Money, being the instrument of an important public and private purpose, is rightly regarded as wealth; but everything else which serves any human purpose, and which nature does not afford gratuitously, is wealth also. To be wealthy is to have a large stock of useful articles, or the means of purchasing them. Everything forms, therefore, a part of wealth, which has a power of purchasing; for which anything useful or agreeable would be given in exchange. Things for which nothing could be obtained in exchange, however useful or necessary they may be, are not wealth in the sense in which the term is used in Political Economy. Air, for example, though the most absolute of necessaries, bears no price in the market, because it can be obtained gratuitously; to accumulate a stock of it would yield no profit or advantage to any one; and the laws of its production and distribution are the subject of a very different study from Political Economy. It is possible to imagine circumstances in which air would be a part of wealth. If it became customary to sojourn long in places where the air does not naturally penetrate, as in diving-bells sunk in the sea, a supply of air artificially furnished would, like water conveyed into houses, bear a price: and, if from any revolution in nature the atmosphere became too scanty for the consumption, or could be monopolized, air might acquire a very high marketable value. In such a case, the possession of it, beyond his own wants, would be, to its owner, wealth; and the general wealth of mankind might at first sight appear to be increased, by what would be so great a calamity to them. The error would lie in not considering that, however rich the possessor of air might become at the expense of the rest of the community, all persons else would be poorer by all that they were compelled to pay for what they had before obtained without payment.

Wealth, then, may be defined, all useful or agreeable things which possess exchangeable value; or, in other words, all useful or agreeable things except those which can be obtained, in the quantity desired, without labor or sacrifice.

This is the usual definition of wealth. Henry George (see "Progress and Poverty," pp. 34-37) regards wealth as consisting "of natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the gratification of human desires.... Nothing which Nature supplies to man without his labor is wealth.... All things which have an exchange value are, therefore, not wealth. Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth.... Increase in land values does not represent increase in the common wealth, for what land-owners gain by higher prices the tenants or purchasers who must pay them will lose." Jevons ("Primer," p. 13) defines wealth very properly as what is transferable, limited in supply, and useful. F. A. Walker defines wealth as comprising "all articles of value and nothing else" ("Political Economy," p. 5). Levasseur's definition ("Precis," p. 15) is, "all material objects possessing utility" (i.e., the power to satisfy a want). (Cf. various definitions in Roscher's "Political Economy," section 9, note 3.) Perry ("Political Economy," p. 99) rejects the term wealth as a clog to progress in the science, and adopts property in its stead, defining it as that "which can be bought or sold." Cherbuliez ("Precis," p. 70) defines wealth as the material product of nature appropriated by labor for the wants of man. Carey ("Social Science," i, 186) asserts that wealth consists in the power to command Nature's services, including in wealth such intangible things as mental qualities.



BOOK I. PRODUCTION.



Chapter I. Of The Requisites Of Production.



1. The Requisites of Production are Two: Labor, and Appropriate Natural Objects.

There is a third requisite of production, capital (see page 58). Since the limitation to only two requisites applies solely to a primitive condition of existence, so soon as the element of time enters into production, then a store of capital becomes necessary; that is, so soon as production requires such a term that during the operation the laborer can not at the same time provide himself with subsistence, then capital is a requisite of production. This takes place also under any general division of labor in a community. When one man is making a pin-head, he must be supplied with food by some person until the pins are finished and exchanged.

Labor is either bodily or mental; or, to express the distinction more comprehensively, either muscular or nervous; and it is necessary to include in the idea, not solely the exertion itself, but all feelings of a disagreeable kind, all bodily inconvenience or mental annoyance, connected with the employment of one's thoughts, or muscles, or both, in a particular occupation.

The word "sacrifice" conveys a just idea of what the laborer undergoes, and it corresponds to the abstinence of the capitalist.

Of the other requisite—appropriate natural objects—it is to be remarked that some objects exist or grow up spontaneously, of a kind suited to the supply of human wants. There are caves and hollow trees capable of affording shelter; fruits, roots, wild honey, and other natural products, on which human life can be supported; but even here a considerable quantity of labor is generally required, not for the purpose of creating, but of finding and appropriating them.

Of natural powers, some are unlimited, others limited in quantity. By an unlimited quantity is of course not meant literally, but practically unlimited: a quantity beyond the use which can in any, or at least in present circumstances, be made of it. Land is, in some newly settled countries, practically unlimited in quantity: there is more than can be used by the existing population of the country, or by any accession likely to be made to it for generations to come. But, even there, land favorably situated with regard to markets, or means of carriage, is generally limited in quantity: there is not so much of it as persons would gladly occupy and cultivate, or otherwise turn to use. In all old countries, land capable of cultivation, land at least of any tolerable fertility, must be ranked among agents limited in quantity. Coal, metallic ores, and other useful substances found in the earth, are still more limited than land.

For the present I shall only remark that, so long as the quantity of a natural agent is practically unlimited, it can not, unless susceptible of artificial monopoly, bear any value in the market, since no one will give anything for what can be obtained gratis. But as soon as a limitation becomes practically operative—as soon as there is not so much of the thing to be had as would be appropriated and used if it could be obtained for asking—the ownership or use of the natural agent acquires an exchangeable value.

Rich lands in our Western Territories a few years ago could be had practically for the asking; but now, since railways and an increase of population have brought them nearer to the markets, they have acquired a distinct exchange value. The value of a commodity (it may be anticipated) is the quantity of other things for which it can be exchanged.

When more water-power is wanted in a particular district than there are falls of water to supply it, persons will give an equivalent for the use of a fall of water. When there is more land wanted for cultivation than a place possesses, or than it possesses of a certain quality and certain advantages of situation, land of that quality and situation may be sold for a price, or let for an annual rent.



2. The Second Requisite of Production, Labor.

It is now our purpose to describe the second requisite of production, labor, and point out that it can be either direct or indirect. This division and subdivision can be seen from the classification given below. Under the head of indirect labor are to be arranged all the many employments subsidiary to the production of any one article, and which, as they furnish but a small part of labor for the one article (e.g., bread), are subsidiary to the production of a vast number of other articles; and hence we see the interdependence of one employment on another, which comes out so conspicuously at the time of a commercial depression.

"We think it little to sit down to a table covered with articles from all quarters of the globe and from the remotest isles of the sea—with tea from China, coffee from Brazil, spices from the East, and sugar from the West Indies; knives from Sheffield, made with iron from Sweden and ivory from Africa; with silver from Mexico and cotton from South Carolina; all being lighted with oil brought from New Zealand or the Arctic Circle. Still less do we think of the great number of persons whose united agency is required to bring any one of these finished products to our homes—of the merchants, insurers, sailors, ship-builders, cordage and sail makers, astronomical-instrument makers, men of science, and others, before a pound of tea can appear in our market."(101)

The labor(102) which terminates in the production of an article fitted for some human use is either employed directly about the thing, or in previous operations destined to facilitate, perhaps essential to the possibility of, the subsequent ones. In making bread, for example, the labor employed about the thing itself is that of the baker; but the labor of the miller, though employed directly in the production not of bread but of flour, is equally part of the aggregate sum of labor by which the bread is produced; as is also the labor of the sower, and of the reaper. Some may think that all these persons ought to be considered as employing their labor directly about the thing; the corn, the flour, and the bread being one substance in three different states. Without disputing about this question of mere language, there is still the plowman, who prepared the ground for the seed, and whose labor never came in contact with the substance in any of its states; and the plow-maker, whose share in the result was still more remote. We must add yet another kind of labor; that of transporting the produce from the place of its production to the place of its destined use: the labor of carrying the corn to market, and from market to the miller's, the flour from the miller's to the baker's, and the bread from the baker's to the place of its final consumption.

