Chapter V The Real Functions of Capital

It may now be asked, If capital is not required for the payment of wages or the support of labor during production, what, then, are its functions?

If capital is not needed to pay wages or support labor during production, what are its functions?

The previous examination has made the answer clear. Capital, as we have seen, consists of wealth used for the procurement of more wealth, as distinguished from wealth used for the direct satisfaction of desire; or, as I think it may be defined, of wealth in the course of exchange.

The previous examination has made the answer clear. Capital, as we have seen, is wealth used to procure more wealth, as distinct from wealth used for the direct satisfaction of desire. I think it can also be defined as wealth in the course of exchange.

Capital, therefore, increases the power of labor to produce wealth: (1) By enabling labor to apply itself in more effective ways, as by digging up clams with a spade instead of the hand, or moving a vessel by shoveling coal into a furnace, instead of tugging at an oar. (2) By enabling labor to avail itself of the reproductive forces of nature, as to obtain corn by sowing it, or animals by breeding them. (3) By permitting the division of labor, and thus, on the one hand, increasing the efficiency of the human factor of wealth, by the utilization of special capabilities, the acquisition of skill, and the reduction of waste; and, on the other, calling in the powers of the natural factor at their highest, by taking advantage of the diversities of soil, climate and situation, so as to obtain each particular species of wealth where nature is most favorable to its production.

Capital therefore increases the power of labor to produce wealth in three ways. (1) It lets labor work more effectively, as when we dig clams with a spade instead of a hand, or move a ship by shoveling coal into a furnace instead of tugging at an oar. (2) It lets labor use the reproductive forces of nature, as in getting corn by sowing it or animals by breeding them. (3) It permits the division of labor. On the human side, that raises the efficiency of labor by using special abilities, building skill and cutting waste. On the natural side, it calls the powers of nature into play at their highest. It takes advantage of differences in soil, climate and location, so each kind of wealth is obtained where nature is most favorable to producing it.

Capital does not supply the materials which labor works up into wealth, as is erroneously taught; the ma80terials of wealth are supplied by nature. But such materials partially worked up and in the course of exchange are capital.

Capital does not supply the materials that labor works up into wealth, as is wrongly taught. Nature supplies the materials80 of wealth. But such materials, once partly worked up and in the course of exchange, are capital.

Capital does not supply or advance wages, as is erroneously taught. Wages are that part of the produce of his labor obtained by the laborer.

Capital does not supply or advance wages, as is wrongly taught. Wages are the part of the produce of his labor that the laborer obtains.

Capital does not maintain laborers during the progress of their work, as is erroneously taught. Laborers are maintained by their labor, the man who produces, in whole or in part, anything that will exchange for articles of maintenance, virtually producing that maintenance.

Capital does not maintain laborers while they work, as is wrongly taught. Laborers are maintained by their labor. A man who produces, in whole or in part, anything that will exchange for articles of maintenance is virtually producing that maintenance.

Capital, therefore, does not limit industry, as is erroneously taught, the only limit to industry being the access to natural material. But capital may limit the form of industry and the productiveness of industry, by limiting the use of tools and the division of labor.

Capital therefore does not limit industry, as is wrongly taught. The only limit to industry is access to natural material. But capital may limit the form of industry and its productiveness, by limiting the use of tools and the division of labor.

That capital may limit the form of industry is clear. Without the factory, there could be no factory operatives; without the sewing machine, no machine sewing; without the plow, no plowman; and without a great capital engaged in exchange, industry could not take the many special forms which are concerned with exchanges. It is also as clear that the want of tools must greatly limit the productiveness of industry. If the farmer must use the spade because he has not capital enough for a plow, the sickle instead of the reaping machine, the flail instead of the thresher; if the machinist must rely upon the chisel for cutting iron; the weaver on the hand loom, and so on, the productiveness of industry cannot be a tithe of what it is when aided by capital in the shape of the best tools now in use. Nor could the division of labor go further than the very rudest and almost imperceptible beginnings, nor the exchanges which make it possible extend beyond the nearest neighbors, unless a portion of the things produced were constantly kept in stock or in transit. Even the pursuits of hunting,81 fishing, gathering nuts, and making weapons could not be specialized so that an individual could devote himself to any one, unless some part of what was procured by each was reserved from immediate consumption, so that he who devoted himself to the procurement of things of one kind could obtain the others as he wanted them, and could make the good luck of one day supply the shortcomings of the next. While to permit the minute subdivision of labor that is characteristic of, and necessary to, high civilization, a great amount of wealth of all descriptions must be constantly kept in stock or in transit. To enable the resident of a civilized community to exchange his labor at option with the labor of those around him and with the labor of men in the most remote parts of the globe, there must be stocks of goods in warehouses, in stores, in the holds of ships, and in railway cars, just as to enable the denizen of a great city to draw at will a cupful of water, there must be thousands of millions of gallons stored in reservoirs and moving through miles of pipe.

