Land And Capital
( Originally Published Early 1900's )
1. Man and Nature.—Man first began to rise above the level of the beasts of the fields and forests, and to be able to satisfy an increasing number of wants, by entering into a sort of business partnership with Nature. He doubtless first scratched the soil with sticks when he began in a primitive way to cultivate vegetables and cereals, and for many thousand years his partner, Nature, was so generous and rich in re-sources that she demanded no share of the product, but old plots of ground long cultivated grew stingy and refused to produce the expected crop. Then man discovered that the land must be fed and that if he buried in it the offal of the animals which he had tamed, or even the dead compost of a swamp, Nature was pleased and the soil gave forth its old yield.
This first partnership between man and Nature is still in existence, and in all civilized countries many scientific men are constantly at work upon plans and methods to make a more effective use of the resources of man's rich partner. The partnership is so important that governments maintain special departments whose sole function is the conservation and development of nature's resources, whether in lands, mines, rivers or forests.
The products supplied by nature are commonly known as raw materials, and with very few exceptions are not consumed by man until he has effected some change in them by cooking them with heat or by changing their form thru manufacture. Among our primitive ancestors there was undoubtedly a time when their total wealth, all the utilities in their possession, consisted of raw materials. Today, however, men have developed such a multiplicity of wants and such great ability to satisfy them, that raw materials constitute a relatively small part of the existing store of wealth of economic goods in any civilized country.
2. Agriculture and the sciences.—In the writings of economists land is given the broadest possible meaning. It is made to include not only the soil and its undetached products such as forests and growing crops, but also all of nature's productive forces and riches such as rivers, lakes and mines. In economics Niagara Falls, the river Thames and the beautiful lakes of the north of Italy are all classified under the head of land.
Soil varies much in fertility and different pieces of land are adapted to the production of different crops because of differences in their chemical elements. In the last fifty years increasing attention has been given to the study of the chemistry of the soil, and as a result the productivity of many different kinds of land has been greatly increased. The scientists at work in the agricultural colleges and laboratories of America and Europe deserve most of the credit for this progress.
Only in recent years has the physics of the soil begun to receive the attention it deserves. Most farmers in the middle of the nineteenth century sup-posed that the destruction of weeds was the main object of hoeing and cultivating a crop. Now it is known that cultivation of the soil has a second and in many regions an equally important purpose, namely, the creation on the surface of a mulch of dust to pre-vent evaporation of moisture. The so-called dry farming now practised in certain arid regions is only one of the contributions made by the science of physics to the art of agriculture.
The science of bacteriology is also helping the farmer in his struggle with the soil. It was discovered, for instance, that soils long cultivated often contain harmful bacteria injurious to the crop; also that certain varieties of clover contain bacteria which extract fertilizing nitrogen from the atmosphere.
These and other natural sciences have been very helpful, not only in agriculture, but also in all the industries which have for their end the utilization of nature's resources.
3. Extractive industries.—The economist views nature as a storehouse of potential wealth, and all industries aiming at the production or development of that wealth are called extractive industries. Farming, cattle raising, mining, forestry, floriculture, lumbering, fishing, horticulture, are some of the most important extractive industries.
The products of the extractive industries are the primary raw materials of the manufacturing industries.
4. Climate and environment.—It is a well-known fact that men are very much influenced by the climate and environment in which they live. Indeed, most writers upon racial development look upon the climate of a country as one of the most important factors in the development of a people's character. The rigorous climate of New England and parts of Canada, subjecting the people to great extremes of atmosphere, must, it is believed, tend to produce a hardy, vigorous, self-reliant people. A changeable climate with an uncertain rainfall and great variations in temperature is said by some scientists to account in part for the much discussed nervousness of Americans. The stolidity of the English is attributed to the equable climate. Buckle in his famous "History of Civilization," which was never completed, found in the differences of climate and physical environment the main causes of the development of races characterized by different qualities.
The subject is a most interesting one, but in a treatise on economics we cannot give it much consideration. It is sufficient to know that climate and environment are important factors in the production of wealth. Theoretically they are a part of the land and cannot be bought or sold by themselves. Only in a slight degree has man been able to modify or improve a climate, but his physical environment is some-what under his control. Thus the introduction of artificial ice and the electric light have done much to make the lot of Europeans in the tropics more comfortable. The cultivation of forests in some regions tends to prevent the damaging floods of spring and the exhausting droughts of summer, and irrigation can be made to lessen the evils of an arid climate. That is why all governments have expended large sums for the production and conservation of forests and upon systems of irrigation.