Besides the two classes of indirect laborers here mentioned, those engaged in producing materials and those in transportation, there are several others who are paid fractions out of the bread. Subsidiary to the direct labor of the bread-maker is the labor of all those who make the instruments employed in the process (as, e.g., the oven). Materials are completely changed in character by one use, as when the coal is burned, or the flour baked into bread; while an instrument, like an oven, is capable of remaining intact throughout many operations. The producer of materials and the transporter are paid by the bread-maker in the price of his coal and flour when left at his door, so that the price of the loaf is influenced by these payments. Those persons, moreover, who, like the police and officers of our government, act to protect property and life, are also to be classed as laborers indirectly aiding in the production of the given article, bread (and by his taxes the bread-maker helps pay the wages of these officials). Shading off into a more distant, although essential, connection is another class—that of those laborers who train human beings in the branches of knowledge necessary to the attainment of proper skill in managing the processes and instruments of an industry. The acquisition of the rudiments of education, and, in many cases, the most profound knowledge of chemistry, physics and recondite studies, are essential to production; and teachers are indirect laborers in producing almost every article in the market. In this country, especially, are inventors a class of indirect laborers essential to all ultimate production as it now goes on. The improvements in the instruments of production are the results of an inventive ability which has made American machinery known all over the world. They, too, as well as the teacher, are paid (a small fraction, of course) out of the ultimate result, by an indirect path, and materially change the ease or difficulty, cheapness or dearness, of production in nearly every branch of industry. In the particular illustration given they have improved the ovens, ranges, and stoves, so that the same or better articles are produced at a less cost than formerly. All these indirect laborers receive, in the way of remuneration, a fraction, some more, some less (the farther they are removed from the direct process), of the value of the final result.



3. Of Capital as a Requisite of Production.

But another set of laborers are to be placed in distinct contrast with these, so far as the grounds on which they receive their remuneration is concerned. These are the men engaged previously in providing the subsistence, and articles by which the former classes of labor can carry on their operations.

The previous employment of labor is an indispensable condition to every productive operation, on any other than the very smallest scale. Except the labor of the hunter and fisher, there is scarcely any kind of labor to which the returns are immediate. Productive operations require to be continued a certain time before their fruits are obtained. Unless the laborer, before commencing his work, possesses a store of food, or can obtain access to the stores of some one else, in sufficient quantity to maintain him until the production is completed, he can undertake no labor but such as can be carried on at odd intervals, concurrently with the pursuit of his subsistence.

The possession of capital is thus a third requisite of production, together with land and labor, as noted above. Henry George ("Progress and Poverty," chap. iv) holds an opposite opinion: "The subsistence of the laborers who built the Pyramids was drawn, not from a previously hoarded stock" (does he not forget the story of Joseph's store of corn?), "but from the constantly recurring crops of the Nile Valley."

He can not obtain food itself in any abundance; for every mode of so obtaining it requires that there be already food in store. Agriculture only brings forth food after the lapse of months; and, though the labors of the agriculturist are not necessarily continuous during the whole period, they must occupy a considerable part of it. Not only is agriculture impossible without food produced in advance, but there must be a very great quantity in advance to enable any considerable community to support itself wholly by agriculture. A country like England or the United States is only able to carry on the agriculture of the present year because that of past years has provided, in those countries or somewhere else, sufficient food to support their agricultural population until the next harvest. They are only enabled to produce so many other things besides food, because the food which was in store at the close of the last harvest suffices to maintain not only the agricultural laborers, but a large industrious population besides.

The claim to remuneration founded on the possession of food, available for the maintenance of laborers, is of another kind; remuneration for abstinence, not for labor. If a person has a store of food, he has it in his power to consume it himself in idleness, or in feeding others to attend on him, or to fight for him, or to sing or dance for him. If, instead of these things, he gives it to productive laborers to support them during their work, he can, and naturally will, claim a remuneration from the produce. He will not be content with simple repayment; if he receives merely that, he is only in the same situation as at first, and has derived no advantage from delaying to apply his savings to his own benefit or pleasure. He will look for some equivalent for this forbearance:(103) he will expect his advance of food to come back to him with an increase, called, in the language of business, a profit; and the hope of this profit will generally have been a part of the inducement which made him accumulate a stock, by economizing in his own consumption; or, at any rate, which made him forego the application of it, when accumulated, to his personal ease or satisfaction.



Chapter II. Of Unproductive Labor.



1. Definition of Productive and Unproductive Labor.

Labor is indispensable to production, but has not always production for its effect. There is much labor, and of a high order of usefulness, of which production is not the object. Labor has accordingly been distinguished into Productive and Unproductive. Productive labor means labor productive of wealth. We are recalled, therefore, to the question touched upon in our [Preliminary Remarks], what Wealth is.

By Unproductive Labor, on the contrary, will be understood labor which does not terminate in the creation of material wealth. And all labor, according to our present definition, must be classed as unproductive, which terminates in a permanent benefit, however important, provided that an increase of material products forms no part of that benefit. The labor of saving a friend's life is not productive, unless the friend is a productive laborer, and produces more than he consumes.

The principle on which the distinction is made is perfectly clear, but in many cases persons may be misled chiefly in regard to matters of fact. A clergyman may at first sight be classed as an unproductive laborer; but, until we know the facts, we can not apply the principle of our definition. Unless we know that no clergyman, by inculcating rules of morality and self-control, ever caused an idler or wrong-doer to become a steady laborer, we can not say that a clergyman is a laborer unproductive of material wealth. Likewise the army, or the officers of our government at Washington, may or may not have aided in producing material wealth according as they do or do not, in fact, accomplish the protective purposes for which they exist. So with teachers. There is, however, no disparagement implied in the word unproductive; it is merely an economic question, and has to do only with forces affecting the production of wealth.

Unproductive may be as useful as productive labor; it may be more useful, even in point of permanent advantage; or its use may consist only in pleasurable sensation, which when gone leaves no trace; or it may not afford even this, but may be absolute waste. In any case, society or mankind grow no richer by it, but poorer. All material products consumed by any one while he produces nothing are so much subtracted, for the time, from the material products which society would otherwise have possessed.

To be wasted, however, is a liability not confined to unproductive labor. Productive labor may equally be waste, if more of it is expended than really conduces to production. If defect of skill in laborers, or of judgment in those who direct them, causes a misapplication of productive industry, labor is wasted. Productive labor may render a nation poorer, if the wealth it produces, that is, the increase it makes in the stock of useful or agreeable things, be of a kind not immediately wanted: as when a commodity is unsalable, because produced in a quantity beyond the present demand; or when speculators build docks and warehouses before there is any trade.



2. Productive and Unproductive Consumption.

The distinction of Productive and Unproductive is applicable to Consumption as well as to Labor. All the members of the community are not laborers, but all are consumers, and consume either unproductively or productively. Whoever contributes nothing directly or indirectly to production is an unproductive consumer. The only productive consumers are productive laborers; the labor of direction being of course included, as well as that of execution. But the consumption even of productive laborers is not all of it Productive Consumption. There is unproductive consumption by productive consumers. What they consume in keeping up or improving their health, strength, and capacities of work, or in rearing other productive laborers to succeed them, is Productive Consumption. But consumption on pleasures or luxuries, whether by the idle or by the industrious, since production is neither its object nor is in any way advanced by it, must be reckoned Unproductive: with a reservation, perhaps, of a certain quantum of enjoyment which may be classed among necessaries, since anything short of it would not be consistent with the greatest efficiency of labor. That alone is productive consumption which goes to maintain and increase the productive powers of the community; either those residing in its soil, in its materials, in the number and efficiency of its instruments of production, or in its people.