That capital may limit the form of industry is clear. Without the factory there could be no factory operatives, without the sewing machine no machine sewing, and without the plow no plowman. Without a great capital engaged in exchange, industry could not take the many special forms that deal with exchanges. It is just as clear that a lack of tools must greatly limit the productiveness of industry. Suppose the farmer must use the spade because he lacks capital for a plow, the sickle instead of the reaping machine, the flail instead of the thresher. Suppose the machinist must cut iron with a chisel and the weaver must use a hand loom. Then the productiveness of industry cannot be a tithe of what it is with the best tools now in use. Unless part of what is produced were constantly kept in stock or in transit, the division of labor could not go beyond the rudest and barely noticeable beginnings. The exchanges that make it possible could not reach beyond the nearest neighbors. Even hunting,81 fishing, gathering nuts and making weapons could not become separate trades unless part of what each person procured were saved from immediate consumption. Only then can someone who devotes himself to one kind of thing get the others as he wants them, and let one day's good luck cover the next day's shortfall. The minute subdivision of labor that marks high civilization, and that high civilization needs, requires a great amount of wealth of all kinds constantly held in stock or in transit. A resident of a civilized community can exchange his labor at will with the labor of those around him and of men in the most remote parts of the globe. That requires stocks of goods in warehouses, in stores, in the holds of ships and in railway cars. It is like the city dweller who draws a cupful of water at will: thousands of millions of gallons must be stored in reservoirs and moving through miles of pipe.

But to say that capital may limit the form of industry or the productiveness of industry is a very different thing from saying that capital limits industry. For the dictum of the current political economy that “capital limits industry,” means not that capital limits the form of labor or the productiveness of labor, but that it limits the exertion of labor. This proposition derives its plausibility from the assumption that capital supplies labor with materials and maintenance—an assumption that we have seen to be unfounded, and which is indeed transparently preposterous the moment it is remembered that capital is produced by labor, and hence that there must be labor before there can be capital. Capital may limit the form of industry and the productiveness of industry; but this is not to say that there could be no industry without capital, any more than it is to say that without the power82 loom there could be no weaving; without the sewing machine no sewing; no cultivation without the plow; or that in a community of one, like that of Robinson Crusoe, there could be no labor because there could be no exchange.

But to say that capital may limit the form or productiveness of industry is very different from saying that capital limits industry. When current economics says “capital limits industry,” it does not mean that capital limits the form or productiveness of labor. It means that capital limits the exertion of labor. This proposition gets its plausibility from the assumption that capital supplies labor with materials and maintenance. We have seen that assumption is unfounded. It is plainly preposterous the moment we remember that labor produces capital, so there must be labor before there can be capital. Capital may limit the form and productiveness of industry. That does not mean there could be no industry without capital, any more than it means there could be no weaving without the power82 loom, no sewing without the sewing machine, or no cultivation without the plow. Nor does it mean that in a community of one, like Robinson Crusoe's, there could be no labor because there could be no exchange.

And to say that capital may limit the form and productiveness of industry is a different thing from saying that capital does. For the cases in which it can be truly said that the form of productiveness of the industry of a community is limited by its capital, will, I think, appear upon examination to be more theoretical than real. It is evident that in such a country as Mexico or Tunis the larger and more general use of capital would greatly change the forms of industry and enormously increase its productiveness; and it is often said of such countries that they need capital for the development of their resources. But is there not something back of this—a want which includes the want of capital? Is it not the rapacity and abuses of government, the insecurity of property, the ignorance and prejudice of the people, that prevent the accumulation and use of capital? Is not the real limitation in these things, and not in the want of capital, which would not be used even if placed there? We can, of course, imagine a community in which the want of capital would be the only obstacle to an increased productiveness of labor, but it is only by imagining a conjunction of conditions that seldom, if ever, occurs, except by accident or as a passing phase. A community in which capital has been swept away by war, conflagration, or convulsion of nature, and, possibly, a community composed of civilized people just settled in a new land, seem to me to furnish the only examples. Yet how quickly the capital habitually used is reproduced in a community that has been swept by war, has long been noticed, while the rapid production of the capital it can,83 or is disposed to use, is equally noticeable in the case of a new community.

