Chapter III


EVERY SOCIAL ORDER rests upon a foundation of ideas or beliefs. These are of indefinite number and extent. Some are so deeply imbedded in the history of the race as to be shared by virtually all societies; while others; nearer the surface, are common only to the more recent and closely related cultures. Still others are peculiar to one particular society which is thereby distinguished from all others. Students of the social sciences would agree that modern civilization is no exception to this rule. Some of the ideas upon which it rests, like that of property, for example, are very ancient and are shared in some form or other by all human societies. Others, like that of free enterprise, are more limited in scope. Still others, it is to be presumed, are peculiar to the form and structure which commercial society has taken in the Western world during the last five or ten generations. Among these probably the most important is that of capital.

This is true for two reasons. No other idea epitomizes commercialism more completely, and no other idea carries greater weight in the exercise of rationalization by which commercial society has justified itself to itself. To use the language of Emile Durkhiem, capital is the "collective representation" par excellence of capitalism. These two words identify and define each other, as indeed they should. For many years after it had come into general use among the socialists the word "capitalism" was refused admission to polite society because of the contemptuous tone in which it was always uttered by the followers of Marx. For no other term so neatly designates the economic structure of modern society, and os the word of the socialists has gradually found its way into general use; and since whatever is done by the right people straightway becomes right, "capitalism" has ceased to be a term of opprobrium and is now uttered with pride and even veneration by the adherents and defenders of the status quo. Many economists more timid than their betters, bestow a scholar's frown upon this barbarism and profess not to understand what such a word might mean. But its meaning is perfectly clear to the world at large. "Capitalism" is that economy of which the dominant institution and idea is that of capital.

It is equally extraordinary as an institution and as an idea, and a perfect illustration of the extent to which the human mind can go in accepting and believing the folklore upon which it has been nurtured. The acceptance is so complete that few people are ever moved to reflect upon the enormities to which they have become accustomed. Under capitalism outstanding achievement, presumably of any sort, is rewarded by the elevation of its author to an aristocracy of wealth and power, and the guarantee of this position not only to the author himself for the duration of his life but to their heirs and assigns in perpetuity. So far there is nothing unique about it. The transmission of nobility to one's heirs is a feature of nearly every aristocracy. But in contrast to other forms of feudalism in which people are counseled to walk uprightly in whatever station in life it has please Almighty God to place them, capitalism foster the belief that the acquisition of wealth is something that may happen to anybody­­ may and very probably will. From infancy the virtues of industry and thrift are sedulously cultivated in the young to the continually reiterated refrain that if they go to bed without protest and get up early without grumbling they will infallibly become rich. Not everybody, of course will become very rich, but everybody may aspire to save his children from having to start life where he did, and even to provide them with "an independent income." So wise a man as William James, writing half­facetiously of his financial innocence, remarked in his letters that he knew just enough to know that he must never draw on capital. Having inherited a modest competence from his father, he took it for granted that the next generation of Jameses must have independent means.

It goes without saying that a whole community cannot belong to the leisure class. Yet the institutions of capitalism provide no regular machinery for the termination of such claims. Wealth is extinguished in bankruptcy, and some economists have seen that such extinction is an indispensable condition to carrying on the system. But the community at large persists in treating such occurrences as calamities, not at all a part of the natural order of things, and no one enjoys more universal sympathy than people who having lived all their lives in idleness suddenly find themselves penniless, especially if their fathers and grandfathers before them also lived in idleness. In theory all capital is perpetual. To set aside funds for the repayment of debt and the replacement of worn­out machinery is the most elementary and universal accounting practice. Indeed the idea is that industry does this on its own account and can do it by virtue of the potency it acquires from capitals. The whole system is conceived derived from the peculiar character of capital as a "factor of production" and is not ordinarily regarded as an order of nobility at all, so that its beneficiaries are conceived not in terms of a social system of which they are the ruling class but in terms of a method of production in which they perform an essential function, that of "providing capital."