I grant that no labor really tends to the enrichment of society, which is employed in producing things for the use of unproductive consumers. The tailor who makes a coat for a man who produces nothing is a productive laborer; but in a few weeks or months the coat is worn out, while the wearer has not produced anything to replace it, and the community is then no richer by the labor of the tailor than if the same sum had been paid for a stall at the opera. Nevertheless, society has been richer by the labor while the coat lasted. These things also [such as lace and pine-apples] are wealth until they have been consumed.



3. Distinction Between Labor for the Supply of Productive Consumption and Labor for the Supply of Unproductive Consumption.

We see, however, by this, that there is a distinction more important to the wealth of a community than even that between productive and unproductive labor; the distinction, namely, between labor for the supply of productive, and for the supply of unproductive, consumption; between labor employed in keeping up or in adding to the productive resources of the country, and that which is employed otherwise. Of the produce of the country, a part only is destined to be consumed productively; the remainder supplies the unproductive consumption of producers, and the entire consumption of the unproductive class. Suppose that the proportion of the annual produce applied to the first purpose amounts to half; then one half the productive laborers of the country are all that are employed in the operations on which the permanent wealth of the country depends. The other half are occupied from year to year and from generation to generation in producing things which are consumed and disappear without return; and whatever this half consume is as completely lost, as to any permanent effect on the national resources, as if it were consumed unproductively. Suppose that this second half of the laboring population ceased to work, and that the government maintained them in idleness for a whole year: the first half would suffice to produce, as they had done before, their own necessaries and the necessaries of the second half, and to keep the stock of materials and implements undiminished: the unproductive classes, indeed, would be either starved or obliged to produce their own subsistence, and the whole community would be reduced during a year to bare necessaries; but the sources of production would be unimpaired, and the next year there would not necessarily be a smaller produce than if no such interval of inactivity had occurred; while if the case had been reversed, if the first half of the laborers had suspended their accustomed occupations, and the second half had continued theirs, the country at the end of the twelvemonth would have been entirely impoverished. It would be a great error to regret the large proportion of the annual produce, which in an opulent country goes to supply unproductive consumption. That so great a surplus should be available for such purposes, and that it should be applied to them, can only be a subject of congratulation.

This principle may be seen by the following classification:

(A) Idlers; or unproductive laborers—e.g., actors. (B) Productive laborers—e.g., farmers. (C) Producing wealth for productive consumption, one half the annual produce. (D) Producing wealth for unproductive consumption (A), one half the annual produce.

Group D are productive laborers, and their own necessaries are productively consumed, but they are supplied by C, who keep themselves and D in existence. So long as C work, both C and D can go on producing. If D stopped working, they could be still subsisted as before by C; but A would be forced to produce for themselves. But, if C stopped working, D and C would be left without the necessaries of life, and would be obliged to cease their usual work. In this way it may be seen how much more important to the increase of material wealth C are than D, who labor "for the supply of unproductive consumption." Of course, group D are desirable on other than economic grounds, because their labor represents what can be enjoyed beyond the necessities of life.



Chapter III. Of Capital.



1. Capital is Wealth Appropriated to Reproductive Employment.

It has been seen in the preceding chapters that besides the primary and universal requisites of production, labor and natural agents, there is another requisite without which no productive operations beyond the rude and scanty beginnings of primitive industry are possible—namely, a stock, previously accumulated, of the products of former labor. This accumulated stock of the produce of labor is termed Capital. What capital does for production is, to afford the shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the laborers during the process. These are the services which present labor requires from past, and from the produce of past, labor. Whatever things are destined for this use—destined to supply productive labor with these various prerequisites—are Capital.

Professor Fawcett, "Manual" (chap. ii), says: "Since the laborer must be fed by previously accumulated food, ... some of the results of past labor are required to be set aside to sustain the laborer while producing. The third requisite of production, therefore, is a fund reserved from consumption, and devoted to sustain those engaged in future production.... Capital is not confined to the food which feeds the laborers, but includes machinery, buildings, and, in fact, every product due to man's labor which can be applied to assist his industry" (chap. iv). General Walker ("Political Economy," pages 68-70) defines capital as that portion of wealth (excluding unimproved land and natural agents) which is employed in the production of new forms of wealth. Henry George ("Progress and Poverty," page 41) returns to Adam Smith's definition: "That part of a man's stock which he expects to yield him a revenue is called his capital." Cherbuliez ("Precis," page 70) points out the increasing interdependence of industrial operations as society increases in wealth, and that there is not a single industry which does not demand the use of products obtained by previous labor. "These auxiliary products accumulated with a view to the production to which they are subservient" form what is called capital. Carey ("Social Science," iii, page 48) regards as capital all things which in any way form the machinery by which society obtains wealth. Roscher's definition is, "Every product laid by for purposes of further production." ("Political Economy," section 42.) By some, labor is regarded as capital.(104)

A manufacturer, for example, has one part of his capital in the form of buildings, fitted and destined for carrying on this branch of manufacture. Another part he has in the form of machinery. A third consists, if he be a spinner, of raw cotton, flax, or wool; if a weaver, of flaxen, woolen, silk, or cotton thread; and the like, according to the nature of the manufacture. Food and clothing for his operatives it is not the custom of the present age that he should directly provide; and few capitalists, except the producers of food or clothing, have any portion worth mentioning of their capital in that shape. Instead of this, each capitalist has money, which he pays to his work-people, and so enables them to supply themselves. What, then, is his capital? Precisely that part of his possessions, whatever it be, which he designs to employ in carrying on fresh production. It is of no consequence that a part, or even the whole of it, is in a form in which it can not directly supply the wants of laborers.

Care should be taken to distinguish between wealth, capital, and money. Capital may be succinctly defined as saved wealth devoted to reproduction, and the relations of the three terms mentioned may be illustrated by the following figure: The area of the circle, A, represents the wealth of a country; the area of the inscribed circle, B, the quantity out of the whole wealth which is saved and devoted to reproduction and called capital. But money is only one part of capital, as shown by the area of circle C. Wherefore, it can be plainly seen that not all capital, B, is money; that not all wealth, A, is capital, although all capital is necessarily wealth as included within it. It is not always understood that money is merely a convenient article by which other forms of wealth are exchanged against each other, and that a man may have capital without ever having any actual money in his possession. In times of commercial depression, that which is capital to-day may not to-morrow satisfy any desires (i.e., not be in demand), and so for the time it may, so to speak, drop entirely out of our circles above. For the moment, not having an exchange value, it can not be wealth, and so can the less be capital.



Suppose, for instance, that the capitalist is a hardware manufacturer, and that his stock in trade, over and above his machinery, consists at present wholly in iron goods. Iron goods can not feed laborers. Nevertheless, by a mere change of the destination of the iron goods, he can cause laborers to be fed. Suppose that [the capitalist changed into wages what he had before spent] in buying plate and jewels; and, in order to render the effect perceptible, let us suppose that the change takes place on a considerable scale, and that a large sum is diverted from buying plate and jewels to employing productive laborers, whom we shall suppose to have been previously, like the Irish peasantry, only half employed and half fed. The laborers, on receiving their increased wages, will not lay them out in plate and jewels, but in food. There is not, however, additional food in the country; nor any unproductive laborers or animals, as in the former case, whose food is set free for productive purposes. Food will therefore be imported if possible; if not possible, the laborers will remain for a season on their short allowance: but the consequence of this change in the demand for commodities, occasioned by the change in the expenditure of capitalists from unproductive to productive, is that next year more food will be produced, and less plate and jewelry. So that again, without having had anything to do with the food of the laborers directly, the conversion by individuals of a portion of their property, no matter of what sort, from an unproductive destination to a productive, has had the effect of causing more food to be appropriated to the consumption of productive laborers. The distinction, then, between Capital and Not-capital, does not lie in the kind of commodities, but in the mind of the capitalist—in his will to employ them for one purpose rather than another; and all property, however ill adapted in itself for the use of laborers, is a part of capital, so soon as it, or the value to be received from it, is set apart for productive reinvestment.



