raw materials to the ultimate buyer of the fin ished product stocks are accumulated. This helps to safeguard buyers, at whatever point in the chain, against the inconvenience and losses of delays, and it makes for economy in transport and handling. Furthermore, even if production and trade were al ways managed with complete efficiency and if producers and traders always had complete knowledge of the market, it would be impracticable and uneconomical to keep all of the various processes of production and distribution moving together so as to maintain a smooth and even flow of goods from the first producers to the final buyers. Stocks are like the reservoirs in which the waters from variable and intermittent streams are impounded so as to guard against both floods and drought.
The Supply of Capital.—The use of capital saves time, in the sense that a larger product can be had with a given amount of labour. But it increases the average interval of time which elapses before the products of a given day's labour reach their final form and pass into the hands of consumers. Present work, however far away its final fruition in a finished product may be, has to be paid for it the present, and so do the present uses of land and capital—unless, indeed, the owners of land and capital can be induced to defer their claims. These present payments are ad vanced in anticipation of the payments which consumers will make later for finished products. This is the central fact of the capitalistic system of production.
Interest is the premium which is paid for advances. The money incomes which employers, labourers, capitalists, and landowners receive are used in part to pay for immediate personal services and for the finished goods that have been produced in the past, and in part to pay (as advances) for the present expenses of forwarding the production of goods for future markets. In those future markets, it is expected, the goods will sell for enough to cover the advances, with interest added. If the returns finally secured prove on the whole to be inadequate, or even promise to be inadequate, the demand for advances will fall off and the rate of interest will decline. But if industry is prosperous, if the prospect is that in general some net profit will be left after the cost of advances has been met, the demand for advances will increase and the rate of interest will rise, so that a smaller part of the current stream of money incomes will be expended for finished goods and personal services and a larger part will be used in pro ducing instruments and in increasing stocks. There is thus an effective tendency towards an unstable sort of equilibrium, in which the most important variable factors (human nature being taken as constant) are, first, the economies of capitalistic methods of production, and, second, the rate of interest. In the long run, however, what part of the product is imputed or attributed to capital rather than to labour or to natural resources will be determined by the rate of interest. How much larger the total product is than it would be if no capital were used is mostly a matter of technology. How much of the product is, in the eco nomic sense, attributed to capital as its product, is largely a matter of the price which has to be paid for advances.
The operations of banks have an important effect upon the way in which advances are made. Banks are more than mere in termediaries between lenders (depositors) and borrowers. So far as their own obligations (notes and deposits) will serve as money, and within the, limits set by the necessity of maintaining their own solvency, they can make advances to industry and trade without there being any prior saving. In fact, because consumers' incomes will be increased as the funds advanced by the banks are paid out to cover the expenses of producing goods, the demand (in terms of money offered) for goods and services will be larger than before. If stocks cannot be increased as rapidly as the demand for finished goods increases, prices will rise, and a dis guised form of involuntary saving will thus be imposed upon all consumers whose incomes have not increased proportionately. Furthermore, if manufacturers and traders gain by reason of the rise of prices (their expenses not having increased proportionate ly), they are fairly sure to reinvest some of their profits. The real burden of the saving which makes these new advances possible falls more heavily upon the persons who lose (in purchasing power) because of the rise of prices than upon the manufacturers and traders who gain. But profits, of course, do not depend upon price fluctuations alone. A high general level of profits, brought about as the result of whatever causes, will increase both the demand for and the supply of advances. In consequence there may be an unduly rapid increase of instruments and stocks—a circumstance which probably plays a part in the recurring indus trial fluctuations which have come to be known as trade cycles. Business profits are probably the largest single source of invest ment funds. Estimates made by A. L. Bowley, Sir Josiah Stamp and W. I. King indicate that in Great Britain and the United States fully half of the current supply of advances comes from that source.