The concept of capital by use of which a social system is thus identified with a system of production combines two sets of meanings which are not only distinct but incompatible. These two meanings are frequently distinguished by the phrases "capital funds" and "capital equipment." The former represents a sum of "claims to income" measured in pecuniary units; the latter an aggregate of the physical materials and instruments of trade and manufacture subject to enumeration by inventory. To the modern student coming upon the problem for the first time in this form, there would seem to be no good reason for the mutual identification of these two distinct sets of phenomena, and every reason for clear differentiation. As Professor Frank A. Fetter has remarked. "These two types of capital concepts are so distinctive in essential thought and practical application that confusion inevitably resulted from the use of one word to designate both." It is in the practice of scholars to treat matters of this kind as if they were simple mistakes, to which earlier scholars were unfortunately prone, and to caution their readers against continuing to commit such errors as though nothing were involved but the discovery and elimination of simple mistakes of reasoning. This is the spirit in which virtually all the textbooks of the present day point out the two senses in which the word "capital" has often been employed, recommend that hereafter it be used in one sense only, usually that of physical equipment, and caution their readers against confusing this meaning with that of pecuniary funds. It is in this spirit that Professor Fetter proceeds directly from the sentence just quoted to remark that "this confusion occurred not later than the early years of the seventeenth century," and to trace its long inglorious career without any suggestion that anything more is involved than the obtuseness of earlier economists.

Scholarly as it seems, such procedure may be in the highest degree misleading. Undoubtedly it is so in this instance. To be sure, the identification of the social interest and attitudes which such "mistakes" express is no substitute for logical analysis. An idea is not proved false by identifying it with a social movement. But insofar as an idea derives its real substance from the social movement from which it did in fact result, analysis can scarcely presume to deal adequately with it which ignores the whole of that substance and undertakes to treat it as a pure intellectual abstraction. Such procedure may be itself merely a mistake if the social content of the idea under consideration is unknown. But that is not the case with the concept of capital. The confusion which is here under consideration did not begin with two sets of entities, funds and things, which were insufficiently distinguished from each other. It did not begin with entities at all. It began with capitalism.

The power of money­­ that is to say, of moneyed men­­ was growing throughout the middle ages and early modern times in spite of almost universal opposition and condemnation. By the middle of the sixteenth century, in England at least, it was paramount. "By the middle of the sixteenth century," says Max Beer, "the career of cannon law was at an end."; and to show that "mercantile capital was a powerful factor two decades prior to the Reformation," he cites a document dated 1559 to the effect that "since Henry VIII there could never been won any good law or order which touched their liberty or estate, but they stayed it." Scholars have ascertained that the first use of the word "capital" in economic literature occurred just before the middle of this century. It was of this century that R. H. Tawney wrote in a passage which has often been quoted. "A century before," he says, business men "had practiced extortion and been told that it was wrong; for it was contrary to the law of God. A century later [they were] to practice it and be told that it was right; for it was in accordance with the law of nature."

The resolution which was thus effected by the concept of capital brought to an end a great historic controversy : that of "usury." As every student knows, the controversy over usury began in medieval theology and ended in modern economics, and reflected the process by which feudalism was supplanted by capitalism. What was at issue was no mere quibble over the morals of money­making. So much has been said in recent years about "the profit motive" as almost to obscure the larger social motive of which making money is only an elliptical expression. Making money, by whatever means, is obviously only a prelude to having money. To have money is to have moved permanently from one social class to another superior social class. It was this aspect of the case which constituted a direct threat to the feudal hierarchy, and it was this threat which the church speaking again for the feudal order as it was already doing in the matter of just price, therefore undertook to meet.

