Progress and Poverty (George)/Chapter II

by Henry George

Chapter II The importance of defining terms

Before proceeding in our inquiry, let us make sure of the meaning of our terms, for indistinctness in their use must inevitably produce ambiguity and indeterminateness in reasoning.

Not only is it requisite in economic reasoning to give to such words as "Wealth", "Capital", "Rent", "Wages", and the like, a much more definite sense than they bear in common discourse, but unfortunately, even in Political Economy, as to some of those terms no certain meaning is assigned by common consent, different writers giving to the same term different meanings, and the same writers often using a term in different senses.

It will be my effort throughout, as any term becomes of importance, to state clearly what I mean by it, and to use it in that sense and in no other. Let me ask the reader to note and to bear in mind the definitions thus given, as otherwise I cannot hope to make myself properly understood.

I shall not attempt to attach arbitrary meanings to words, or to coin terms, even when it would be convenient to do so, but shall conform to usage as closely as is possible, only endeavoring to fix the meaning of words that they may clearly express thought.

As a preliminary, let us settle what we mean by "wages" and what we mean by "capital". To the former word a sufficiently definite meaning has been given by economic writers, but the ambiguities which have attached to the use of the latter in Political Economy will require a detailed examination.

As used in common discourse " wages " means a compensation paid to a hired person for his services; and we speak of one man " working for wages," in contradistinction to another who is " working for himself." The use of the term is still further narrowed by the habit of applying it solely to compensation paid for manual labour. We do not speak of the wages of professional men, managers or clerks, but of their fees, commissions, or salaries.

Thus the common meaning of the word wages is the compensation paid to a hired person for manual labour. But in Political Economy the word wages has a much wider meaning, and includes all returns for exertion. For, as political economists explain, the three agents or factors in production are land, labour and capital, and that part of the produce which goes to the second of these factors is by them styled wages.

Wages in the economic sense

Thus the term labour includes all human exertion in the production of wealth, and wages, being that part of the produce which goes to labour, includes all reward for such exertion.

There is, therefore, in the politico-economic sense of the term wages no distinction as to the kind of labour, or as to whether its reward is received through an employer or not. Wages means the return received for the exertion of labour, as distinguished from the return received for the use of capital, and the return received by the landholder for the use of land.

The man who cultivates the soil for himself receives his wages in its produce, just as, if he uses his own capital and owns his own land, he may also receive interest and rent. The hunter's wages are the game he kills; the fisherman's wages are the fish he takes. The gold washed out by the self-employing gold-digger is as much his wages as the money paid to the hired coal-miner by the purchaser of his labour; and as Adam Smith shows, the high profits of retail storekeepers are in large part wages, being the recompense of their labour and not of their capital. In short, whatever is received as the result or reward of exertion in the production of wealth is wages.

This is all it is now necessary to note as to wages, but it is important to keep this in mind. For although in economic works this sense of the term wages is recognized with greater or less clearness it is often subsequently ignored.

Conflicting definitions of capital

It is more difficult to clear away from the idea of capital the ambiguities that beset it, and to fix the scientific use of the term. In general discourse, all sorts of things that have a value or will yield a return are vaguely spoken of as capital, while economic writers vary so widely that the term can hardly be said to have a fixed meaning.

Let us compare with each other the definitions of a few representative writers:

"That part of a man's stock," says Adam Smith, which he expects to afford him a revenue, is called his capital," and the capital of a country or society, he goes on to say, consists of (i) machines and instruments of trade which facilitate and abridge labour; (2) buildings, not mere dwellings, but which may be considered instruments of trade, such as shops, farmhouses, etc.; (3) improvements of land which better fit it for tillage or culture; (4) the acquired and useful abilities of all the inhabitants; (5) money; (6) provisions in the hands of producers and dealers, from the sale of which they expect to derive a profit; (7) the material of, or partially completed, manufactured articles still in the hands of producers or dealers; (8) completed articles still in the hands of producers or dealers. (Wealth of Nations, Book 2, Chapter I). The first four of these he styles fixed capital, and the last four circulating capital, a distinction of which it is not necessary for our purpose to take any note.