And to say that capital may limit the form and productiveness of industry is different from saying that it does. On examination, I think, the cases where a community's industry is truly limited by its capital will prove more theoretical than real. In a country like Mexico or Tunis, wider and more general use of capital would clearly change the forms of industry and enormously raise its productiveness. People often say such countries need capital to develop their resources. But is there not something behind this, a want that includes the want of capital? Do not the rapacity and abuses of government, the insecurity of property, and the ignorance and prejudice of the people prevent capital from being accumulated and used? Is not the real limit in these things, and not in the want of capital, which would go unused even if placed there? We can imagine a community where lack of capital is the only obstacle to more productive labor. But only by imagining a combination of conditions that seldom if ever occurs, except by accident or for a passing time. The only examples, I think, are a community whose capital has been swept away by war, fire or natural disaster, and perhaps a community of civilized people just settled in a new land. It has long been noticed how quickly a community swept by war reproduces the capital it habitually used. A new community, likewise, quickly produces all the capital it can,83 or is disposed to, use.

I am unable to think of any other than such rare and passing conditions in which the productiveness of labor is really limited by the want of capital. For, although there may be in a community individuals who from want of capital cannot apply their labor as efficiently as they would, yet so long as there is a sufficiency of capital in the community at large, the real limitation is not the want of capital, but the want of its proper distribution. If bad government rob the laborer of his capital, if unjust laws take from the producer the wealth with which he would assist production, and hand it over to those who are mere pensioners upon industry, the real limitation to the effectiveness of labor is in misgovernment, and not in want of capital. And so of ignorance, or custom, or other conditions which prevent the use of capital. It is they, not the want of capital, that really constitute the limitation. To give a circular saw to a Terra del Fuegan, a locomotive to a Bedouin Arab, or a sewing machine to a Flathead squaw, would not be to add to the efficiency of their labor. Neither does it seem possible by giving anything else to add to their capital, for any wealth beyond what they had been accustomed to use as capital would be consumed or suffered to waste. It is not the want of seeds and tools that keeps the Apache and the Sioux from cultivating the soil. If provided with seeds and tools they would not use them productively unless at the same time restrained from wandering and taught to cultivate the soil. If all the capital of a London were given them in their present condition, it would simply cease to be capital, for they would only use productively such infinitesimal part as might assist in the chase, and would not even use that until all the edible part of the stock thus showered upon them had been consumed. Yet such capital as they do want84 they manage to acquire, and in some forms in spite of the greatest difficulties. These wild tribes hunt and fight with the best weapons that American and English factories produce, keeping up with the latest improvements. It is only as they became civilized that they would care for such other capital as the civilized state requires, or that it would be of any use to them.

I cannot think of any conditions, other than such rare and passing ones, in which the productiveness of labor is really limited by lack of capital. A community may contain individuals who lack the capital to apply their labor as efficiently as they would like. But so long as the community as a whole has enough capital, the real limit is not a want of capital but a want of proper distribution. Suppose bad government robs the laborer of his capital. Suppose unjust laws take from the producer the wealth he would use to assist production and hand it to those who are mere pensioners on industry. Then the real limit on the effectiveness of labor is misgovernment, not lack of capital. The same goes for ignorance, custom and other conditions that prevent the use of capital. These, not the want of capital, are the real limit. Giving a circular saw to a Terra del Fuegan, a locomotive to a Bedouin Arab, or a sewing machine to a Flathead woman would not make their labor more efficient. Nor does it seem possible to add to their capital by giving them anything else, because any wealth beyond what they were used to employing as capital would be consumed or left to waste. The Apache and the Sioux do not lack seeds and tools to cultivate the soil. If given seeds and tools they would not use them productively unless they were also kept from wandering and taught to cultivate. If all the capital of a London were given them as they are now, it would simply cease to be capital. They would use productively only the tiny part that might help in the chase, and not even that until they had eaten all the edible part of the stock showered on them. Yet such capital as they do want84 they manage to acquire, in some forms despite the greatest difficulties. These wild tribes hunt and fight with the best weapons American and English factories produce, keeping up with the latest improvements. Only as they became civilized would they care for the other capital that a civilized state requires, or would it be of any use to them.

