colloquially and for business accountings in the term “wealth” are
truly Wealth in the technical Economic sense, let us repeat, since
they are Artificial Objects produced by Man from and upon Natural
Resources--that is to say, by Labor from and upon Land. But others
are not at all in the Wealth category, and putting them there has no
other Economic result than confusion. Such of them as consist solely
of Natural Resources belong in the Land category. Artificial Objects
alone belong in the Wealth category. Deeds, mortgages, bank balances,
money in hand, corporation stocks and the like, belong in no Economic
category at all below the surface of customary titles to property.
They are nothing but evidences of legal title to property of any
kind--Natural Resources, Artificial Objects, Man himself when and where
ownership of Man by Man is conventional.
To illustrate that species of confusion, for the importance of precise
discrimination in Economic thought cannot be overemphasized in Economic
study, a farm is often accounted “wealth” or “capital” in colloquial
and business usage. So of its purchase “price” or “value,” and also of
a mortgage upon it. Yet its purchase price and a mortgage are merely
evidences of title to property. Neither of them is Wealth or Capital
within the meaning of precise Economic terminology. If they were, the
more the mortgages upon a farm the more valuable it would be. A farm
the purchase price of which is ten thousand dollars would be worth
fifteen thousand if it were mortgaged for five, and seventeen if it
carried a second mortgage for two. And that would be absurd. The farm
itself really consists of a combination of Artificial Objects and
Natural Resources--that is to say, of Wealth and also of Land--two
radically different things as matter of Economic discrimination. Its
site is a Natural Resource, its untilled soil is a Natural Resource,
the space which it and its surrounding atmosphere occupy are Natural
Resources. All those characteristics are in the Land category. But its
artificial enrichments of soil by tillage or other human activity, and
artificial replacements of exhausted or partly exhausted fertility, the
fencing and the ditching and the buildings, what are they? what can
they be but Artificial Objects, and therefore in the Wealth category?
Nor is this conclusion vitiated by the fact that permanent improvements
of the soil or location by means of drainage or “made land” or the
like may with lapse of time lose their artificial characteristics in
consequence of an ultimate natural merging with the site.
A different type of illustration, though identical in Economic
terminology, would be an urban residence or a building for business.
Its site, the enveloping atmosphere, the space--all these are in the
Economic category of Natural Resources or Land. But the building is
an Artificial Object and therefore in the category of Wealth. If the
building burn down or be torn down, then the property--the site and the
space it commands--is in the category of Land alone. In no respect can
the site and the space it commands be Wealth in the technical Economic
sense--in the discriminative sense which identifies basic differences.
In that sense nothing is or can be Wealth except Artificial Objects
produced by Man from and upon Natural Resources. The common
characteristic of Wealth in the technical Economic sense is that
it consists of natural substances which have been adapted by human
exertion to human uses. Another term would serve as well, but no term
would serve if used also to designate something radically different.
IV. SECONDARY CATEGORIES
In Economic analysis Wealth takes on two aspects. They are
distinguishable by secondary classifications. One is Wealth in the
possession of consumers; the other is Wealth in process of utilization
by Labor for the production of further Wealth. For the former no
technical Economic term is in use; for the latter the technical
Economic term is Capital.
1--_Capital_
Capital is a highly important technical term in Economics. It must
not be confused, therefore, with the same word as loosely used in
business accounts, where, like the term for its parent category,
Wealth, it mingles such essentially different things as Wealth and
Land--Artificial Products and Natural Resources. And, as observed in a
preceding paragraph, not only such different things as Wealth and Land,
but in some circumstances Labor also.
Such undiscriminating uses of the term Capital are doubtless defensible
enough in business accountings; for in private business anything may
be thought of as business “capital” if it can be summarized in terms
of Money. But for Economics as a comprehensive social science, the
dumping into the same basic category of such radically different things
as Labor, Land and Wealth--Man, Natural Resources and Artificial
Objects--is indefensible and miraculously confusing.
