Definitions of Wealth and its Associated Concepts
( Originally Published Early 1900's )
Remarks on Economic Nomenclature. An exact nomenclature is one of the first requirements of an exact science. But economics is so peculiar in its nature as to render this requirement very difficult of fulfilment. In most other sciences things are classified according to their own inherent qualities. But in the present one things have to be classified, not merely with respect to such qualities, but rather according to their relation to human desires. We have to associate things so purely mental as human hopes and fears with things so purely material as ships, ploughs, and steam-hammers. Thus we encounter the necessity of arranging things with reference to the mental emotions which they are calculated to excite. One consequence of this is that an object which may belong to one class if owned by one person may belong to a different class when Ile sells it to his neighbor. Such anomalies are inherent in the subject, and can be reduced to order only by the reader keeping well in mind what is meant in each particular case where terms of peculiar signification are applied.
As a rule, no new words have been introduced into economics. What has been done is to extend and generalize the meaning of familiar words. Such words we shall now proceed to define.
Labor. In its widest economic sense labor is any exertion of the human faculties for the attainment of a definite object. This definition is merely an extension of the familiar one. The latter includes only physical exertion. But in economics the exercise of the judgment and imagination finds as important a place as that of the body. Hence the mental occupations of the lawyer, the author, the clergyman, and the actor belong to the same class as the bodily exertions of the common laborer. They are equally necessary to the gratification of the general desires of the community.
Although no harm would result from our using the word labor in the above extended sense, yet in practice we limit it as follows : Labor is exertion of the human faculties devoted to the production of any object or effort for which other persons than the laborer are, or might be, willing to pay. In familiar language, labor is all that any one does in order to make a living.
Wealth. In economics the term wealth, in its widest sense, designates all those things which men gain by labor, and employ to gratify their desires.
Economists have sometimes been divided on the question how far anything not material could be considered wealth, and also whether the term should be confined to objects the use of which could be transferred from one person to another. It will not be profitable at the present time to enter into a discussion of this question further than to say that it seems advantageous to consider the word in its more extended sense ; but, at the same time, to confine it to actual objects of desire, material or immaterial, transferable or not. The understanding of the definition will be facilitated by enumerating the principal classes of objects which may be included in the term. They are :
I All the lands and mines of the country to which labor has been applied to make them productive of edible plants, of animals, or of minerals.
II. The improvements in and upon the land designed to facilitate production, such as roads, fences, storehouses, barns, etc.
III. All appliances which men have made for the manufacture, transportation, preservation, and sale of the products of industry, including railways, manufactories, etc.
IV. The houses in which we live, together with the furniture, pictures, and everything else which they contain intended to promote our ease and pleasure.
V. All products undergoing the processes of manufacture, transportation, and sale to those who finally use them.
VI. Clothing, food, books, and all other manufactured pro-ducts in possession of those who are to wear or use them.
VII. The skill, business ability, or knowledge which enable their possessors to contribute to the enjoyment of others, including the talents of the actor, the ability of the man of business; the knowledge of the lawyer, and the skill of the physician, are to be considered wealth when we use the term in its most extended sense.
If, instead of discussing the definition in detail, we inquire what is the understood sense in which the word is used in economics, we shall find the definition to be : Wealth is that for the use or enjoyment of which people pay money.
Of Property or the Right to or Ownership of Wealth.. It is necessary in every branch of economics to bear carefully in mind the distinction between the objects, material or immaterial, which constitute wealth, and the ownership of or rights in those objects, which secures the proper party in the enjoyment of the wealth. In many cases it is difficult to make the distinction, owing to the very general or abstract nature of the object possessed ; but its importance requires a very careful and critical examination on the part of the student. The understanding of the subject will be facilitated by taking it up in special cases, beginning with the most familiar ones, before we proceed to any generalization.
Here is a suit of clothes. That suit of clothes is capable of protecting some one person from the inclemency of the weather. Since it can protect only one person at a time, it follows that there must be some law or general understanding to determine a person having an exclusive right to it. The person so determined is called the owner of the clothing ; the clothing is called his property; he has the sole right to the use and enjoyment of the clothing, and this right is called ownership. We have thus four words all of. which are relative : owner, which designates the person, but which also implies his relation to the clothing; property, which designates the clothing in its relation to the owner; ownership, which designates the relation between the two ; and right, which may be considered as giving force to this relation. The word wealth, on the other hand, designates the object absolutely; that is, not in its relations to any particular person. So far as the mere object is concerned, property means the same thing as wealth ; it differs in being relative to some owner.