In the reign of George IV., some returning missionaries took with them to England a New Zealand chief called Hongi. His noble appearance and beautiful tatooing attracted much attention, and when about to return to his people he was presented by the monarch and some of the religious societies with a considerable stock of tools, agricultural instruments, and seeds. The grateful New Zealander did use this capital in the production of food, but it was in a manner of which his English entertainers little dreamed. In Sydney, on his way back, he exchanged it all for arms and ammunition, with which, on getting home, he began war against another tribe with such success that on the first battle field three hundred of his prisoners were cooked and eaten, Hongi having preluded the main repast by scooping out and swallowing the eyes and sucking the warm blood of his mortally wounded adversary, the opposing chief.13 But now that their once constant wars have ceased, and the remnant of the Maoris have largely adopted European habits, there are among them many who have and use considerable amounts of capital.

In the reign of George IV, some returning missionaries took a New Zealand chief named Hongi with them to England. His noble appearance and beautiful tattooing drew much attention. When he was about to return to his people, the king and some of the religious societies gave him a considerable stock of tools, farm implements and seeds. The grateful New Zealander did use this capital to produce food, but in a way his English hosts little dreamed of. In Sydney, on his way back, he traded it all for arms and ammunition. On getting home he used them to make war on another tribe, with such success that on the first battlefield three hundred of his prisoners were cooked and eaten. Hongi opened the main feast by scooping out and swallowing the eyes of his mortally wounded adversary, the opposing chief, and sucking his warm blood.13 But now that their once constant wars have ceased, and the remnant of the Maoris have largely adopted European habits, many of them have and use considerable amounts of capital.

Likewise it would be a mistake to attribute the simple modes of production and exchange which are resorted to in new communities solely to a want of capital. These modes, which require little capital, are in themselves rude and inefficient, but when the conditions of such85 communities are considered, they will be found in reality the most effective. A great factory with all the latest improvements is the most efficient instrument that has yet been devised for turning wool or cotton into cloth, but only so where large quantities are to be made. The cloth required for a little village could be made with far less labor by the spinning wheel and hand loom. A perfecting press will, for each man required, print many thousand impressions while a man and a boy would be printing a hundred with a Stanhope or Franklin press; yet to work off the small edition of a country newspaper the old-fashioned press is by far the most efficient machine. To carry occasionally two or three passengers, a canoe is a better instrument than a steamboat; a few sacks of flour can be transported with less expenditure of labor by a pack horse than by a railroad train; to put a great stock of goods into a cross-roads store in the backwoods would be but to waste capital. And, generally, it will be found that the rude devices of production and exchange which obtain among the sparse populations of new countries result not so much from the want of capital as from inability profitably to employ it.

Likewise it would be a mistake to blame the simple modes of production and exchange in new communities solely on a want of capital. These modes need little capital and are rude and inefficient in themselves. But given the conditions of such85 communities, they turn out to be the most effective. A great factory with all the latest improvements is the most efficient instrument yet devised for turning wool or cotton into cloth, but only where large quantities are wanted. A little village could have its cloth made with far less labor by spinning wheel and hand loom. A perfecting press prints many thousand impressions for each man it requires, while a man and a boy would print a hundred with a Stanhope or Franklin press. Yet for the small run of a country newspaper, the old-fashioned press is by far the most efficient machine. To carry two or three passengers now and then, a canoe is better than a steamboat. A few sacks of flour can be moved with less labor by a pack horse than by a railroad train. Putting a great stock of goods into a cross-roads store in the backwoods would only waste capital. Generally, the rude methods of production and exchange among the sparse populations of new countries come less from want of capital than from inability to employ it profitably.

As, no matter how much water is poured in, there can never be in a bucket more than a bucketful, so no greater amount of wealth will be used as capital than is required by the machinery of production and exchange that under all the existing conditions—intelligence, habit, security, density of population, etc.—best suit the people. And I am inclined to think that as a general rule this amount will be had—that the social organism secretes, as it were, the necessary amount of capital just as the human organism in a healthy condition secretes the requisite fat.

No matter how much water is poured in, a bucket never holds more than a bucketful. In the same way, no more wealth will be used as capital than the machinery of production and exchange requires. That machinery is the kind that best suits the people under all existing conditions: intelligence, habit, security, density of population and the rest. I am inclined to think that as a general rule this amount will be had. The social organism secretes the necessary amount of capital, as it were, just as a healthy human body secretes the fat it needs.