It is comparatively recently that the conservation of natural resources has been recognized as a national duty in the United States. Appropriations for the improvement of rivers and harbors, not always judiciously expended, are of long standing; disbursements for these purposes in the five years ending June 30, 1915, amounted to nearly two hundred million dollars. The Fish Commission, later the Bureau of Fisheries, was established in 1871. Its annual disbursements are over one million dollars. The Bureau of Forestry spends over five million dollars annually, and devotes something more than one million dollars each year to the acquisition of lands for the protection of watersheds of navigable streams. The irrigation projects of the United States Government will involve a total outlay of about $175,000,000 and will bring three million acres under cultivation. About half of this program has already been carried out.
5. Rent.—The word rent is commonly applied to cover the payment made to the owner of land or of any economic good, except money, by some other man who enjoys the use of it. In economics the rent of land is always spoken of as economic rent or pure rent, for it is generally held that the rent of land is subject to a law unlike that which governs the rent of buildings and other economic goods. This difference will be discussed later.
It should be noted that all improvements of land which increase its productivity become really a part of the land; for example, the fences on a farm, the ditches which drain its meadows, fertilizers placed in the soil, all these things become a part of the land in which they are embodied.
In the last analysis rent is the enjoyment that man gets out of any utility or human service, and by some economists the term is used in this broad sense. The wages of a farmer's hired man are said to be really the rent paid for his services and represent in the last analysis the satisfaction which the farmer gets out of a man's work. If a man works for himself he gets the rent or usufruct of his own labor.
In this book we shall not use rent in this broad sense but shall employ it in its common usage.
6. Capital.—Unaided by tools and machinery man could make very little use of the riches of nature. So out of the stick which first scratched the soil was finally evolved the idea of the spade, the hoe, the plow and the great mass of 'agricultural machinery in the invention and perfection of which the United States has led the world. In the processes of manufacture there has been the same evolution from the sharpened stone to the steel knife and ax, from the simple hand tools of not many hundred years ago up to the intricate and almost automatic machines of the modern factory.
The reader should note that these tools and ma-chines are not wanted in themselves; that they do not gratify any human sense ; that they are wanted simply because they enable man to make more effective use of nature's resources and products. The farmer gets no pleasure out of a plow, but he does get satisfaction out of the knowledge that the thoro and deep turning of the soil is a step toward getting a good crop. The plow is merely an instrument of production. So are all tools and machines that play any part in the production of other goods. To the economist all such goods are known as production goods or capital.
7. Capital and waiting.-If we do a little clear thinking about the nature of the process by which our tools and machinery have been created, we shall discover that the men who made them were thinking especially about future needs or wants and were willing to wait for their compensation. While primitive man was sharpening a stone into an arrowhead or was making his first rough bow, he had to forego the pleasure of the hunt and of fishing and he must have fasted a bit unless he had previously accumulated a store of food. It is evident that while a man is en-gaged in the manufacture of a tool or machine he can-not be producing food, or making clothing for himself, or constructing or repairing his shelter. In order that he may not suffer privation he must have food and clothing sufficient to last him thru the period of production and must have his house in fit condition for work. These things are essential to the creation of the tool or machine. Hence to the economist all the food and clothing and buildings in a country which are consumed in the production of wealth are capital.
The farmer who sows corn in the spring is planning for the autumn's crop. The seed corn is capital quite as much as the seeder which drops it in the row.
In general economists define capital as any form of wealth, land excepted, which is used in the production of other wealth. All economic goods so used are called capital goods or production goods.
8. Capital goods.—In the production of most commodities the raw material is subject to several processes before a product is reached which is ready for final consumption. For example, the raw wheat be-comes part of the miller's capital and is ground into flour; then it becomes part of the baker's capital and is made into bread; finally it becomes part of the retailer's capital and is ready for distribution to the consumer. In the form of bread the economist thinks of it as a consumable good.
No absolute and clear line of distinction can be drawn between production and consumption goods, for loaves of bread consumed by men for the continuance of productive effort are manifestly playing a part in the productive process. But this is a matter concerning which there need be no refinement of discussion. Under the head of a country's capital economists usually include all its tools, machinery, shops and factories, stores and warehouses, all its harvested raw materials, its mined ores in the various stages of manufacture, and the stored foodstuffs.
It would be idle to attempt to determine just what part of a country's wealth is capital and what is not. It is sufficient to know that the idea of capital implies an element of time, a period of waiting, a postponement of consumption, consideration of future wants rather than of present.