If this distinction of absolute and relative terms for the same object offers any difficulty to the student, he may make the subject clear by considering that a body of men may all be brothers. Hence to a certain extent man and brother may mean the same thing. The difference is that the word man is an absolute term designating the individual just as he stands, whereas when we call him brother we imply his relation to somebody else, either a sister or another brother. Of the same general nature is the difference between the word wealth, which is either absolute, or relative only to the community at large, and property, which considers it relative to the owner.
Of the Owners of Property. The owner of property may be an individual, a society, or an indefinite number of individuals called the public, whose collective personality is em-bodied in a conception called society, the government, or the state. Any individual or. society legally capable of becoming an owner of property is called a legal person, or simply a person. Examples of such persons are mercantile firms, banking and railway companies, and incorporated societies, as well as individuals of legal age.
Different Forms of Ownership. Considered in its relation to the three classes of owners, property may be divided into public, joint or corporate, and individual.
Public property we may consider to be owned by the state, or by society at large. The roads on which we travel in the country, the streets and pavements of a city, the fountains and statues which ornament it, and the pipes which supply it with water, are examples. of this sort of property. That is, all these kinds of wealth are equally possessed and enjoyed by everybody who can use them.
Joint property. is that the owner of which is any definite body of persons. When this body is specially organized by law it is called an incorporated company, and the property is called corporate. In economics we have no occasion for any distinction between corporate and other forms of joint property.
Individual property is that owned by an individual. Each member, of an association has an indirect or secondary right in the wealth owned by the association, so that there are two distinct orders of ownership. An example of this is afforded by a railway. The wealth is not only the railway itself, but the buildings, engines, cars, and other appliances necessary to its running. The owner of the railway as a whole is a body of men called a railway company. Considered in its relation to this owner, the property in the railway is called stock, and the stock is divided up into small parts called shares. The shares again are possessed separately by the individual men who form the company, each man owning a certain number, which are then his individual property. Here we have no difficulty in distinguishing between the stock or shares, which make up the several properties of the individual owners and the wealth consisting of the railway it-self and the various appurtenances connected with it, which exists independently of changes in the ownership. The same principles apply to manufacturing and commercial companies.
The individual ownership of wealth is subject to an infinite variety of modifications. In economics the most important modified forms are credit and divided ownership, which we shall next define.
Credit. The right held by the owner of credit is that of requiring from some other person or owner at a future time the payment of a designated sum of money. The holder of the right is called the creditor; the person against whom he holds it, the debtor. The debtor, whom we may consider as the present owner of the money to be paid, may be any kind of legal person, an individual, a company, or a government. But the right possessed by the creditor is apparently neither the ownership of anything which comes under our definition of wealth, nor that of any material object. The right to demand money from another party is not the same thing as the ownership of money. Let us take for example a promissory note by which the drawer, D, is under an obligation to pay the holder, A, a sum of money. Now although ideally this sum of money is a certain weight of gold or silver, yet there are no particular pieces of gold or silver which constitute the wealth. It may very well happen that the sum of all the moneys to which the members of the community have rights expressed by promissory notes exceeds many times over the money which actually exists in the community.
The difficulty in this case will be avoided, and the case brought under our general definitions, by looking at another feature of the case. Every right of this class is accompanied by a corresponding obligation on the side of another party; and the right and obligation are mutual and equal in amount: where one ceases the other ceases also. There cannot be a creditor without a debtor. Now the most accurate way to consider the subject is to regard the right possessed by the creditor as algebraically positive property, and the equal obligation on the part of the debtor as algebraically negative property. The sum total of property possessed by the community is not altered by one member owing another; because equal credits and debits cancel each other, just as positive and negative quantities do in algebra when they are added.
Thus, if D is indebted to C in the sum of x dollars, we conceive that D's ownership does not extend to the whole of the money or other wealth which is in his possession, because such ownership is diminished x dollars by the debt. If w represents the whole quantity of money which he is to possess when the debt becomes due, his property in that money is w - x, and C's property is x. The sum of these properties makes up w, the quantity of money in question.
Divided Property. Credit involves a special kind of divided property. But there are modified ownerships of many kinds, of which the following is the most important.
A person may have a right of property in an estate, not by virtue of owning any part or share of it, but by enjoying the right to demand from its owner, no matter who he may be, a sum of money, and to seize the estate, or require its sale, in case the corresponding obligation on the part of the owner is not fulfilled. The property owned in this case is in the nature of credit, but it differs from the credits described in the last article in that the property inheres in a particular piece of wealth, namely, the estate which is pledged to the payment of the debt. The property is then divided between the two owners as follows : if x be the total value of the estate, and n the amount of the debt upon it, the creditor's share will be n and the owner's share of the estate will be x — n. Both values together will make up the value of the estate, as it should. The method of representing the property algebraically is the same in the case of simple credit.