2. More Capital Devoted to Production than Actually Employed in it.

As whatever of the produce of the country is devoted to production is capital, so, conversely, the whole of the capital of the country is devoted to production. This second proposition, however, must be taken with some limitations and explanations. (1) A fund may be seeking for productive employment, and find none adapted to the inclinations of its possessor: it then is capital still, but unemployed capital. (2) Or the stock may consist of unsold goods, not susceptible of direct application to productive uses, and not, at the moment, marketable: these, until sold, are in the condition of unemployed capital.

This is not an important distinction. The goods are doubtless marketable at some price, if offered low enough. If no one wants them, then, by definition, they are not wealth so long as that condition exists.

(3) [Or] suppose that the Government lays a tax on the production in one of its earlier stages, as, for instance, by taxing the material. The manufacturer has to advance the tax, before commencing the manufacture, and is therefore under a necessity of having a larger accumulated fund than is required for, or is actually employed in, the production which he carries on. He must have a larger capital to maintain the same quantity of productive labor; or (what is equivalent) with a given capital he maintains less labor. (4) For another example: a farmer may enter on his farm at such a time of the year that he may be required to pay one, two, or even three quarters' rent before obtaining any return from the produce. This, therefore, must be paid out of his capital.

(5) Finally, that large portion of the productive capital of a country which is employed in paying the wages and salaries of laborers, evidently is not, all of it, strictly and indispensably necessary for production. As much of it as exceeds the actual necessaries of life and health (an excess which in the case of skilled laborers is usually considerable) is not expended in supporting labor, but in remunerating it, and the laborers could wait for this part of their remuneration until the production is completed.

The previous accumulation of commodities requisite for production must inevitably be large enough to cover necessaries, but need not be more, if the laborer is willing to wait for the additional amount of his wages (the amount of his unproductive consumption) until the completion of the industrial operation. In fact, however, the accumulation must be sufficient to pay the laborer all his wages from week to week, by force of custom (wherever there is any considerable division of labor), and also sufficient to purchase tools and materials. The various elements of capital are materials, instruments, and subsistence, giving "instruments" its wide signification which includes money (the tool of exchange), and other necessary appliances of each special kind of production.

In truth, it is only after an abundant capital had already been accumulated that the practice of paying in advance any remuneration of labor beyond a bare subsistence could possibly have arisen: since whatever is so paid is not really applied to production, but to the unproductive consumption of productive laborers, indicating a fund for production sufficiently ample to admit of habitually diverting a part of it to a mere convenience.

It will be observed that I have assumed that the laborers are always subsisted from capital:(105) and this is obviously the fact, though the capital need not necessarily be furnished by a person called a capitalist.

The peasant does not subsist this year on the produce of this year's harvest, but on that of the last. The artisan is not living on the proceeds of the work he has in hand, but on those of work previously executed and disposed of. Each is supported by a small capital of his own, which he periodically replaces from the produce of his labor. The large capitalist is, in like manner, maintained from funds provided in advance.



3. Examination of Cases Illustrative of the Idea of Capital.

That which is virtually capital to the individual is or is not capital to the nation, according as the fund which by the supposition he has not dissipated has or has not been dissipated by somebody else.

Let the reader consider, in the four following suppositions, whether or not the given capital has wholly dropped out of the circle in the diagram, page 67. In (3) and (4) the wealth is entirely dissipated; as it can not longer be in circle A, it can not, of course, be in circle B.

(1.) For example, let property of the value of ten thousand pounds, belonging to A, be lent to B, a farmer or manufacturer, and employed profitably in B's occupation. It is as much capital as if it belonged to B. A is really a farmer or manufacturer, not personally, but in respect of his property. Capital worth ten thousand pounds is employed in production—in maintaining laborers and providing tools and materials—which capital belongs to A, while B takes the trouble of employing it, and receives for his remuneration the difference between the profit which it yields and the interest he pays to A. This is the simplest case.

(2.) Suppose next that A's ten thousand pounds, instead of being lent to B, are lent on mortgage to C, a landed proprietor, by whom they are employed in improving the productive powers of his estate, by fencing, draining, road-making, or permanent manures. This is productive employment. The ten thousand pounds are sunk, but not dissipated. They yield a permanent return; the land now affords an increase of produce, sufficient in a few years, if the outlay has been judicious, to replace the amount, and in time to multiply it manifold. Here, then, is a value of ten thousand pounds, employed in increasing the produce of the country. This constitutes a capital, for which C, if he lets his land, receives the returns in the nominal form of increased rent; and the mortgage entitles A to receive from these returns, in the shape of interest, such annual sum as has been agreed on.

(3.) Suppose, however, that C, the borrowing landlord, is a spendthrift, who burdens his land not to increase his fortune but to squander it, expending the amount in equipages and entertainments. In a year or two it is dissipated, and without return. A is as rich as before; he has no longer his ten thousand pounds, but he has a lien on the land, which he could still sell for that amount. C, however, is ten thousand pounds poorer than formerly; and nobody is richer. It may be said that those are richer who have made profit out of the money while it was being spent. No doubt if C lost it by gaming, or was cheated of it by his servants, that is a mere transfer, not a destruction, and those who have gained the amount may employ it productively. But if C has received the fair value for his expenditure in articles of subsistence or luxury, which he has consumed on himself, or by means of his servants or guests, these articles have ceased to exist, and nothing has been produced to replace them: while if the same sum had been employed in farming or manufacturing, the consumption which would have taken place would have been more than balanced at the end of the year by new products, created by the labor of those who would in that case have been the consumers. By C's prodigality, that which would have been consumed with a return is consumed without return. C's tradesmen may have made a profit during the process; but, if the capital had been expended productively, an equivalent profit would have been made by builders, fencers, tool-makers, and the tradespeople who supply the consumption of the laboring-classes; while, at the expiration of the time (to say nothing of an increase), C would have had the ten thousand pounds or its value replaced to him, which now he has not. There is, therefore, on the general result, a difference, to the disadvantage of the community, of at least ten thousand pounds, being the amount of C's unproductive expenditure. To A, the difference is not material, since his income is secured to him, and while the security is good, and the market rate of interest the same, he can always sell the mortgage at its original value. To A, therefore, the lien of ten thousand pounds on C's estate is virtually a capital of that amount; but is it so in reference to the community? It is not. A had a capital of ten thousand pounds, but this has been extinguished—dissipated and destroyed by C's prodigality. A now receives his income, not from the produce of his capital, but from some other source of income belonging to C, probably from the rent of his land, that is, from payments made to him by farmers out of the produce of their capital.

(4.) Let us now vary the hypothesis still further, and suppose that the money is borrowed, not by a landlord, but by the state. A lends his capital to Government to carry on a war: he buys from the state what are called government securities; that is, obligations on the Government to pay a certain annual income. If the Government employed the money in making a railroad, this might be a productive employment, and A's property would still be used as capital; but since it is employed in war, that is, in the pay of officers and soldiers who produce nothing, and in destroying a quantity of gunpowder and bullets without return, the Government is in the situation of C, the spendthrift landlord, and A's ten thousand pounds are so much national capital which once existed, but exists no longer—virtually thrown into the sea, as wealth or production is concerned; though for other reasons the employment of it may have been justifiable. A's subsequent income is derived, not from the produce of his own capital, but from taxes drawn from the produce of the remaining capital of the community; to whom his capital is not yielding any return, to indemnify them for the payment; it is all lost and gone, and what he now possesses is a claim on the returns to other people's capital and industry.

The breach in the capital of the country was made when the Government spent A's money: whereby a value of ten thousand pounds was withdrawn or withheld from productive employment, placed in the fund for unproductive consumption, and destroyed without equivalent.