As in the case of just price, the condemnation of usuary by the doctors of the church was a fatal compromise. The medieval theologians condemned usury on the ground already occupied by the ancient philosophers that money is sterile, that it cannot and does not breed. Saturated with the doctrine of capital, modern writers have quite generally treated this idea as one of Aristotle's lapses. But was Aristotle wrong, after all? Does money breed? Corporations pay interest on bonds, and from the point of view of the bond­holder that is very nice of them; but what does it prove? Does it indicate that corporations know how to breed dollars, or that bonds are a feature of capitalism? To make money is to seize power, nowadays with the sanction of a society in which this is the accredited way of gaining power. What does this signify with regard to the birth rate of the dollar? Aristotle was not alone in his conviction. All the wisdom of all other cultures but our own has imputed sterility to money. It is our view of the matter which is ridiculous, as we should see at once if we were to substitute some other title to power for money in our neat formula. Does kingship breed kingship? do feudal perquisites breed other feudal perquisites? Obviously Aristotle was right about money, and if the church had stood fast on this point and condemned money­power as such in all cases and in every degree, feudalism might have continued to prevail.

But the church compromised on usury as it did on just price, and for the same reason and in the same way. Economists make much of the ecclesiastical distinction between "consumptive" and "productive" loans. The distinction is of course one of class. The people who borrowed for "consumptive" purposes were princes, lay and ecclesiastical; consequently the doctors of the church were at pains to deny the power of the lender over them. The people who borrowed for "productive" purposes were other merchants; and with regard to them the church was content to maintain an attitude of dog­eat­dog. Furthermore commerce and finance had already become too important a part of the medieval world to be completely extirpated. Business must go on somehow. It was the medieval church which promulgated the doctrine of "Business is business." It did so in that amazing series of exceptions to the condemnation of usury of which later economists have made so much. The owner of money, it was thought, might be entitled to compensation for the loss he would sustain if his money were not employed in a given undertaking and therefore lay idle. One might ask, just why? And what does the word "idle" mean with reference to money and in the light of Aristotle's doctrine? A man whose money was employed so as to make him in effect a partner in an enterprise might properly share in the proceeds of that enterprise. Again why? What does the loan of money make the lender a partner in the enterprise? A merchant lends money to a shipmaster. The ship goes down with all hands. The merchant loses his money and the captain and all his shipmates lose their lives. The case is even, then? The partners have shared the risks, have they, and os are entitled to share the proceeds of a less disastrous voyage? A great deal of casuistry has gone into the formulation of the doctrine of capital, and we owe much of it to the master hand of the medieval church.

For the doctrine of capital was already present in spirit in the medieval compromise. Indeed, as a theory of authorship it was only a new variety of an ancient species. In every civilization there exists some supreme power to which the fate of the people is attributed. In theocracies it is priests; in kingdoms it is kings. Modern readers often become very impatient with ancient chronicles in which every event of consequence is attributed to the personal agency of some king or other. This sort of thing is usually characterized as "over­emphasis," in such a case upon the "political factor." But the king is more than a political factor; he is the symbol of essential causality. Not only does such an interpretation of the life of a people impute supreme importance to political events; it imputes final responsibility for every event to the supreme authority. Since the king does exercise supreme authority­­ since his decisions are in some sense final­­ the destiny of the whole people is thus identified with his being, not without some show of plausibility. Capitalism is a theory of authorship in this sense.

It is the modern belief, perhaps the basic faith of capitalism, that the supreme author of modern civilization is business enterprise. This belief, like that of theocracies and kingdoms, derives from the power which is in fact exercised by capitalists. Everyone knows the part which science has played in Western civilization But science is an impersonal force, a sort of vegetable growth, a highly cultivated hothouse plant which requires sedulous attention if it is to live and grow. The spokesmen of science­­ university presidents and the heads of research institutes­­ continually reiterate the common belief that the progress of science itself depends upon the will of business men in whose power it is to dispose or to withhold.

The same is true in the larger sense. Ours is an industrial society. As everyone knows, the whole community depends today upon what we call mass production, that is upon the use of machinery on an enormous scale. But it is business men who exercise discretionary power over the use of this machinery. There is therefore a very literal sense in which the whole community depends upon the decisions of business men­­ hence the general belief in their essential authorship.