But whether the amount of capital ever does limit the productiveness of industry, and thus fix a maximum which wages cannot exceed, it is evident that it is not86 from any scarcity of capital that the poverty of the masses in civilized countries proceeds. For not only do wages nowhere reach the limit fixed by the productiveness of industry, but wages are relatively the lowest where capital is most abundant. The tools and machinery of production are in all the most progressive countries evidently in excess of the use made of them, and any prospect of remunerative employment brings out more than the capital needed. The bucket is not only full; it is overflowing. So evident is this, that not only among the ignorant, but by men of high economic reputation, is industrial depression attributed to the abundance of machinery and the accumulation of capital; and war, which is the destruction of capital, is looked upon as the cause of brisk trade and high wages—an idea strangely enough, so great is the confusion of thought on such matters, countenanced by many who hold that capital employs labor and pays wages.

Whether the amount of capital ever does limit the productiveness of industry, and so fix a maximum that wages cannot exceed, one thing is evident. The poverty of the masses in civilized countries does not come from86 any scarcity of capital. Wages nowhere reach the limit set by the productiveness of industry, and they are relatively lowest where capital is most abundant. In all the most progressive countries the tools and machinery of production clearly exceed the use made of them, and any prospect of paying work brings out more capital than is needed. The bucket is not only full but overflowing. This is so evident that not only the ignorant but men of high economic reputation blame industrial depression on abundant machinery and accumulated capital. They look on war, which destroys capital, as the cause of brisk trade and high wages. So great is the confusion of thought on these matters that, strangely enough, many who hold that capital employs labor and pays wages share this idea.

Our purpose in this inquiry is to solve the problem to which so many self-contradictory answers are given. In ascertaining clearly what capital really is and what capital really does, we have made the first, and an all-important step. But it is only a first step. Let us recapitulate and proceed.

Our purpose in this inquiry is to solve the problem to which so many self-contradictory answers are given. By finding out clearly what capital really is and what it really does, we have taken the first step, and an all-important one. But it is only a first step. Let us recapitulate and go on.

We have seen that the current theory that wages depend upon the ratio between the number of laborers and the amount of capital devoted to the employment of labor is inconsistent with the general fact that wages and interest do not rise and fall inversely, but conjointly.

We have seen that the current theory, that wages depend on the ratio between the number of laborers and the capital devoted to employing labor, conflicts with a general fact. Wages and interest do not rise and fall in opposite directions but together.

This discrepancy having led us to an examination of the grounds of the theory, we have seen, further, that, contrary to the current idea, wages are not drawn from capital at all, but come directly from the produce of the labor for which they are paid. We have seen that capi87tal does not advance wages or subsist laborers, but that its functions are to assist labor in production with tools, seed, etc., and with the wealth required to carry on exchanges.

That conflict led us to examine the grounds of the theory. We have seen, further, that contrary to the current idea, wages are not drawn from capital at all but come directly from the produce of the labor for which they are paid. We have seen that capital87 does not advance wages or support laborers. Its functions are to assist labor in production with tools, seed and the like, and with the wealth needed to carry on exchanges.

We are thus irresistibly led to practical conclusions so important as amply to justify the pains taken to make sure of them.

We are thus led irresistibly to practical conclusions so important that they amply justify the pains taken to make sure of them.

For if wages are drawn, not from capital, but from the produce of labor, the current theories as to the relations of capital and labor are invalid, and all remedies, whether proposed by professors of political economy or workingmen, which look to the alleviation of poverty either by the increase of capital or the restriction of the number of laborers or the efficiency of their work, must be condemned.

If wages are drawn not from capital but from the produce of labor, the current theories about the relations of capital and labor are invalid. We must then condemn every remedy for poverty, whether proposed by professors of economics or by workingmen, that looks to increasing capital, limiting the number of laborers, or raising the efficiency of their work.

If each laborer in performing the labor really creates the fund from which his wages are drawn, then wages cannot be diminished by the increase of laborers, but, on the contrary, as the efficiency of labor manifestly increases with the number of laborers, the more laborers, other things being equal, the higher should wages be.

If each laborer, in doing his labor, really creates the fund from which his wages are drawn, then more laborers cannot reduce wages. The efficiency of labor plainly rises with the number of laborers. So, other things being equal, the more laborers there are, the higher wages should be.

But this necessary proviso, “other things being equal,” brings us to a question which must be considered and disposed of before we can further proceed. That question is, Do the productive powers of nature tend to diminish with the increasing drafts made upon them by increasing population?

But the necessary proviso “other things being equal” brings us to a question we must consider and settle before going further. Do the productive powers of nature tend to diminish as growing population draws more heavily on them?