The United States had borrowed in the late civil war, by August 31, 1865, $2,845,907,626; and, to June 30, 1881, the Government had paid in interest on its bonds, "from taxes drawn from the produce of the remaining capital," $1,270,596,784, as an income to bondholders. From this can be seen the enormous waste of wealth to the United States during the war, and consequently the less existing capital to-day in this country; since, under the same inducements to save, the smaller the outside circle (wealth), the less the inside circle (capital) must be.



Chapter IV. Fundamental Propositions Respecting Capital.



1. Industry is Limited by Capital.

The first of these propositions is, that industry is limited by capital. To employ labor in a manufacture is to invest capital in the manufacture. This implies that industry can not be employed to any greater extent than there is capital to invest. The proposition, indeed, must be assented to as soon as it is distinctly apprehended. The expression "applying capital" is of course metaphorical: what is really applied is labor; capital being an indispensable condition. The food of laborers and the materials of production have no productive power; but labor can not exert its productive power unless provided with them. There can be no more industry than is supplied with materials to work up and food to eat. Self-evident as the thing is, it is often forgotten that the people of a country are maintained and have their wants supplied, not by the produce of present labor, but of past.

Therefore, as capital increases, more labor can be employed. When the Pittsburg rioters, in 1877, destroyed property, or the product of past labor, they did not realize then that that property might, but now could never again, be employed for productive purposes, and thereby support laborers.

They consume what has been produced, not what is about to be produced. Now, of what has been produced, a part only is allotted to the support of productive labor; and there will not and can not be more of that labor than the portion so allotted (which is the capital of the country) can feed, and provide with the materials and instruments of production.

Because industry is limited by capital, we are not, however, to infer that it always reaches that limit. There may not be as many laborers obtainable as the capital would maintain and employ. This has been known to occur in new colonies, where capital has sometimes perished uselessly for want of labor.

In the farming districts of our Middle and Western States, in harvest-time, crops have been often of late years ruined because farm-hands could not be obtained. In earlier days, President John Adams was unable to hire a man in Washington to cut wood in the surrounding forests with which to warm the White House.

The unproductive consumption of productive laborers, the whole of which is now supplied by capital, might cease, or be postponed, until the produce came in; and additional productive laborers might be maintained with the amount.

[Governments] can create capital. They may lay on taxes, and employ the amount productively. They may do what is nearly equivalent: they may lay taxes on income or expenditure, and apply the proceeds toward paying off the public debts. The fund-holder, when paid off, would still desire to draw an income from his property, most of which, therefore, would find its way into productive employment, while a great part of it would have been drawn from the fund for unproductive expenditure, since people do not wholly pay their taxes from what they would have saved, but partly, if not chiefly, from what they would have spent.



2. Increase of Capital gives Increased Employment to Labor, Without Assignable Bounds.

While, on the one hand, industry is limited by capital, so, on the other, every increase of capital gives, or is capable of giving, additional employment to industry; and this without assignable limit. I do not mean to deny that the capital, or part of it, may be so employed as not to support laborers, being fixed in machinery, buildings, improvement of land, and the like. In any large increase of capital a considerable portion will generally be thus employed, and will only co-operate with laborers, not maintain them.

It will be remembered, however, that subsistence is but one part or element of capital; that instruments and materials form a large part of capital. But still the question of mere maintenance is rightfully discussed, because it is asserted to-day that, while the rich are growing richer, the poor lack even the food to keep them alive; and throughout this discussion Mr. Mill has in view the fact that laborers may exist in the community either "half fed or unemployed."

What I do intend to assert is, that the portion which is destined to their maintenance may (supposing no alteration in anything else) be indefinitely increased, without creating an impossibility of finding the employment: in other words, that if there are human beings capable of work, and food to feed them, they may always be employed in producing something. It is very much opposed to common doctrines.(106) There is not an opinion more general among mankind than this, that the unproductive expenditure of the rich is necessary to the employment of the poor.

It is to be noticed that, in fact, after the arts have so far advanced in a community that mankind can obtain by their exertion more than the amount of the mere necessaries of life sufficient on the average for the subsistence of all, any further production rendered possible to the human race by new discoveries and processes is naturally unproductively consumed, and that consequently a demand for labor for unproductive consumption is essential for the employment of all existing laborers. This, however, can be done, because enough capital has been brought into existence to create the demand for the labor. Yet it is clear that it is not expenditure, but capital, by which employment is given to the poor.

Suppose that every capitalist came to be of opinion that, not being more meritorious than a well-conducted laborer, he ought not to fare better; and accordingly laid by, from conscientious motives, the surplus of his profits; unproductive expenditure is now reduced to its lowest limit: and it is asked, How is the increased capital to find employment? Who is to buy the goods which it will produce? There are no longer customers even for those which were produced before. The goods, therefore (it is said), will remain unsold; they will perish in the warehouses, until capital is brought down to what it was originally, or rather to as much less as the demand of the customers has lessened. But this is seeing only one half of the matter. In the case supposed, there would no longer be any demand for luxuries on the part of capitalists and land-owners. But, when these classes turn their income into capital, they do not thereby annihilate their power of consumption; they do but transfer it from themselves to the laborers to whom they give employment. Now, there are two possible suppositions in regard to the laborers: either there is, or there is not, an increase of their numbers proportional to the increase of capital. (1.) If there is, the case offers no difficulty. The production of necessaries for the new population takes the place of the production of luxuries for a portion of the old, and supplies exactly the amount of employment which has been lost. (2.) But suppose that there is no increase of population. The whole of what was previously expended in luxuries, by capitalists and landlords, is distributed among the existing laborers, in the form of additional wages. We will assume them to be already sufficiently supplied with necessaries.

What follows? That the laborers become consumers of luxuries; and the capital previously employed in the production of luxuries is still able to employ itself in the same manner; the difference being, that the luxuries are shared among the community generally, instead of being confined to a few, supposing that the power of their labor were physically sufficient to produce all this amount of indulgences for their whole number. Thus the limit of wealth is never deficiency of consumers, but of producers and productive power. Every addition to capital gives to labor either additional employment or additional remuneration.

That laborers should get more (a) by capitalists abstaining from unproductive expenditure than (b) by expenditure in articles unproductively consumed is a question difficult for many to comprehend, and needs all the elucidation possible. To start with, no one ever knew of a community all of whose wants were satisfied: in fact, civilization is constantly leading us into new fields of enjoyment, and results in a constant differentiation of new desires. To satisfy these wants is the spring to nearly all production and industry. There can, therefore, be no stop to production arising from lack of desire for commodities. "The limit of wealth is never deficiency of consumers," but of productive power.

Now, in supposition (2) of the text, remember that the laborers are supposed not to be employed up to their full productive power. If all capitalists abstain from unproductive consumption, and devote that amount of wealth to production, then, since there can be no production without labor, the same number of laborers have offered to them in the aggregate a larger sum of articles for their exertions, which is equivalent to saying they receive additional wages.

But some persons want to see the process in the concrete, and the same principle may be illustrated by a practical case. It is supposed that all laborers have the necessaries of life only, but none of the comforts, decencies, and luxuries. Let A be a farmer in New York, who can also weave carpets, and B a lumberman in Maine. A begins to want a better house, and B wishes a carpet, both having food, clothing, and shelter. One of the capitalists abstaining from unproductive consumption, as above, is X, who, knowing the two desires of A and B, presents himself as a middle-man (i.e., he gives a market for both men, as is found in every center of trade, as well as in a country store), furnishing A the tools, materials, etc., and giving him the promise of lumber if he will create the carpet, and promising B the carpet if he will likewise produce the additional lumber. To be more matter of fact, X buys the carpet of A, and sells it to B for the lumber. Thus two new articles have been created, and for their exertions A has received additional wages (either in the form of lumber, or of the money paid him for the carpet), and B has received additional wages (either in the form of a carpet, or the money paid him by X for the lumber). If A and B are regarded as typifying all the laborers, and X all the above capitalists, in the multiplicity of actual exchanges, it will be seen that A and B are creating new articles to satisfy their own demand, instead of meeting the demands of X. If their primary wants are already supplied, then they take their additional wages in the form of comforts and decencies. When Class X forego their consumption, but add that amount to capital, they do not give up their title to that capital, but they transfer the use of it, or their consuming power, to others for the time being. This question will be more fully discussed in 6.