It was this belief which found expression in the medieval distinction between usury and legitimate commercial transactions. The money lender was in fact a partner since his decisions were paramount over the whole enterprise. If the decision were negative, the shipmaster could not sail. In the medieval times the essential authorship of finance was confined to the relatively narrow limits of commerce in the strictest and meanest sense, and the stern prohibition of the exercise of financial power over princes was conceived to implement this limitation. If the doctors of the church could have looked forward to a time when financial power would be paramount over a whole society, they would certainly have been appalled and would probably have taken steps to obliterate the power of money. As their casuistry shows, they recognized the fact of discretionary power. That was something they understood, and their subtle distinction between usuary and lucrum cessans and the rest is intelligible in no other terms. What they failed to reckon with was the industrial revolution.

The period which separates medieval from modern times has usually been described as one of spiritual awakening, but it was also and perhaps primarily one of very great material change; and it was as a consequence of this change that finance came to bestride the world like a colossus until by the middle of the sixteenth century it seemed to some contemporary observes that business men were already in a position to dictate to parliaments and kings. The stage was then set for the appearance of the pure theory of capitalism.

The pure theory of essential authorship always postulates identity, the identity of discretionary authority with social process. "L'etat, c'est moi!" is the pure theory of kingship. The state and all its functions are sublimated in the person of the king. This is the identity which was established by the concept of capital. Modern critics describe it as a confusion of meanings, but it was not a confusion in origin and function. It was the intentional identification of discretionary power with all that over which the power was exercised. Already science and industry had transformed the world. Europeans had crossed all the oceans. No other people in the world was a match for their new weapons. The curtain was rising on the age of machinery. All this was the work of the community, as anyone could see. There has never been a time when prevailing beliefs have completely blinded men's eyes to the physical facts of life. Throughout the literature of this period passages may be found which show that ships and instruments of navigation, farm implements and methods of cultivation, iron, wood, and other "natural resources," did not pass altogether unnoticed. Obviously the life of the Western peoples depended utterly on the existence and use of an already considerable accumulation of tools, materials, and "know­how." But in a community in which everything is for sale not only can nothing be done except with the consent of those who control the power to purchase; where everything is for sale even the instruments of production are identical with a sum of money values. In effect they are money values.

It was the historic function of the term "capital" to establish this identity. Etymologically the word derives from the Latin for "head," and means "chief" or "principle": that which is indispensable to whatever is under consideration. For economic activity tools and materials are indispensable; but especially money is indispensable. The term capital, which combines these meanings, thus expresses the joint meaning. Furthermore it does so in terms of money. For it is in terms of money that industrial tools and materials are symbolized, not vice versa. It is money which is "invested" in tools and materials. The process of investiture never works the other way since, like every investiture, it is a ceremonial transfer of authority of which in this instance money is the source. And since money is the source of the industrial power which is thus vested in moneyed men, the source and origin of capital is the accumulation of money. That is why no economist, however much he may take to heart Professors Fetter's lesson, can avoid using "capital" in both senses. If he follows common practice and defines capital as the physical equipment of industry, he must proceed to attribute the origin of capital to saving, since that is the universal dogma. No orthodox economist has ever attributed the growth of capital to science and technology. Civilization may, in a sense, depend upon science and technology, but capital comes into existence through saving; and it is money which is saved, not the physical equipment of industry. No one secretes steel rails by going without lunch. But if, on the other hand, the economist follows Professor Fetter's own practice and taking his cue from the process of accumulation defines capital as a sum of money claims brought into existence through saving, he is then obliged to identify these capital funds with the physical equipment of industry, as Professor Fetter does, since otherwise they are functionless and meaningless.

The whole formula may be put quite simply. The very existence of the community together with all the material progress which recent centuries have witnessed depends upon the existence and use of capital (meaning the physical tools and materials of industry, the knowledge and skills of the community) ; but it is only by "saving" that we are able to accumulate capital (meaning funds of money values capable of being "invested" in capital equipment) ; consequently it is upon the accumulation of capital (funds) that the whole life of the community depends.