9. The capital fund.—Among business men capital is always thought of in terms of money and very seldom in the strictly economic sense. If you ask what capital a man had when he started in business you will be told, say, $10,000. If a man needs more capital, he thinks of the amount of money he wants and will seek to borrow it.
We cannot here explain the close relation between the supply of capital goods and loanable funds, but such a relation does exist, as will be explained in later chapters. It is enough here for the reader to see that money, aided by credit, is merely a medium of exchange by the use of which men are able to get the capital or economic goods which they need for productive purposes.
A manufacturer's real capital is not the money he had at the start, but the factory and machines for which the money was exchanged. Reference to the subject is made here simply to put the reader on his guard. Business men and bankers often use the terms capital, money and loanable funds as if they were exactly the same thing, and for practical business purposes they are.
10. Capital and saving.—Capital is the result of saving,- and by saving is meant the production of more income than the producer consumes. It is evident that if a farmer consumes each year all that he produces he will not increase in wealth. If, however, he increases his effort to produce larger crops and practises economy, he may find in the fall that he has several hogs and steers more than he will need for the winter supply of food for his family. These hogs and steers constitute his savings. They are wealth, but he cannot save the wealth to advantage in that form. What he wants to save is not the hogs and steers but the value embodied in them, so he sells them for $500 and deposits the money in a bank. In the course of time the hogs and steers become the food of other people, but to the economist the important thing is that the farmer who produced them did not consume them, but instead saved their value and added it to the country's store of capital. The bank will seek to lend the $500 to some man who can use it profitably.
Without saving of the kind we have here illustrated there can be no increase in a country's capital or business. Saving is, therefore, a most important economic function; important to the individual, for if he does not save he makes no provision for sickness or old age and does not equip himself for the conduct of larger enterprises; important to society, for if a country's stock of capital does not increase there will be no expansion and no increase in the production of wealth unless men work harder and for longer hours. Any increase of the population in the country where the capital supply is not also increasing is al-most certain to be attended by a lowering of the standard of living and by a decline of wages.
The economist believes quite properly that too much emphasis cannot be put upon saving or thrift. Its practice should be thought of not as a negative value to be stigmatized as meanness or stinginess, but as a positive virtue contributing to the welfare of society. A than helps increase the country's wealth quite as much when he saves as when he works.
How much any man shall save is a question each individual must decide for himself. Our incomes are produced for our enjoyment. We have numerous wants and we do not really live unless many of them are gratified. Thus the problem of saving is really part of the problem of living.
11. Importance of capital.—As we have said in the previous section, the enlargement of a country's industry or business is dependent upon the increase of its stock of capital, and in any country the capital of which is not increasing there can be no increase of population without severe suffering among the poor and the unskilled.
The truth of the foregoing propositions may be easily illustrated if you take the concrete case of a single farmer. If he has only one horse, one plow, one cultivator, one reaper and so on thru the list of farm implements, it is evident that he cannot employ to advantage more than one hired man, no matter how large his farm. If he has a tillable farm of 160 acres he will not be able to cultivate it all. His lack of capital will compel him to turn much of it into pasture.
If an entire community is made up of farmers of this sort and if all of them are equally poor and thriftless, producing barely enough to support them-selves and their families, there will be no increase in the demand for labor in that community. But if gradually other farmers come in to buy these farms and, by using better methods of production, are able to get larger crops and, by the practice of economy in living, are able to have a surplus at the end of the season, before long some shrewd man will open a bank in that community and many of those farmers will be able to borrow even more money than they have saved and buy more implements, cultivate larger fields and hire more men.
What is true of this imaginary farming community is equally true of any industrial community. There cannot be more factories in the future and employment for more labor unless people today consume less than they produce and so create a capital fund. A shoemaker with only one bench and one set of tools cannot hire an assistant no matter how great the demand for his services. He must first save enough to buy another bench and set of tools or borrow from somebody else who has saved.
12. Capital demands labor.—As John Stuart Mill very clearly pointed out in his "Political Economy," the existence of unemployed capital is a prerequisite to any increase in a country's demand for labor. Mill stated this truth in what seemed a paradox as follows: "A demand for commodities is not a demand for labor." Inasmuch as the whole object of labor is to produce commodities for which there is a demand, this statement by Mill gave rise to much controversy and was quite commonly misunderstood.