3. Capital is the result of Saving, and all Capital is Consumed.

A second fundamental theorem respecting capital relates to the source from which it is derived. It is the result of saving.

If all persons were to expend in personal indulgences all that they produce, and all the income that they receive from what is produced by others, capital could not increase. Some saving, therefore, there must have been, even in the simplest of all states of economical relations; people must have produced more than they used, or used less than they produced. Still more must they do so before they can employ other laborers, or increase their production beyond what can be accomplished by the work of their own hands. If it were said, for instance, that the only way to accelerate the increase of capital is by increase of saving, the idea would probably be suggested of greater abstinence and increased privation. But it is obvious that whatever increases the productive power of labor, creates an additional fund to make savings from, and enables capital to be enlarged, not only without additional privation, but concurrently with an increase of personal consumption. Nevertheless, there is here an increase of saving, in the scientific sense. Though there is more consumed, there is also more spared. There is a greater excess of production over consumption. To consume less than is produced is saving; and that is the process by which capital is increased; not necessarily by consuming less, absolutely.

The economic idea of saving involves, of course, the intention of using the wealth in reproduction. Saving, without this meaning, results only in hoarding of wealth, and while hoarded this amount is not capital. To explain the process by which capital comes into existence, Bastiat has given the well-known illustration of the plane in his "Sophisms of Protection."(107)

A fundamental theorem respecting capital, closely connected with the one last discussed, is, that although saved, and the result of saving, it is nevertheless consumed. The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and, while hoarded, is not consumed at all. But, if employed as capital, it is all consumed, though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid in wages to productive laborers, who consume it for their daily wants; or if they in their turn save any part, this also is not, generally speaking, hoarded, but (through savings-banks, benefit clubs, or some other channel) re-employed as capital, and consumed. To the vulgar, it is not at all apparent that what is saved is consumed. To them, every one who saves appears in the light of a person who hoards. The person who expends his fortune in unproductive consumption is looked upon as diffusing benefits all around, and is an object of so much favor, that some portion of the same popularity attaches even to him who spends what does not belong to him; who not only destroys his own capital, if he ever had any, but, under pretense of borrowing, and on promise of repayment, possesses himself of capital belonging to others, and destroys that likewise.

This popular error comes from attending to a small portion only of the consequences that flow from the saving or the spending; all the effects of either, which are out of sight, being out of mind. There is, in the one case, a wearing out of tools, a destruction of material, and a quantity of food and clothing supplied to laborers, which they destroy by use; in the other case, there is a consumption, that is to say, a destruction, of wines, equipages, and furniture. Thus far, the consequence to the national wealth has been much the same; an equivalent quantity of it has been destroyed in both cases. But in the spending, this first stage is also the final stage; that particular amount of the produce of labor has disappeared, and there is nothing left; while, on the contrary, the saving person, during the whole time that the destruction was going on, has had laborers at work repairing it; who are ultimately found to have replaced, with an increase, the equivalent of what has been consumed.

Almost all expenditure being carried on by means of money, the money comes to be looked upon as the main feature in the transaction; and since that does not perish, but only changes hands, people overlook the destruction which takes place in the case of unproductive expenditure. The money being merely transferred, they think the wealth also has only been handed over from the spendthrift to other people. But this is simply confounding money with wealth. The wealth which has been destroyed was not the money, but the wines, equipages, and furniture which the money purchased; and, these having been destroyed without return, society collectively is poorer by the amount. In proportion as any class is improvident or luxurious, the industry of the country takes the direction of producing luxuries for their use; while not only the employment for productive laborers is diminished, but the subsistence and instruments which are the means of such employment do actually exist in smaller quantity.



4. Capital is kept up by Perpetual Reproduction, as shown by the Recovery of Countries from Devastation.

To return to our fundamental theorem. Everything which is produced is consumed—both what is saved and what is said to be spent—and the former quite as rapidly as the latter. All the ordinary forms of language tend to disguise this. When people talk of the ancient wealth of a country, of riches inherited from ancestors, and similar expressions, the idea suggested is, that the riches so transmitted were produced long ago, at the time when they are said to have been first acquired, and that no portion of the capital of the country was produced this year, except as much as may have been this year added to the total amount. The fact is far otherwise. The greater part, in value, of the wealth now existing [in the United States] has been produced by human hands within the last twelve months.

"In the State of Massachusetts it is estimated that the capital, on the average, belonging to each individual does not exceed $600, and that the average annual product per capita is about $200; so that the total capital is the product of only two or three years' labor."(108)

The land subsists, and the land is almost the only thing that subsists. Everything which is produced perishes, and most things very quickly. Most kinds of capital are not fitted by their nature to be long preserved. Westminster Abbey has lasted many centuries, with occasional repairs; some Grecian sculptures have existed above two thousand years; the Pyramids perhaps double or treble that time. But these were objects devoted to unproductive use. Capital is kept in existence from age to age not by preservation, but by perpetual reproduction; every part of it is used and destroyed, generally very soon after it is produced, but those who consume it are employed meanwhile in producing more. The growth of capital is similar to the growth of population. Every individual who is born, dies, but in each year the number born exceeds the number who die; the population, therefore, always increases, though not one person of those composing it was alive until a very recent date.

This perpetual consumption and reproduction of capital afford the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation. The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterward, then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production. If there is as much of food left to them, or of valuables to buy food, as enables them by any amount of privation to remain alive and in working condition, they will, in a short time, have raised as great a produce, and acquired collectively as great wealth and as great a capital, as before, by the mere continuance of that ordinary amount of exertion which they are accustomed to employ in their occupations. Nor does this evince any strength in the principle of saving, in the popular sense of the term, since what takes place is not intentional abstinence, but involuntary privation.

The world has at any given period the power, under existing conditions of production and skill, to create a certain amount of wealth, as represented by the inner rectangle, W. Each increased power of production arising from conquests over Nature's forces, as the use of steam and labor-saving machinery, permits the total wealth to be enlarged, as, in the figure, to rectangle W'. For the production of wealth are required labor, capital, and land; therefore, if the labor and land are not destroyed by war, there need not necessarily be in existence all the previous capital. If there are the necessaries for all, and only sufficient tools to accomplish the work, they will, in a few years, again recreate all the wealth that formerly existed, regain the same position as before, and go on slowly increasing the total wealth just as fast as improvements in the arts of production render it possible.





5. Effects of Defraying Government Expenditure by Loans.

[An application of this truth has been made to the question of raising government supplies for war purposes.] Loans, being drawn from capital (in lieu of taxes, which would generally have been paid from income, and made up in part or altogether by increased economy), must, according to the principles we have laid down, tend to impoverish the country: yet the years in which expenditure of this sort has been on the greatest scale have often been years of great apparent prosperity: the wealth and resources of the country, instead of diminishing, have given every sign of rapid increase during the process, and of greatly expanded dimensions after its close.

During our civil war, at the same time that wealth was being destroyed on an enormous scale, there was a very general feeling that trade was good, and large fortunes were made. At the close of the war a period of speculation and overtrading continued until it was brought to a disastrous close by the panic of 1873. Much of this speculation, however, was due to an inflated paper currency.