The expression "saving" used with reference to the accumulation of capital (funds) is such a travesty of the ordinary meaning of this word that is has become a cynosure of dissident opinion. It has always been quite obvious and is not a matter of statistically established fact that a very considerable part of all "saving" is accomplished by the rich, nowadays in large part on the books of corporations which do not even trouble with the formality of assigning their "savings" to their putative owners; and since it is not the habit of the rich to stint themselves in the matter of their personal expenditures, it is quite evident that their accumulations, whether personal or corporate, do not constitute "saving" in the Christmas­club sense as the community at large conceives it. Various attempts have therefore been made to reinforce the theory of capital at this point.

The most notable of these is perhaps the theory of "abstinence" promulgated by Nassau Senior, one of the most devoutly uncritical adherents of classical doctrine. The idea is that funds may be consumed in more spacious living or they may be accumulated for the endowment of future legatees. Since the latter necessarily involves a sacrifice of present consumptive spaciousness, the advantages which accrue to future owners of the capital so accumulated is a proportionate payment for this abstinence, quite without reference to the quality of spaciousness from which present income­receivers thus abstain. The idea that anybody should be rewarded because somebody has refrained from still wilder flights of ostentation than those to which the community is already inured is so ridiculous however, that later economists have expunged the word "abstinence" from their vocabularies. The modern formula is "time preference." This phrase has two advantages over abstinence: in appearance it is morally neutral, since it ostensibly makes no reference to any quality of expenditure except date; and it purports to derive the whole theory of saving from the fact that rates of interest do actually vary inversely with the term of the loan. Higher rates are in fact asked and bid for short­term loans than for long­term loans. Does this mean that time is what is thus bought and sold? And does this mean that saving and investment can be conceived wholly with reference to the time span, without raising any question of the quality of abstinence? A vast amount of scholarship has been lavished upon the analysis of time spans and interest rates in recent years, apparently under the apprehension that these considerations are all that matters. Yet it requires only a little reflection to establish that such is not the case.

In the first place, the fact that interest rates vary inversely with time spans does not mean that the original motive for the accumulation of the funds for which investment is thus being sought was a "preference" for time. Food prices vary, too, but no one would say that the price of food is the incentive to eating. One might assume that fund­accumulation is an inescapable consequence of large incomes, that funds exist willy­nilly for which investment must be found; different types of investment might still appear in a competitive economy at different rates of interest. Since short­term loans threaten a speedy renewal of the bother and risk of reinvestment, they might well find it necessary to offer higher rates than long­term loans, quite without reference to the circumstances which have brought into existence an accumulation of funds available for investment. In short, even within the universe of discourse of the investment process, it is never pure duration that is at issue.

But, secondly, whatever happens to funds after they are accumulated is quite a different matter from the circumstances by virtue of which accumulation has occurred. To say that the willingness of investors to loan money for long terms at low rates of interest proves that people prefer having money in the sweet by­and­by is as ridiculous as anything Nassau Senior ever said. What does "having money" mean in such a formula? Whatever it means, that is the substance of the matter, of which time is only a concomitant variation. One cannot speak of a time span without it being a span of something or other. If the issue is between present and future money­having, enjoyment, consumption, or what have you, the substantive issue is still Senior's abstinence, for which "time preference" is only a substitution mechanism.

The truth is that economists have used time preference, with its empirical reference to the facts of interest rates, as a means of averting their eyes from a very embarrassing spectacle: the great inequality of income which is one of the most conspicuous features of capitalism. There is no boggling the fact of inequality by any amount of talk of abstinence, or even of time preference. Funds are accumulated not because some people are more abstemious than others, or more far­sightedly prone to idealize the sweet by­and­by, but because some people are richer than others, and for no other reason. All attempts to idealize the accumulation of money are beside the point, and so are all attempts to discredit capitalism on the ground of the cruel inequalities on which it rests. Capitalism is neither sustained nor discredited by the facts of inequality; it is inequality which in the last analysis is to be justified by capitalism. If the existence and progress of industrial society are contingent upon the accumulation of capital (funds) as the condition of existence and growth of capital (equipment) , then inequality, however cruel, is the price civilization pays for its existence and development. To the credit of the classical tradition it must be admitted that this is the issue to which in the main it has been addressed, an issue with reference to which the pros of abstinence and time preference and the cons of injustice and cruelty are merely byplay.