Limited strictly to distinguishing Wealth consumed in the process
of producing more Wealth--Artificial Objects devoted to further
production of Artificial Objects,--the term Capital is a convenient
subclassification of some kinds of Wealth. To appreciate that
characterization one need but think, for instance, of any sort of
productive machinery. Is it not an Artificial Object? Is it not
produced by Labor? Is it not produced from and upon Land? Is it
not used by Labor upon Land for further production of Artificial
Objects? And are not those observations true also of seed gathered
and saved for planting? of minerals mined for metal? of metal to be
transformed into productive machinery? of food material turned into
food at a restaurant? Are they not true of every kind of intermediate
product--from Machinery (which, though finished as machinery, is
only an intermediate factor in the process of producing Wealth for
ultimate consumption), back to the rawest of artificial raw materials
and forward through all gradations to the food on a dinner table, the
clothing on a diner’s body, the floor under his feet and the roof over
his head?
One obsession regarding Capital, even when the term is used with
Economic accuracy, is that it consists of saved Wealth. There is no
such process, in any literal sense, as saving Wealth--Artificial
Objects--except for ripening or reproduction purposes. Even for those
purposes the saving is in the nature of using, its object being the
production of more Wealth rather than preserving this Wealth. Any
saving of Wealth in the Economic sense, consists in utilizing it in the
Productive Process.
Are art objects exceptional? Not such as are relatively reproducible.
Only “uniques” are exceptions, if indeed they may be regarded as within
the boundaries of Economics. Saved over long periods, hundreds upon
hundreds of years in some instances, these would seem to be out of the
field of contemporary Economics. What gives them their extraordinary
value? The same kind of non-Economic sentiment, on a higher plane,
perhaps, that gives extraordinary value to heirlooms. Such products are
not Wealth in the Economic sense any more than sacred tombstones are.
Though produced by Man from and upon Natural Resources, they cannot be
satisfactorily reproduced. They are closer to the nonproducible Natural
Resource category than to the reproducible Wealth category.
That titles to Wealth may be saved is true enough. But in no extensive
sense can Wealth itself be saved. Unless consumed in the production of
more Wealth, or in the satisfaction of human desire, Wealth goes to
waste.
Titles to Wealth, except such as are specific like the title to a
particular house, are titles not to existing Wealth but to future
Wealth. A title to a house, being specific, testifies to property
rights in a particular structure which is in process of consumption.
A title to its site is not a title to Wealth, but to Land, which,
however, may be exchanged for Wealth. Such general titles as Money
obligations declare, are titles to anything upon the market when
demanded, including Wealth that may have been produced years after
the total consumption of everything for which the Money title was
originally exchanged. One’s “savings” in the form of Money or credits
are not Wealth produced but titles to Wealth not yet delivered to him,
and perhaps yet to be produced.
Only in the sense of withholding for use or of using or permitting its
use in further Production of Wealth, is Wealth actually saved; and
such saving is part of the Productive Process. It is a dedication of
that portion of produced Wealth to service in the production of further
Wealth. Wealth so dedicated is Capital.
A familiar example is seed saved for sowing. Also seed sown for
growing. And seed in the barn awaiting the sowing season, that too is
Capital. Seed in the field sprouting and growing and producing grain
for the coming harvest, is likewise Capital. The ripened grain ready
for harvest is Capital in turn, for it, too, is Wealth to be utilized
in the production of more Wealth--bread or seed or both.
And so of mechanisms, which grow not as seeds do but only as the hand
of the mechanic coaxes them into shape. When, for example, a machine
which aids in the flouring of grain is produced, he who owns the
machine owns Capital. He has saved it by putting purchasing power into
a productive implement instead of putting it into ultimate products
for his own consumption. Owning the machine, he owns bread-producing
Capital. Using it, he consumes it in the production of bread.
