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CHAPTER III. On Capital.
It is erroneous to suppose that Capital and Money are synonymous. Capital is sometimes spoken of as if it were synonymous with money ; if this were so it would not be true that Capital was one of the three requisites of the production of wealth, for money in itself does not assist in the production of wealth. A few pages back the use and functions of money were explained, and if this explanation is borne in mind it becomes evident that money is not identical with either wealth or capital. It must not be forgotten that money is a measure of value and a medium of exchange; in other words that it is a substance which is selected by universal consent to serve as a standard by which the value of all other commodities may be estimated, and which consequently may be exchanged for all other commodities.
A Definition of Capital. Capital may be defined as that part of wealth which is saved in order to assist future production.
An example of the service which Capital renders to Production. Agricultural operations could not be carried on unless the labourers were supported by wealth which had been previously accumulated. Many months elapse between the sowing of the seed and the time when the produce of that seed is converted into a loaf of bread. It is therefore evident that the labourers cannot live upon that which their labour is assisting to produce ; but they are maintained by that wealth which their labour or the labour of others has previously produced. This wealth is Capital. Formerly the service which the wealth produced by past labour rendered to future production was more apparent; because farmers, instead of paying their labourers in money, paid them by giving them so much corn, potatoes, beer, cider, etc. This was called paying “in kind.” A somewhat similar method of paying labourers is also known as “truck," which has been restrained and regulated by many Acts of • Parliament. It has, however, been found more convenient for the farmer to exchange his wealth for money, and to distribute that portion of it which he gives as wages to his workpeople in money also. Wages are now almost universally paid in money; this money is the representative of wealth previously accumulated, and renders the same assistance to future production as the food with which the labourer was formerly remunerated. Let it then be remembered that the wealth which is distributed as wages to productive labourers is capital, and that it renders an essential service to production by maintaining the labourer whilst he is engaged in assisting future production. It must always be remembered that the money, in which the wages are distributed, is not capital : but the food, clothing, etc., for which this money is exchanged, are capital. Gold and silver cannot of themselves maintain labour ; they are useless unless they can be exchanged for the necessaries of life. During the hardships suffered by the French army in the retreat from Moscow, the difficulties of carriage made it necessary to abandon the treasure-chest. Its contents were seized by some of the soldiers who filled their pockets and knapsacks with the gold. But they did not keep it long; it was entirely useless in alleviating their wretchedness; the weight of it, in fact, increase their distress. They soon flung it out upon the snow rather than endure the burden of carrying it. This incident illustrates the uselessness of money unless it can be exchanged for commodities which are capable in themselves of supporting life or increasing its pleasures.
The Wages-fund. The wealth which is expended in wages is called the wages-fund. It must be remembered
that the wealth expended in wages is not all employed to support productive labourers. A considerable proportion of it is distributed to those whose labour is strictly unproductive. Only that portion of the wages-fund which supports productive labour, is capital. The wages-fund,
-, therefore, resolves itself into two leading divisions : Ist, that which súpports productive labour and forms a part of the general capital of the country; and 2nd, that which supports labour not creative of wealth, and goes in unproductive expenditure.
An example of another service which Capital renders to Production. The maintenance of the labourer is not the only service which capital renders to the production of wealth. All wealth which is set aside to assist future production is capital. Buildings, machinery, and tools which assist the production of wealth, constitute capital. Many manufactures cannot be profitably carried on without the erection of large buildings and costly machinery. Take for an example the case of the manufacture of woollen cloth. The manufacturer, besides the capital which he requires for wages, must also have a vast amount of capital in buildings, tools, and machinery. It must not be supposed that the whole wealth of the manufacturer is capital; a part of his wealth is spent in various luxuries ; that part, only, of his wealth is capital “which he designs to employ in carrying on fresh production.” In the words of Mr Mill, "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 labourers during the process. These are the services which present labour requires from past, and from the produce of past, labour. Whatever things are destined for this use- -destined to supply productive labour with these various pre-requisites—are capital.”
A demand for commodities not a demand for labour.
It was said above that the part of the wealth of the manufacturer which he spends in luxuries does not constitute capital, but that part only is capital which is employed in carrying on fresh production. But it may be said that the wealth which he gives for luxuries maintains labour. If, for instance, he spends £50 upon lace, may it not be asserted that this £50 maintains the labourers who make the lace, and that therefore it is employed as capital, exactly in the same way as if the manufacturer had employed it in his own business?
This brings us to a most important proposition respecting capital, one which it is essential that the student should thoroughly understand.
The proposition is this—A demand for commodities is not a demand for labour.
The demand for labour is determined by the amount of capital and other wealth directly devoted to the remuneration of labour : the demand for commodities simply determines in what direction labour shall be employed.
An example. The truth of these assertions can best be shewn by examples. Let us suppose that a manufacturer of woollen cloth is in the habit of spending £50 annually in lace. What does it matter, say some, whether he spend this £50 in lace or whether he use it to employ more labourers in his own business? Does not the £ 50 spent in lace maintain the labourers who make the lace, just the same as it would maintain the labourers who make cloth, if the manufacturer used the money in extending his own business? If he ceased buying the lace, for the sake of employing more clothmakers, would there not be simply a transfer of the £ 50 from the lacemakers to the clothmakers? In order to find the right answer to these questions let us imagine what would actually take place if the manufacturer ceased buying the lace, and employed the £50 in paying the wages of an additional number of clothmakers. The lace manufacturer in consequence of the diminished demand for lace would diminish the production, and would withdraw from his business an amount of capital corresponding to the diminished demand. As there is no reason to suppose that the lacemaker would, on losing some of his custom, become more extravagant, or would cease to desire to derive income from the capital which the diminished demand has caused him to withdraw from his own business, it may be assumed that he would invest this capital in some other industry. This capital is not the same as that which his former customer, the woollen cloth manufacturer, is now paying his own labourers with; it is a second capital ; and in the place of £50 employed in maintaining labour, there is now £ 100 so employed. There is no transfer from lacemakers to clothmakers. There is fresh employment for the clothmakers and a transfer from the lacemakers to some other labourers. (Principles of Political Economy, vol. I. p. 102.)
This example illustrates the fallacy of the popular notion that luxurious expenditure is good for trade. No benefit is conferred upon the wages-receiving classes by the consumption of luxuries; and if the money given for luxuries be withdrawn from such an employment as farming the labourers suffer in two ways. In the first place, as shewn in the above example, the wages-fund is diminished by an amount corresponding to that given for the luxuries ; and in the second place the production of wealth and consequent reproduction of capital are checked.
Another example. This last point can be best explained by another example, which will further illustrate the truth of the assertion that a demand for commodities is not a demand for labour. A farmer sells his wheat for the purpose of purchasing commodities. If these commodities are consumed unproductively, an amount exactly equal