Debts of all kinds come under the rule that they are necessarily offset by corresponding obligations on the part of some one, and therefore form no part of the total property of the community. In the case of government, state or municipal bonds of any kind, the debtors comprise all the property-owners in the community, who must be taxed to pay the debt, and in any estimate of the total value of property each man's share of the amount due should be subtracted from the value of his individual possessions. The result of the correct application of all these principles is that we can form an estimate of the total value of all the wealth of the country which shall be quite independent of the particular rights of property in that wealth.
Illustration of the Difference between Wealth and Property. The importance of keeping in mind the nature of wealth, irrespective of the rights of property in it, will be made clear by an illustration. In the year 1837 a commercial crisis unparalleled in its intensity swept over this country : failures in business were seen on all sides ; those who did not fail had the greatest difficulty in making good their debts; workmen were thrown out of employment, and a large majority of the people felt that they had suddenly become poor. In ordinary language, their wealth was swept away as by a hurricane, and in all descriptions of the crisis it was alluded to as a destroyer of wealth.
And yet if we look at the case from a common-sense point of view we shall see that no wealth at all was destroyed. There were just as many suits of clothes in the country the day after the crisis as there were before, and they were just as well fitted for wearing. The mills and factories were all in as good order, the farms as fertile, and the crops as large before the supposed hurricane as after. The houses remained standing, the wood was in the woodsheds ready for burning, and the food in the larder ready for cooking, just as it had been left. In a word, every appliance for the continued enjoyment of the fruits of labor remained as perfect as it ever was. It is true that many found it difficult to purchase the necessary food and clothing although it existed in the granary and shops. But this is simply saying that there was a difficulty in arranging the terms and conditions of sales between the owners of the food and clothing and the people who wanted them. What the change in the state of things really consisted in cannot be explained until we have reached a more advanced stage of the subject, but it is perfectly clear at this stage that it did not consist of any destruction of wealth.
Transfer of Ownership. In most cases the ownership of property can be transferred by some simple process from one person to another. This transfer consists in one person taking the place of another in that right to the wealth which is called ownership. It is made in various ways. In the familiar case of sale of personal property, the first owner, called the seller, places the property in the possession of the second one, called the purchaser. In case where the purchaser cannot conveniently take possession of the property it is transferred by an instrument in writing known under various names: a deed or conveyance when the property transferred is real estate; a bill of sale when it is personal property; a cheque or bill of exchange when it is credit.
Commodity. The term commodity, in economics, means any special kind or collection of wealth. It is usually confined to goods for sale in the public markets, such as clothing and food, and in general to particular portions of wealth considered in their relation to any one who wants to possess and enjoy them.
Capital. Capital is a kind of wealth. That is, all capital is wealth, but not all wealth is capital. But what kinds of wealth shall be considered capital and what not is a question which cannot be fully understood until after a thorough study of the subject. It will suffice at present to say that capital consists of all that wealth which the owner is keeping, not for its own sake, but in order that he may by its means make it the instrument of acquiring further wealth. For example, tools are not kept because they satisfy any desire of the owner, but because they can be used in making things which do fulfil this object. Hence they are capital. The term also includes machinery, buildings designed for manufacturing purposes, and the raw material which is stored away in order to be manufactured into articles of utility. But the clothes we wear, the food we have stored in our houses for eating, and the beds on which we sleep are not capital, because they are kept in order to be immediately useful.
To the beginner it will not be evident why this distinction should be made between wealth which is and wealth which is not capital, but we shall see later that it is of fundamental importance in questions involving the interests of society.
Note on the Definition of the Word Property. This word is used in the present chapter in its popular rather than in its strictly legal sense. In the latter sense such words as " property," " estate," and " farm " do not mean things, but rights. An estate is not fields and buildings, but the right to ownership in fields, buildings, or other wealth. A farm does not mean a cultivated piece of ground, but the right to cultivate the ground and dispose of the crops. So property is not wealth, but the exclusive right to the possession of wealth. Whether it would conduce to clear thinking in economics to confine such words to their purely legal sense is a question well worthy of consideration. Mr. HENRY DUNNING McLEOD in his Elements of Economies insists very strongly on the legal meaning of these words, and considers it a positive error to apply them to things. It is certain that in the case in question the general and popular meaning of the words referred to is wealth, considered not in itself, but in relation to its owner. Since this relation necessarily implies the right of the owner to it, the two ideas of right and thing in which the right inheres are inseparable. It does not therefore seem that any confusion will arise from the double sense in which the word is used. When one transfers property, it amounts to the same thing whether we say that what he transfers is the right or the thing. On the other hand, the restriction put upon the definition by Mr. McLeod has led him to conclude that wealth may comprise "abstract rights, quite separate and severed from any material substances," which does not sufficiently distinguish the right from the thing.