Is fund­accumulation indispensable to industrial process? Economics has never rested content with mere legerdemain. The identify of the two meanings of capital has supposedly been proved. The most specific proof is one which was devised t the Austrian, Boehm­Bawerk, in the latter part of the nineteenth century as an answer to the strictures of Karl Marx. Since it turns upon the so­called "roundabout" character of industrial production and is reproduced in most current textbooks, it is familiar at least in substance to virtually every elementary student. Briefly it runs as follows. Depending upon the machine process, for example for the baking of bread, means that before the first loaf can be baked a lot of machinery must be installed. This takes a considerable interval of time during which the mechanics, the future bakers, and their potential customers must eat. Their sustenance must therefore be provided in advance of the operation of the projected bakery. In short there must be, in advance of every industrial operation and as a condition of the "roundabout" method of production by machinery, an accumulation of the means of subsistence proportionate to the length of the interval. This accumulation is capital. It is the accumulation of capital funds which makes it possible for the capitalist to "advance" the means of subsistence without which the community cannot wait for the delayed product of the machine process.

So convinced was Boehm­Bawerk of the physical actuality of this situation that he understood to show that is would obtain even on Robinson Crusoe's island, that he is therefore largely responsible for the reproach of "Crusoe mentality" under which economics has labored ever since. On the supposition that Robinson Crusoe was living on berries, literally from hand to mouth, but could achieved greater security if he could build a boat, Boehm­Bawerk argued that he could build the boat only if he could accumulate enough berries in advance to sustain him during the building operations. Thus capital accumulation and investment were demonstrated to be a condition of expanded production in a one­man economy in which no exchange took place and no money was employed.

The fatuity of this argument is so extreme that it would be apparent to the most elementary student if he could escape the atmosphere of intimidation in which such instruction commonly proceeds. Society does of course make "advances" to every new industrial operation. The whole existing apparatus of industry is available as the foundation of further industrial operations. This includes, in the case of the baking industry, a highly organized industry for the production of baking machinery and behind that the smelting and mining industries which supply the raw materials for baking machinery, the machine tool industry, the whole constellation of the milling industry from which comes the flour for the large­scale production of bread, and so the industrial system generally.

At any given moment the development of any industrial operation assumes industrial society as a going concern. This is indeed a sort of accumulation: it is the cumulative process of industrial technology. To give plausibility to Boehm­Bawerk's argument it is necessary to ignore industrial technology altogether, as he did, and use the word "advances" in so vague a sense that the whole going concern of industrial society may be mistaken for the pecuniary advances of the capitalist. Even in the case of Robinson Crusoe it is evident that if the hermit could never pick more than enough berries to keep body and soul together for another day, no accumulation would be possible. The indispensable condition to boat­building must be an improvement of the technology of berry­picking. All industrial operations are so conditioned and would be even in a one­man, non­exchange economy; but this has nothing in common with the accumulation and investment of funds. What could be done with the funds of the investor in a bakery if no source of baking machinery existed?

Not only does the "roundabout" theory confuse industrial integration with financial power; it completely misrepresents the industrial facts. Generation after generation of students have been learning from the study of economics that industrial production is a particularly slow and cumbersome affair in which speed is sacrificed for eventual quantity. This is utterly untrue. In the automobile industry, for example, it is only a matter of days for a scoopful of earth from the Mesabi range to be rolling down the highway as a motor vehicle. In actual operation machine production is the reverse of roundabout. It is prodigiously direct. Any given operation is conditioned by the whole industrial system of which it is a part and without which it would unthinkable in spite of all the gold of Midas. It is also conditioned by financial control. The "advancing" capitalist decrees that the product of the baking­machine industry shall be set up in his town, and this is important. But it is quite another matter.