A coffeemill, for further illustration, is a machine produced by Labor
from and upon Land, which, when Labor uses it for grinding coffee
(another product of Labor from and upon Land) brings the latter product
nearer in serviceability to the ultimate consumer.
For a complex illustration, consider a railway passenger car. It is
Wealth because it is an Artificial Object produced by Labor from and
upon Land. But does it fall into that subdivision of Wealth which
is distinguished as Capital--Wealth used for the production of more
Wealth? As to its owners it is Capital, for they are using it to
increase their share of Wealth in process of production; but as to
the aggregate of social Wealth, its passengers, if not using it for
productive purposes, are consuming Wealth unproductively. To the extent
that the passengers are not on productive missions, but are gratifying
their own wants, a passenger-car is in Economic contemplation Wealth
in process of ultimate consumption to satisfy wants; to the extent
that its passengers are on productive missions it is Wealth devoted to
the Production of more Wealth, and therefore in the subcategory which
is distinguished as Capital. The fact that part of its use is for
Production and another for enjoyment does not disturb the principle
which distinguishes Capital from Wealth in process of ultimate
consumption for the satisfaction of wants.
Capital is Wealth in forms that are consumed in the further or better
production of Wealth toward final forms for ultimate consumption. To
save such Wealth in the sense of preventing its consumption would be to
waste it; but to permit its consumption in the Productive Process is to
give it serviceability.
So with all other details of the Productive Process, from natural raw
materials to and including delivery to ultimate consumers. Capital is
produced by Labor from and upon Land and in forms of Wealth--either
Artificial materials or Artificial contrivances--which, being adapted
and devoted to further Production of Wealth, are part of Labor’s
artificial materials or mechanism or both--Wealth produced for
augmenting Productive power. In Economic phrasing, Wealth used in the
Production of Wealth is Capital.
2--_Trade_
Another prominent sub-classification of secondary facts involved in
the Productive Process is inseparably associated with Capital. This
subordinate category is Trade, to which our attention was directed in
the second stage of our delving down from the surface of Economics to
its Basic Facts.
Trade is an essential part of the Productive Process in Economics.
It is inseparable from Labor specialization. If some Labor be
devoted to the Production of one kind of Artificial Objects, one
kind of Wealth--food, for instance--the producers of such Wealth
must satisfy their desires by trading with other kinds of Labor
specialists--clothing producers, for instance--for what the latter make
and the former do not make. Evidently, then, the more minutely Labor
takes on specialized activities, the more extensive and intensive must
Trade become. And when, as in our civilization, Labor is so minutely
specialized that nobody can satisfy his Economic desires by his own
productive activities directly, Trade is an indispensable part of the
Productive Process.
In form it is an interchange of commodities; but in essence it is, as
already explained, an interchange of Labor functions--of human services.
Springing out of a manifestation of natural law which is rightly
distinguished in Economics as “division of labor,” and thus inspiring
and facilitating specialization in the Production of Wealth, Trade is a
natural phenomenon. Within manifest limits and without extra exertion
two producers can produce more than twice as much as one, four more
than twice as much as two, and so on, subject only to the limitations
of Natural Resources. By exchanging products they therefore naturally
multiply their productive powers.
For a crude illustration, is it not plain that two frontiersmen working
cooperatively can build a habitation for each quicker and better than
either could build one for himself? Or two messengers, each charged
with one errand a mile away in one direction from a central point
and another a mile away in the opposite direction, can they not do
the four errands twice as quickly and easily, even if not more than
twice, if they divide their functions? By such division each messenger
would walk one mile out and one back, two for each and four in all,
delivering four messages; whereas, without such division, each would
travel two miles out (one in each direction) and two miles back, four
for each and eight in all. In addition to the saving of time and
energy, each will have saved productive capabilities too subtle for
specific enumeration.
The principle of those illustrations applies to the whole Productive
Process. By division of Labor, that is to say, by Labor specialization,
Economic accomplishment is multiplied beyond all the possibilities of
isolated individual production.