Mill meant merely that there could be no demand for labor unless men had the capital necessary for the equipment of laborers with the needed tools and materials. The existing demand for commodities would surely determine the nature of the occupations in which the labor could be most profitably employed.
Evidently the demand for airplanes in the European war could not have brought about a demand for labor for their manufacture unless the necessary capital had been obtained by the different governments, and it is quite possible that this demand for airplanes, toward the construction of which the United States Congress appropriated over $600,000,000 in 1917, did not increase the total demand for labor in that year, but merely diverted the demand from other occupations to that of building airplanes.
13. Fixed and circulating capital.—When capital goods are in such form that they can be utilized for the production of any of the goods for which they are adapted, they are called free or circulating capital. Capital of this sort disappears when consumed, but reappears in the form of another commodity.
When, however, a capital good is given a permanent form it is called fixed capital.
For example, iron ore is free or circulating capital. It can be first converted into steel and then into a great variety of articles, such as rails, steamships, nails, hammers, axes, saws, when it becomes fixed capital. Lumber fresh from a sawmill is circulating capital; in the form of a house it is fixed capital.
The distinction is mainly one of degree, but is nevertheless important. A country's ability to carry thru new enterprises depends much upon the amount of circulating capital in its possession. If a large part of its capital is fixed, it cannot always be utilized to advantage. Fixed capital is always liable to be rendered worthless by progress, by new inventions, by changes in the market demand, etc. The automobile largely displaced the bicycle, and bicycle factories were at a considerable expense fitted up to manufacture automobiles. The great war in Europe, bringing to the United States an immense demand for munitions, caused many factories and ships to be refitted, the old equipment being discarded. All this could not have been done by the owners had not the Allies been willing to supply the capital by paying prices which yielded much more than an ordinary profit.
The money or credit in banks is commonly referred to as circulating or liquid capital. When a depositor withdraws his balance and buys the stocks and bonds of a corporation, he is said to invest it; in reality he has turned it into fixed capital.
The change of capital into a fixed form is always attended with the risk that the market demand for capital in that form may change and that the investment therefore will not yield the expected return.
14. Interest, the return on capital.—The rate of interest is commonly thought of as being a certain percentage of money paid for the use of money, and since money itself is not a productive agent, people of the olden times thought the money lender not de-serving of compensation. Some people even today hold this view and call interest usury, altho this term usury can properly be applied only to an excessive rate of interest.
The fact is, money in itself does not earn the interest which is paid to its lender. The borrower simply converts the money into capital goods and by their use, with the aid of labor, increases his income much more rapidly than he could without them.
The transaction would be plain enough if no money were used. Suppose you own a ferry boat and are making a fairly good living by its operation. But you are getting old and want to rest. So you lease your boat to some man who offers a satisfactory rental. Nobody would expect you to let him have the use of it for nothing. The boat is part of your wealth and it will not last forever. You will, there-fore, want a rental large enough to serve two purposes, first to give you a fair return on the value of the boat, say six per cent of its value, and second to recompense you for its deterioration thru use. If the "life" of the boat is only twenty years, the payment on account of the second purpose should be at least 5 per cent of the value of the boat. The payment on this second account in the language of economies is for replacement or reproduction of the capital. Accountants designate it as a payment for depreciation.
15. Capital consumed.—It should be noted that all capital is consumed. As has already been pointed out, in varying periods of time, capital is destroyed when used and the product of its use must be sufficient to compensate the owner for having saved and also to replace it.
16. Wealth as capital.—lf we were to be absolutely exact in the use of terms, we should have to admit that all wealth is capital, for as we have seen all economic goods are productive of psychic income. A piano, the golf links, the automobile, diamonds, fine raiment, cigars, luxuries of all kinds—all things of this sort give pleasure and satisfaction to many people, that is, they yield a psychic income, and in the last analysis are economically as productive of in-come as the Baldwin Locomotive Works or the United States Steel Corporation. Yet the psychic income produced by so-called consumable goods is not transferable or exchangeable, cannot be bought or sold, and therefore does not play any direct part in the field of business. Hence economists, with a few exceptions, have 'attempted no refinement in their definition of capital, but have applied it only to those material goods which aid in the production of additional economic goods or wealth.
What does the economist mean by land; by extractive industries?
Define rent: (a) as usually applied; (b) as understood in an economic sense.
Discuss the evolution of capital. Define capital. What would you include under it?
What is the capital fund as understood by the business man?
Explain the fundamental importance of capital to a nation. Distinguish between a demand for commodities and a demand for labor.