Non-Productive Uses and Forms of Capital.—No simple and consistent view of the nature and uses of capital can be alto gether true to the complicated facts of economic life. The con ception of capital as a productive agent is justified because it emphasizes what are, in fact, the most important uses of capital. Advances are made mostly so that capital may be used in further ing the production of goods. In some important fields of business enterprise, however, large amounts of money are invested, not in producing goods which consumers already want, but in inducing them to buy certain particular things. The purpose of a consider able part of what are commonly called selling expenses is not to supply goods to satisfy an existing demand, but to shift demand from other channels. Such expenditures are not always wholly unproductive. Scrupulously truthful advertising may be of real service to the consumer, perplexed by the wide range of alternative choices and without firsthand knowledge of the qualities of com peting goods. Advertising, furthermore, by helping to create larger markets for particular types of goods which can be produced much more economically if produced on a large scale, may itself be a factor in the economizing of the productive resources of the community. But these are incidental and by no means necessary results of what are primarily competitive or acquisitive uses of capital. Advertising may lead sometimes to the education of the consumer, but it may also lead to the exploitation of weakness and ignorance. While it may sometimes open the way to real economies in production, it may at other times involve a pure waste of resources which might otherwise have been used produc tively. Its importance has been fully recognized in all forms of productive business.
One other qualification of what has been said about the nature of capital remains to be noted. A nation's capital may be taken to be either (I) the capital within the nation's boundaries, irre spective of its ownership, or (2) the capital owned within the nation, irrespective of its situation. In the second sense a nation's capital includes the net excess of its external or foreign assets (property and credits) over its external liabilities (domestic property owned abroad plus foreign debts). In two respects this view is inconsistent with the definition of capital as "produced wealth used productively for gain." In the first place, credits are included, which, in an international stock-taking, would cancel against debts. In the second place, foreign holdings of land, of mineral rights, of concessions, and of other valuable privileges, as well as of instruments and stocks, are included. There is nothing unreasonable in this. Investments in landed property or in mineral rights outside of a nation's own boundaries make part of its national savings and affect the amount of its annual national income. In short, in determining the amount of a nation's capital, it is necessary, for some purposes, to abandon at the na tional frontiers the communal conception of capital, and to adopt a private or acquisitive conception, such as is employed in ac countancy. Similarly, while the phrase, "the export of capital," might conceivably be taken to refer to the movement of instru ments and stocks from one country to another, it is more generally taken to denote the increase of the net foreign investments of the people of a given country.
See also ECONOMICS ; BANKING AND CREDIT ; WEALTH ; WEALTH, NATIONAL; WEALTH AND INCOME, DISTRIBUTION OF; ESTATE DUTIES ; INHERITANCE .
BIBLIOGRAPHY.-E. von Bohm Bawerk, in Kapital and Kapitalzins Bibliography.-E. von Bohm Bawerk, in Kapital and Kapitalzins (4th ed., 1921), provides an acute critical analysis of the principal theories of capital and interest. An English translation of an earlier edition of this important work is available in two separate volumes, Capital and Interest (189o) and Positive Theory of Capital (1891). Standard modern treatments will be found in A. Marshall, Principles of Economics, 8th ed. (192o) ; G. Cassel, The Nature and Necessity of Interest (1903) and Theory of Social Economy (trans. J. McCabe, 1923) ; R. T. Ely and others, Outlines of Economics, 4th ed. (192o) ; F. W. Taussig, Principles of Economics, 3rd ed. (1921) ; A. Landry, L'interet du capital (19o4) ; J. B. Clark, The Distribution of Wealth (1899), distinguishes between capital, viewed as a "fund," and the specific capital goods, including land, in which at any given time the fund is embodied. Irving Fisher, Nature of Capital and Income and The Rate of Interest (5906), identifies capital with wealth, measured in terms of its money value. J. Schumpeter, Theorie der wirtschaft lichen Entwicklung (1912), emphasizes the parts which progress and enterprise play in making capital productive. H. J. Davenport, The Economics of Enterprise (1913), holds that in a competitive society capital must be defined as an instrument of acquisition rather than of production. The most influential statement of the view that income from capital is unearned and is based on exploitation is Karl Marx's Capital. For older views of the nature and services of capital see especially Adam Smith, The Wealth of Nations 0776), Book II. and J. S. Mill, Principles of Political Economy (1848), Book I. Some of the differences in the views of modern economists, it may be observed, are more apparent than real, and come from differences in definitions, in emphasis, or in the particular problems which the different writers have attacked. (A. Yo.)