But division of Labor would be useless were it not for Trade. Each
of those frontiersmen must trade his share in the other’s habitation
for the other’s share in his habitation; each of those messengers
must exchange his claim to compensation for delivering one of the
other’s two messages for the other’s claim to compensation for
delivering one of his. This, then, is the sum and substance of Trade
in Economics--adjustments of compensation for specialized Production
through division of Labor.
The effect is magical. By division of Labor and Trade the single
individual becomes a vital part of a comprehensive human organism, of
a greater man, of the Social or Economic Man--a Man of almost infinite
Economic powers.
Those two kinds of Economic energy, making and trading, permeate the
multitudinous phenomena of that Productive Process in the course
of which Man draws forth Artificial Objects from and upon Natural
Resources, for the satisfaction of human desires; or, to use the
technical Economic terms, in the course of which Labor produces Wealth
from and upon Land.
3--_Utility, Value, Money, Price, Banks_
In connection with division of Labor and Trade we are brought into
contact with the phenomena of Economic Utility and Economic Value.
Utility is an absolute term indicative of essential desirability. Value
is a relative term indicative of the relative Utility of commodities;
or, more precisely, of the degree of desirability of one variety of
Labor or Land or form of Wealth in comparison with other varieties.
One variety of Labor or of Land or of Wealth may be twice as desirable
as another, unit for unit, in which case one unit of the former will
exchange in Trade for two units of the latter. Thus the relative
Utility of a Commodity is indicated in Trade by its Value.
For measuring Value in all its variations from least to greatest and
comparing these in the Productive Process, the Economic instrumentality
is Money, that surface layer of Economics through which we passed in
our exploration down to the Basic Facts; and the synonym for Value in
terms of Money is Price.
By way of illustrating Utility, Value and Price, one may say of a
quantity of Wealth in the specific form of wheat, that it has Utility
because it can be productively advanced to food or be used as seed
for the production of more wheat and so of more food; that it has
Value because its desirability is a subject of comparison with the
desirability of other desirable things in Trade; and that it commands
Price because it can pass from owner to owner through Trade in terms
of Money. Or of Land in the specific form of a building-site, one
may say that it has Utility, for it will afford natural support for
the foundations of a dwelling or a store or a factory or a railroad
right-of-way, and command the natural light and the air within its
boundaries; that it has Value because it can be exchanged for other
Land or for Artificial Objects; and that it has Price because Money or
credit in Money terms may be had for it upon transfer in Trade.
Yet a commodity may have the highest degree of Utility without having
Value or commanding a Price; or it may have great Value and command a
high Price though of little Utility.
Let us observe here a difference in meaning, often ignored by
advanced students, between the terms “utility” and desirableness.
Thoughtfully considered, “utility” defines an absolute quality,
whereas “desirableness” indicates a varying relationship. This obvious
difference is often confused by such terms as “total utility” for
Utility, and “marginal utility” for degrees of desirableness. For an
example, the “total utility” of water is great, because by natural law
man cannot live without water. Yet an abundant supply of water may
reduce its “marginal utility” to zero. On the other hand, the “total
utility” of diamonds is slight, whereas their “marginal utility,” due
on the one hand to their scarcity and on the other to human vanity, is
great. Such distinctions as “total utility” and “marginal utility” are
nothing but subclassifications of Utility. They serve no better purpose
for fundamental Economic study than the distinction which “utility”
and “desirability” express without as much risk of confusing thought.
Water, for example, is none the less useful because it is abundant,
even though its abundance seems to lessen the desire for it relatively
to desire for scarcer things. As to water, nothing is really lessened
but desire relatively to supply. Nor does the scarcity of diamonds add
an iota to their Utility. It adds only to the relative demand for them
and therefore only to their Value in Trade.
To repeat, then, the assertion made above, a commodity may have the
highest degree of Utility without having Value or commanding a Price;
or, it may have great Value and command a high Price though of little
Utility.