The identity of these two processes­­ of capital equipment with capital funds­­ has never been established by any specific demonstration. It is rather implicit in the whole way of thinking which has been traditional in economics, and in this tradition it has been assumed rather than discovered or demonstrated. As Professor Fetter pointed out, it was assumed before the classical system of ideas was formulated and is one of the basic assumptions of that intellectual system. This is the assumption of the creative potency of funds. It finds expression in two forms: in what Veblen used to call "conjectural history," and in the analysis of production. Nearly all economic writers have indulged at some time or other in chapters on "the progress of opulence" in which they have in imagination represented the accumulation of "wealth" as proceeding and conditioning industrial development, and professional historians have taken their cue and done their best to discover the sources of the (conjectural) funds which, supposedly, made later industrial development possible. These efforts have been notably unsuccessful, so that economic orthodoxy has never been able to cite history to its purpose at all extensively or with any great force of conviction. Nevertheless the historical assumption remains as a challenge to any other way of thinking to show how on any other basis Western society could be conceived to have developed as it has. Fortunately there is a profusion of evidence with which to meet this challenge.

But the chief preoccupation of economists has been with the analysis of production, as they have called it. In this analysis­­ the major task of classical political economy­­ there has been not thought of apology for or justification of the established order or its symbol capital. It did not even have the conscious purpose of furnishing "laws conducive to abundant and reliable supplies of capital and labor at reasonable prices." Nevertheless it is in this main body of economic theory, if at all, that the duality of the concept of capital is explained and justified.

Economic theory has never been concerned with physical production in the sense of what goes on in factories and machine shops. Learned opinion has usually credited William Petty with a more realistically physical conception of the productive process than was true of later and maturer economic thinking because Petty analyzed production in terms of man­hours in terms of the corn necessary to the physical sustenance of the laborer. But this is plainly not job­analysis in the engineering sense. No less than later economists, Petty was fascinated by the subtleties of the pricing mechanism into which like his successors he tried to read a social meaning. Already, in the seventeenth century, the problem of economic theory was not to analyze what was actually going on in mine and factory but to establish a relationship between price and value. The problem is to establish a price equivalence between the value which is extractable from commodities in consumption and the value which has been put into them in production. Since value is by immemorial tradition a subjective phenomenon, its cost­ equivalent must also be subjective; and since for social reasons capital is the factor which is chiefly at issue, the analysis must from the outset do two things. It must identify capital with labor, and it must subjectify labor. Both of these projects were well underway by the time of William Petty. Petty's corn has a more physical appearance than the plainly subjective "toil and trouble" in terms of which Adam Smith reckoned labor cost. But why corn? Why not skill? At no time in history could any genuine attempt to understand the physical operations of production have failed to take cognizance of labor's "know­how" as having at least no less significance for the production of goods than spiritual anguish. Not only did Petty ignore the realities of production; the truth is that whereas later economists thought of general discomfort, Petty thought specifically of hunger as the particular form of anguish which labor incurred in the exercise of production.

From this point on, the classical analysis of the factors of production has been in terms of spiritual wear and tear. The terminology which has been generated by this effort has been encyclopedic, ranging all the way from Petty's corn to disutility, and nowadays, opportunity. But always the effect has been the same. Many critics have noted that the so­called factors of production are really distributive, and that their relation to value is one of imputation. That is, land, labor, capital, and management are identified not by virtue of what they do in the shop but by virtue of what they receive in the division of social income under the rubrics of rent, wages, interest, and profits, payment of which imputes to their recipients some sort and degree of social value. Furthermore it is generally agreed that the problem of imputation is most acute with respect to labor and capital. By common consent the profits of management are not a fixed charge on society since they vary directly with economic frictions and might be expected to approach zero as a limit in a state of perfect competitive equilibrium. Orthodox theory has also long since ceased to concern itself with the claims of landlords. More than a century ago Ricardo proved that rent plays no part in the determination of prices but is only a differential corresponding to physical differences between different parcels of land. Unfortunately this demonstration proves too much. As a number of students have lately seen, both capital and labor can be treated in the same way. Their receipts also can be shown to vary with physical circumstances; and any one may be proved not to determine price if the theory of imputation be observed with respect to the others, as it was in the case of Ricardo's theory of rent. But this anomaly has not been recognized by orthodox opinion generally, in which therefore capital and labor continue to stand by themselves as the major factors for consideration in the imputation of value.