We will suppose the most unfavorable case possible: that the whole amount borrowed and destroyed by the Government was abstracted by the lender from a productive employment in which it had actually been invested. The capital, therefore, of the country, is this year diminished by so much. But, unless the amount abstracted is something enormous, there is no reason in the nature of the case why next year the national capital should not be as great as ever. The loan can not have been taken from that portion of the capital of the country which consists of tools, machinery, and buildings. It must have been wholly drawn from the portion employed in paying laborers: and the laborers will suffer accordingly. But if none of them are starved, if their wages can bear such an amount of reduction, or if charity interposes between them and absolute destitution, there is no reason that their labor should produce less in the next year than in the year before. If they produce as much as usual, having been paid less by so many millions sterling, these millions are gained by their employers. The breach made in the capital of the country is thus instantly repaired, but repaired by the privations and often the real misery of the laboring-class.

As Mr. Mill points out, during the Napoleonic wars, in France the withdrawal of laborers from industry into the army was so large that it caused a rise of wages, and a fall in the profits of capital; while in England, inasmuch as capital, rather than men, was sent to the Continent in the war, the very reverse took place: the diversion of "hundreds of millions of capital from productive employment" caused a fall of wages, and the prosperity of the capitalist class, while the permanent productive resources did not fall off.

This leads to the vexed question to which Dr. Chalmers has very particularly adverted: whether the funds required by a government for extraordinary unproductive expenditure are best raised by loans, the interest only being provided by taxes, or whether taxes should be at once laid on to the whole amount; which is called, in the financial vocabulary, raising the whole of the supplies within the year. Dr. Chalmers is strongly for the latter method. He says the common notion is that, in calling for the whole amount in one year, you require what is either impossible, or very inconvenient; that the people can not, without great hardship, pay the whole at once out of their yearly income; and that it is much better to require of them a small payment every year in the shape of interest, than so great a sacrifice once for all. To which his answer is, that the sacrifice is made equally in either case. Whatever is spent can not but be drawn from yearly income. The whole and every part of the wealth produced in the country forms, or helps to form, the yearly income of somebody. The privation which it is supposed must result from taking the amount in the shape of taxes is not avoided by taking it in a loan. The suffering is not averted, but only thrown upon the laboring-classes, the least able, and who least ought, to bear it: while all the inconveniences, physical, moral, and political, produced by maintaining taxes for the perpetual payment of the interest, are incurred in pure loss. Whenever capital is withdrawn from production, or from the fund destined for production, to be lent to the state and expended unproductively, that whole sum is withheld from the laboring-classes: the loan, therefore, is in truth paid off the same year; the whole of the sacrifice necessary for paying it off is actually made: only it is paid to the wrong persons, and therefore does not extinguish the claim; and paid by the very worst of taxes, a tax exclusively on the laboring-class. And, after having, in this most painful and unjust of ways, gone through the whole effort necessary for extinguishing the debt, the country remains charged with it, and with the payment of its interest in perpetuity.

The United States, for example, borrows capital from A, with which it buys stores from B. If the loan all comes from within the country, A's capital is borrowed, when the United States should have taken that amount outright by taxation. When the money is borrowed of A, the laborers undergo the sacrifice, the title to the whole sum remains in A's hands, and the claim against the Government by A still exists; while, if the amount were taken by taxation, the title to the sum raised is in the state, and it is paid to the right person.

The experience of the United States during the civil war is an illustration of this principle. It is asserted that, as a matter of fact, the total expenses of the war were defrayed by the Northern States, during the four years of its continuance, out of surplus earnings; and yet at the close of the conflict a debt of $2,800,000,000 was saddled on the country.

The United States borrowed $2,400,000,000 Revenue during that time 1,700,000,000 Total cost of the war $4,100,000,000

In reality we borrowed only about $1,500,000,000 instead of $2,400,000,000, since (1) the Government issued paper which depreciated, and yet received it at par in subscriptions for loans. Moreover, the total cost would have been much reduced had we issued no paper and (2) thereby not increased the prices of goods to the state, and (3) if no interest account had been created by borrowing. But could the country have raised the whole sum each year by taxation? In the first fiscal year after the war the United States paid in war taxes $650,000,000. At the beginning of the struggle, to June 30, 1862, the expenditure was $515,000,000, and by June 30, 1863, it had amounted to $1,098,000,000; so that $600,000,000 of taxes a year would have paid the war expenses, and left us free of debt at the close.

A confirmatory experience is that of England during the Continental wars, 1793-1817:

Total war expenditures L1,060,000,000 Interest charge on the existing debt 235,000,000 Total amount required L1,295,000,000 Revenue for that period 1,145,000,000 Deficit L150,000,000

To provide for this deficit, the Government actually increased its debt by L600,000,000. A slight additional exertion would have provided L150,000,000 more of revenue, and saved L450,000,000 to the taxpayers.(109)

The practical state of the case, however, seldom exactly corresponds with this supposition. The loans of the less wealthy countries are made chiefly with foreign capital, which would not, perhaps, have been brought in to be invested on any less security than that of the Government: while those of rich and prosperous countries are generally made, not with funds withdrawn from productive employment, but with the new accumulations constantly making from income, and often with a part of them which, if not so taken, would have migrated to colonies, or sought other investments abroad.



6. Demand for Commodities is not Demand for Labor.

Mr. Mill's statement of the theorem respecting capital, discussed in the argument that "demand for commodities is not demand for labor," needs some simplification. For this purpose represent by the letters of the alphabet, A, B, C, ... X, Y, Z, the different kinds of commodities produced in the world which are exchanged against each other in the process of reaching the consumers. This exchange of commodities for each other, it need hardly be said, does not increase the number or quantity of commodities already in existence; since their production, as we have seen, requires labor and capital in connection with natural agents. Mere exchange does not alter the quantity of commodities produced.

To produce a plow, for example, the maker must have capital (in the form of subsistence, tools, and materials) of which some one has foregone the use by a process of saving in order that something else, in this case a plow, may be produced. This saving must be accomplished first to an amount sufficient to keep production going on from day to day. This capital is all consumed, but in a longer or shorter term (depending on the particular industrial operation) it is reproduced in new forms adapted to the existing wants of man. Moreover, without any new exertion of abstinence, this amount of capital may be again consumed and reproduced, and so go on forever, after once being saved (if never destroyed in the mean while, thereby passing out of the category not only of capital, but also of wealth). The total capital of the country, then, is not the sum of one year's capital added to that of another; but that of last year reproduced in a new form this year, plus a fractional increase arising from new savings. But, once saved, capital can go on constantly aiding in production forever. This plow when made is exchanged (if a plow is wanted, and the production is properly adjusted to meet desires) for such other products, food, means for repairing tools, etc., as give back to the plow-maker all the commodities consumed in its manufacture (with an increase, called profit).

Returning to our illustration of the alphabet, it is evident that a certain amount of capital united with labor (constituting what may be called a productive engine) lies behind the production of A (such as the plow, for example), and to which its existence is due. The same is true of Z. Suppose that 5,000 of Z is produced, of which 4,000 is enough to reimburse the capital used up by labor in the operation, and that the owner of commodity Z spends the remaining 1,000 Z in exchange for 1,000 of commodity A. It is evident (no money being used as yet) that this exchange of goods is regulated entirely by the desires of the two parties to the transaction. No more goods are created simply by the exchange; the simple process of exchange does not keep the laborers engaged on A occupied. And yet the owner of Z had a demand for commodity A; his demand was worthless, except through the fact of his production, which gave him actual wealth, or purchasing power, in the form of Z. His demand for commodity A was not the thing which employed the laborers engaged in producing A, although the demand (if known beforehand) would cause them to produce A rather than some other article—that is, the demand of one quantity of wealth for a certain thing determines the direction taken by the owner of capital A. But, since the exchange is merely the form in which the demand manifests itself, it is clear that the demand does not add to production, and so of itself does not employ labor. Of course, if there were no desires, there would be no demand, and so no production and employment of labor. But we may conclude by formulating the proposition, that wealth (Z) offered for commodities (A) necessitates the use of other wealth (than Z) as capital to support the operation by which those commodities (A) are produced. It makes no difference to the existing employment of labor what want is supplied by the producers of A, whether it is velvet (intended for unproductive consumption) or plows (intended for productive consumption). Even if Z is no longer offered in exchange for A, and if then A is no longer to be made, the laborers formerly occupied in producing A—if warning is given of the coming change; if not, loss results—having the plant, can produce something else wanted by the owner of Z.