For further illustration of Value and Utility thus defined, nothing has
greater Utility--greater “total” Utility, if that professorial term be
preferred--than the sun; but the sun has no Value except as its Utility
is controlled by ownership of Land favorably situated with reference
to it; for it cannot be exchanged in Trade for anything else. Nor has
it Price, for Money cannot buy it. Though it may be bought and sold to
some degree indirectly through the buying and selling of Land which
controls the sun’s utility to that degree, this value is not sun-value
but Land Value.
Yet all commodities--whether in the Wealth class, as a house or food;
or the Land class, as a natural building-site, or an ore deposit, or
soil fertility, or the sun to the degree that its light and heat are
owned through ownership of Land--have Utility, Value and Price. The
last of the three is expressed in terms of Money.
Money is the common medium of Trade. Where and when Money is in use, he
who wishes to trade a hat for shoes need not hunt for somebody who has
shoes but wants a hat instead; all he need do is first to find some one
who has shoes and wants Money. And since persons who want Money (which
as a common medium of Trade is in effect everything in the channels
of Trade) are so many in comparison with those who at a given time
want shoes, Money infinitely diminishes the difficulties of trading
commodities.
Money is also a common denominator of Value, as we have already
observed. Without it each of us would be obliged to express the Value
of each exchangeable object in the complicated terms of all other
exchangeable objects. We should have to say, for example, that a hat
has the Value of a pair of shoes or of a chair or of an umbrella and so
on; that a pair of shoes has the Value of a hat or of a chair or of an
umbrella, and so on; that a chair has the Value of an umbrella or of a
pair of shoes or of a hat and so on; and that an umbrella has the Value
of a hat or a pair of shoes or of a chair and so on. And then we should
have to complicate the comparisons with specifications of quality. But
Money terms obviate the necessity for such vague and multifarious Value
comparisons as are here merely hinted at. They enable us to say that
a hat, a pair of shoes, a chair, an umbrella are each of the Value of
five dollars, or a pound sterling, or so many francs, according to the
names and fidelity to financial standards of Money pieces in the places
where we engage in Trade, and according also to the quality of the
commodities specified.
It should, however, be here repeated and emphasized, that Money pieces
in whatever form, be it coin or scrip, are themselves of slight
practical importance in the ramifications of Trade. Not tangible Money,
but the Money terms which measure and express the relative Values of
commodities--these play the great part.
In adjustments of Trade outside the pocketmoney class of transactions,
Money pieces do not serve to the extent of five per cent. Nearly all
those adjustments are effected by means of Money terms in books of
account and through the medium of checks and drafts and notes and bills
of exchange. These are in effect orders upon banks (one of the forms of
Labor) for the transfer of credits recorded in their books of account.
Banking is an improvement upon Money pieces in Trade, very much as
Money pieces are an improvement upon crude barter. It lifts the
Money-piece customs of Trade to book-keeping levels. If everybody
were a bank depositor, and every bank were connected with every other
by a perfected clearinghouse system, all necessity for Money pieces,
except for “pocket cash,” would vanish. In that event the check and
the promissory note and the bill of exchange, operating as orders to
the book-keepers of banks and clearinghouses, would effect transfers
of debits and credits the world over so that all Trade would be barter
systematized--plain barter freed from the obstructions incident to
barter in primitive Economic circumstances. Except for the use of
“pocket cash,” Money pieces of every kind, whether metal or paper,
would be like children’s toys to grown-ups.
4--_Balances of Trade_
Out of worldwide Trade, which, like Trade in narrower circles is
effected by means of Money terms in books of account and through
the medium of drafts by creditors upon debtors, a subclassification
has evolved in Economics of the business-customs type. This
subclassification alludes to a situation in Trade between the people
in the aggregate of one country and those of the other countries of
the world, in which the balance for that country is at any given time
on the credit side. Its exports exceed its imports. This situation is
known in the business circles of creditor countries as a “favorable
balance of trade.”