The authenticity of capital was thus established by its identification with labor. For nobody challenges the moral claim of labor. In contrast to feudal attitudes modern society has all along made a fetish of the dignity of work. Contemporaneously with William Petty, Locke based his whole theory of property on the indefeasible claim which is established when man mixes his labor with the soil. The right of laborer to the product of his toil was one of those rights which seemed to the philosophers of the eighteenth century to be inalienable. So strong is this sentiment that it dominated even the mind of the revolutionary Marx, who made it the basis of the claim of the proletariat to the "surplus value" of which they had been immemorially robbed. The laborer is worthy of his hire. If the same is true of capital, it is enough.

But the complementary nature of capital and labor does not derive from the working partnership of capi talists and laborers, very fortunately perhaps. Indeed the founders of the classical tradition were singularly candid in their treatment of the actual working relations of owners and employees. "From the writings of many, if not most, of them can be culled passages expressing a benevolent attitude to the claims of labor," as Mr. Hobson says. The truth is that whatever the spotted actuality, owners and employees must be partners, since capital and labor are complements; and they are complements not because of any actuality but by virtue of their conceptional character as intellectual abstractions. This is true of labor no less than capital. From what human quality, for example, do the supposed rights of labor devolve? Clearly they have nothing to in common with technical skill, which appears in quite another universe of discourse. Locke said nothing about property rights being established by the degree of skill with which men till the soil. The quality in terms of which labor is identified with capital is wholly subjective, a spiritual quality, a creative potency, a matter of dignity and anguish, hunger toil and trouble, disutilities endured, opportunities forgone.

In the last analysis classical political economy is a theory of final causes in the theological sense. Production having been conceived as the creation of value, the question is: By virtue of what creative potency do labor and capital contribute jointly to this process? The answer to this question is implicit in the word "virtue." Modern usage retains this expression as a cliche, but in the past it was taken literally. To all the simpler peoples, creation is indeed a matter of virtue­­ of mana, as the polynesians say. Even today this is the popular conception of genius. In "creative" activity man mixes his personality with the inert materials of nature and so endows inanimate objects with something of his virtue. "Claims" and "rights" can be conceived in no other terms. It has often been remarked that Locke established the right of property on grounds identical with those of the rights of kings, which he denied. In this respect the virtue of labor is not only identical with that of capital; it is one with all the mystic potencies which have prevailed since the dawn of history.

Thus classical theory justified the duality of capital by extending its schizophrenia to the whole economic process. Capital means two things: the physical equipment of industry, and the funds by which control is exercised. It is the physical equipment which conditions actual industrial operations; but it is the funds which impart "value" and establish claims. In like fashion labor also means two things. It means the exercise of skill, which is the actuality of industrial production; but it also means the infusion of creative potency which likewise imputes value and establishes all rights and claims. All the terms which are used in the formulas of value theory are similarly schizophrenic. Thus for example we speak of the "productivity" of either labor or capital, meaning in some cases the ratio of physical product to number of machines or man­hours of operation, and in others the ratio of creative potency to pecuniary remuneration. It is for this reason that the anomaly of capital passed unnoticed for so many generations and continues to persist even after it has been explicitly recognized. The confusion of the concept of capital is concealed in a general confusion, and it can be resolved only by a resolution which is likewise general.

Certainly the concept of capital is not altogether responsible for this general confusion. Something of the sort was bound to result from the effort to find a meaning in the price system which it does not have, and the condition was further aggravated by the "discovery" of a conjunction between price and the metaphysics of value. But economic theory has never been merely intellectual exercise. The effort to establish a relation between price and value has been made in the interest of understanding what is happening in the economy of modern Western civilization. Two sorts of things are happening, each of which can be indicated by a single word: industrialism and capitalism. These two aspects of the modern economy are in fact quite distinct. Nevertheless in the apprehension of modern society during the past four hundred years they have been identified; and this identification, symbolized by the word "capital," has imparted its own peculiar quality of confusion to the economic thinking of this entire period.

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