Now into a community, as here pictured, all laborers supposed to be occupied, and all capital employed in producing A, B, C, ... X, Y, Z, imagine the coming of a shipwrecked crew. Instead of exchanging Z for A, as before, the owner of Z may offer his wealth to the crew to dance for him. The essential question is, Is more employment offered to labor by this action than the former exchange for A? That is, it is a question merely of distribution of wealth among the members of a community. The labor engaged on A is not thrown out of employment (if they have warning). There is no more wealth in existence, but it is differently distributed than before: the crew, instead of the former owner, now have 1,000 of Z. So far as the question of employment is concerned, it makes no difference on what terms the crew got it: they might have been hired to stand in a row and admire the owner of Z when he goes out. But yet it may naturally be assumed that the crew were employed productively. In this case, after they have consumed the wealth Z, they have brought into existence articles in the place of those they consumed. But, although this last operation is economically more desirable for the future growth of wealth, yet no more laborers for the time were employed than if the crew had merely danced. The advantages or disadvantages of productive consumption are not to be discussed here. It is intended, however, to establish the proposition that wealth paid out in wages, or advanced to producers, itself supports labor; that wealth offered directly to laborers in this way employs more labor than when merely offered in exchange for other goods, or, in other words, by a demand for commodities; that an increased demand for commodities does not involve an increased demand for labor, since this can only be created by capital. The essential difference is, that the owner of Z in one case, by exchanging goods for A, did not forego his consuming power; in the other case, by giving Z to the unemployed crew, he actually went through the process of saving by foregoing his personal consumption, and handing it over to the crew. If the crew use it unproductively, it is in the end the same as if the owner of Z had done it; but meanwhile the additional laborers were employed. If the crew be employed productively, then the saving once made will go on forever, as explained above, and the world will be the richer by the wealth this additional capital can create.

It may now be objected that, if A is no longer in demand, the laborers in that industry will be thrown out of employment. Out of that employment certainly, but not out of every other. One thousand of Z was able to purchase certain results of labor and capital in industry A, when in the hands of its former owner; and now when in the hands of the crew it will control, as purchasing power, equivalent results of labor and capital. The crew may not want the same articles as the former owner of Z, but they will want the equivalents of 1,000 of Z in something, and that something will be produced now instead of A. The whole process may be represented by this diagram.



1. Z is exchanged against A, and the crew remain unemployed.

2. Here the crew possess Z, and they themselves exchange Z for whatever A may produce in satisfaction of their wants, and the crew are then employed.

It is possible that the intervention of money blinds some minds to a proper understanding of the operations described above. The supposition, as given, applies to a condition of barter, but is equally true if money is used.(110) Imagine a display of all the industries of the world, A, B, C, ... X, Y, Z, presented within sight on one large field, and at the central spot the producer of gold and silver. When Z is produced, it is taken to the gold-counter, and exchanged for money; when A is produced, the same is done. Then the former money is given for A, and the latter for Z, so that in truth A is exchanged against Z through the medium of money, just as before money was considered. Now, it may be said by an objector, "If A is not wanted, after it is produced, and can not be sold, because the demand from Z has been withdrawn, then the capital used for A will not be returned, and the laborers in A will be thrown out of employment." The answer is, of course, that the state of things here contemplated is a permanent and normal one wherein production is correctly adapted to human desires. If A is found not to be wanted, after the production of it, an industrial blunder has been committed, and wealth is wasted just as when burned up. It is ill-assorted production. The trouble is not in a lack of demand for what A may produce (of something else), but with the producers of A in not making that for which there were desires, from ignorance or lack of early information of the disposition of wealth Z. In practice, however, it will be found that most goods are made upon "orders," and, except under peculiar circumstances, not actually produced unless a market is foreseen. Indeed, as every man knows, the most important function of a successful business man is the adaptation of production to the market, that is, to the desires of consumers.

One other form of this question needs brief mention. It is truly remarked that a large portion of industrial activity is engaged to-day, not in supplying productive consumption, such as food, shelter, and clothing, but in supplying the comforts and luxuries of low and high alike, or unproductive consumption; now, if there were not a demand for luxuries and comforts, many vast industries would cease to exist, and labor would be thrown out of employment. Is not a demand for such commodities, then, a cause of the present employment of labor? No, it is not. Luxuries and comforts are of course the objects of human wants; but a desire alone, without purchasing power, can not either buy or produce these commodities. To obtain a piano, one must produce goods, and this implies the possession of capital, by which to bring into existence goods, or purchasing power, to be offered for a piano. Nor is this sufficient. Even after a man, A, for example, offers purchasing power, he will not get a piano unless there exists an accumulation of unemployed capital, together with labor ready to manufacture the instrument. If capital were all previously occupied, no piano could be made, although A stood offering an equivalent in valuable goods. It may be said that A himself has the means. He has the wealth, and if he is willing to forego the use of this wealth, or, in other words, save it by devoting it to reproduction in the piano industry—that is, create the capital necessary for the purpose—then the piano can be made. But this shows again that, not a mere desire, but the existence of capital, is necessary to the production, and so to the employment of labor. An increased demand for commodities, therefore, does not give additional employment to labor, unless there be capital to support the labor.

Some important corollaries result from this proposition: (a.) When a country by legislation creates a home demand for commodities, that does not of itself give additional employment to labor. If the goods had before been purchased abroad, under free discretion, then if produced at home they must require more capital and labor, or they would not have been brought from foreign countries. If produced at home, it would require, to purchase them, more of what was formerly sent abroad; or some must do without. The legislation can not, ipso facto, create capital, and only by an increase of capital can more employment result. It is possible, however, that legislation might cause a more effective use of existing capital; but that must be a question of fact, to be settled by circumstances in each particular case. It is not a thing to be governed by principles.

(b.) It follows from the above proposition also that taxes levied on the rich, and paid by a saving from their consumption of luxuries, do not fall on the poor because of a lessened demand for commodities; since, as we have seen, that demand does not create or diminish the demand for labor. But, if the taxes levied on the rich are paid by savings from what the rich would have expended in wages, then if the Government spends the amount of revenue thus taken in the direct purchase of labor, as of soldiers and sailors, the tax does not fall on the laboring-class taken as a whole. When the Government takes that wealth which was formerly capital, burns it up, or dissipates it in war, it ceases to exist any longer as a means of again producing wealth, or of employing labor.



Chapter V. On Circulating And Fixed Capital.



1. Fixed and Circulating Capital.

Of the capital engaged in the production of any commodity, there is a part which, after being once used, exists no longer as capital; is no longer capable of rendering service to production, or at least not the same service, nor to the same sort of production. Such, for example, is the portion of capital which consists of materials. The tallow and alkali of which soap is made, once used in the manufacture, are destroyed as alkali and tallow. In the same division must be placed the portion of capital which is paid as the wages, or consumed as the subsistence, of laborers. That part of the capital of a cotton-spinner which he pays away to his work-people, once so paid, exists no longer as his capital, or as a cotton-spinner's capital. Capital which in this manner fulfills the whole of its office in the production in which it is engaged, by a single use, is called Circulating Capital. The term, which is not very appropriate, is derived from the circumstance that this portion of capital requires to be constantly renewed by the sale of the finished product, and when renewed is perpetually parted with in buying materials and paying wages; so that it does its work, not by being kept, but by changing hands.