Part 5
Evidently the science of Economics, which comprehends the interests of all and not merely those of a private business, cannot classify slaves as Wealth. Since they are not and cannot be Artificial Objects, but are human beings, they belong of necessity in the Man or Labor category. They differ radically from animals. In the wild state animals belong Economically in the category of Land (Natural Resources) as truly as wild vegetation does; in the domesticated state they are Wealth (Artificial Objects) as truly as produced vegetation is; and if used to produce Wealth they are Capital (Wealth used for the production of Wealth) as truly as machinery is. But slaves in their “wild state” are not Natural Resources for the use of Man, as wild animals are; they are human beings, and as such they belong in the Man category.
As used in business accounts and colloquially, the word “wealth” does, as indicated above, include some kinds of true Economic Wealth, such as “store goods,” buildings, farm produce, machinery and other Artificial Objects. But in those undiscriminating uses it also includes such Natural Resources (Land) as mineral deposits, water fronts, building sites, railroad rights of way; also mere titles to various kinds of property interests, such as bonds, mortgages, deeds, bank balances, money in hand and corporation stocks.
Some of the Economically desirable things which are included 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.