David Ricardo's definition is: "Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labour". Principles of Political Economy, chapter 5

This definition, it will be seen, is very different from that of Adam Smith, as it excludes many of the things which Smith includes, such as acquired talents, articles of mere taste or luxury in the possession of producers or dealers; and it includes some things which he does not include, such as food, clothing, etc., in the possession of the consumer.

J.R. McCulloch's definition is: "The capital of a nation really comprises all those portions of the produce of industry existing in it that may be directly employed either to support human existence or to facilitate production." - McCulloch's "Note" to book 2, chapter I of his edition, 1838, of Adam Smith's Wealth of Nations.

This definition follows the line of Ricardo's, but is wider. While it excludes everything that is not capable of aiding production, it includes everything that is so capable, without reference to actual use or necessity for use - the horse drawing a pleasure carriage being, according to McCulloch's view, as he expressly states, as much capital as the horse drawing a plough, because it may, if need arise, be used to draw a plough.

John Stuart Mill, following the same general line as Ricardo and McCulloch, makes neither the use nor the capability of use, but the determination to use, the test of capital. He says: "Whatever things arc destined to supply productive labour with the shelter, protection, tools and materials which the work requires, and to feed and otherwise maintain the labourer during the process, are capital." Principles of Political Economy, book I, chapter 4.

These quotations sufficiently illustrate the divergence of the masters.

The difficulties which beset the use of the word capital, as an exact term, and which are even more strikingly exemplified in current political and social discussions than in the definitions of economic writers, arise from two facts - first, that certain classes of things, the possession of which to the individual is precisely equivalent to the possession of capital, are not part of the capital of the community; and second, that things of the same kind may or may not be capital, according to the purpose to which they are devoted.

With a little care as to these points, there should be no difficulty in obtaining a sufficiently clear and fixed idea of what the term capital as generally used properly includes; such an idea as will enable us to say what things are capital and what are not, and to use the word without ambiguity or slip.

The factors of production

Land, labour and capital are the three factors of production. If we remember that capital is thus a term used in contradistinction to land and labour, we see at once that nothing properly included under either one of these terms can properly be classed as capital.

Land

The term land necessarily includes not merely the surface of the earth as distinguished from the water and the air, but the whole material universe outside of man himself, for it is only by having access to land, from which his very body is drawn, that man can come in contact with or use nature.

The term land embraces, in short, all natural materials, forces, and opportunities, and, therefore, nothing that is freely supplied by nature can properly be classed as capital. A fertile field, a rich vein of ore, a falling stream which supplies power, may give to the possessor advantages equivalent to the possession of capital, but to class such things as capital would be to put an end to the distinction between land and capital, and, so far as they relate to each other, to make the two terms meaningless.

Labour

The term labour includes all human exertion. Hence human powers whether natural or acquired can never properly be classed as capital. In common parlance we often speak of a man's knowledge, skill, or industry as constituting his capital; but this is evidently a metaphorical use of language that must be eschewed in reasoning that aims at exactness. Superiority in such qualities may augment the income of an individual just as capital would, and an increase in the knowledge, skill, or industry of a community may have the same effect in increasing its production as would an increase of capital; but this effect is due to the increased power of labour and not to capital.

Capital

Thus we must exclude from the category of capital everything that may be included either as land or labour. Doing so, there remain only things that are neither land nor labour but have resulted from the union of these two original factors of production. Nothing can be properly capital that does not consist of these; that is to say, nothing can be capital that is not wealth. But it is from ambiguities in the use of this inclusive term wealth that many of the ambiguities which beset the term capital are derived.

The term "wealth"

As commonly used the word wealth is applied to anything having an exchange value. But when used as a term of Political Economy it must be limited to a much more definite meaning, because many things are commonly spoken of as wealth that cannot, in taking account of collective or general wealth, be considered as wealth at all. Such things have an exchange value, and are commonly spoken of as wealth, insomuch as they represent as between individuals, or between sets of individuals, the power of obtaining wealth; but they are not truly wealth, inasmuch as their increase or decrease does not affect the sum of wealth. Such are bonds, mortgages, promissory notes, bank bills, or other stipulations for the transfer of wealth. Such are slaves, whose value represents merely the power of one class to appropriate the earnings of another class. Such are lands, or other natural opportunities, the value of which is but the result of the acknowledgment in favour of certain persons of an exclusive right to their use and represents merely the power thus given to the owners to demand a share of the wealth produced by those who use them.

Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community, since this comprises both those who are entitled to receive and those who promise to pay. Similarly, the wealth of a people would not be increased by the enslavement of some of them, for what the enslavers gained the enslaved would lose.

Increase in land values does not represent increase in the common wealth, for what landowners gain by higher prices the tenants or purchasers who must pay them will lose. And all this relative wealth, which, in common thought and speech, in legislation and law, is undistinguished from actual wealth, could, without the destruction or consumption of anything more than a few drops of ink and a piece of paper, be utterly annihilated.

Therefore, not all things which have an exchange value are wealth, in the only sense in which the term can be used in Political Economy. Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth. If we consider what these things are, and what their nature is, we shall have no difficulty in defining wealth.

The nature of wealth

When we speak of a community increasing in wealth we mean that there is an increase of certain tangible things such as buildings, cattle, tools, machinery, agricultural and mineral products, manufactured goods, ships, waggons, furniture and the like, which have an actual and not merely a relative value. The increase of such things constitutes an increase of wealth; their decrease is a lessening of wealth; and the community that has, in proportion to its numbers, most of such things is the wealthiest community. The common character of those things is that they consist of natural substances or products which have been adapted by human labour to human use or gratification, their value depending on the amount of labour which upon the average would be required to produce things of like kind.

Definitions of wealth

Thus wealth, as alone the term can be used in Political Economy, consists of natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the satisfaction of human desires. It is, in other words, labour that is

impressed upon matter in such a way as to store up the power of human labour to minister to human desires, as the heat of the sun is stored up in coal.

Wealth is not the sole object of labour, for labour is also expended in ministering directly to desire; but it is the object and result of what we call productive labour that is, labour which gives value to material things. Nothing that nature supplies to man without his labour is wealth, nor yet does the expenditure of labour result in wealth unless there is a tangible product that has and retains the power of ministering to desire.

Since capital is wealth devoted to a certain purpose, nothing can be capital that does not fall within this definition of wealth. By recognizing and keeping this in mind, we get rid of misconceptions which, vitiating all reasoning where they are permitted, befog popular thought and have led even acute thinkers into mazes of contradiction.

Capital further described

But though all capital is wealth, not all wealth is capital. Capital is only a part of wealth - that part, namely, which is devoted to the aid of production.

All we are trying to do, all that it is necessary to do, is to fix, as it were, the metes and bounds of a term that in the main is well apprehended; that is, to make definite a common idea.

If the articles of actual wealth existing at a given time in a given community were presented in situ to a dozen intelligent men who had never read a line of Political Economy, it is doubtful if they would differ in respect to a single item, as to whether it should be accounted capital or not.

That part of a farmer's crop held for sale or for seed, or to feed his help in part payment of wages, would be accounted capital; that held for the use of his own family would not be.

A coat that a tailor had made for sale would be accounted capital but not the coat he had made for himself. Food in the possession of a hotel-keeper or a restaurateur would be accounted capital, but not the food in the pantry of a housewife.

Pig iron in the hands of the smelter, or founder, or dealer, would be accounted capital, but not the pig iron used as ballast in the hold of a private pleasure yacht.

The looms of a factory would be capital, but not the sewing machine of a woman who does only her own work; a building let for hire, or used for business or productive purposes, but not a dwelling-house occupied by the owner.

In short, I think we should find that now, as when Adam Smith wrote, "that part of a man's stock which he expects to yield him a revenue is called his capital." And, omitting his unfortunate slip as to personal qualities, and qualifying somewhat his enumeration of money, it is doubtful if we could better list the different articles of capital than did Adam Smith in the passage I have condensed in the previous part of this chapter.

It is as to whether its services or uses are to be exchanged or not that makes a tool an article of capital or merely an article of wealth. Thus, wealth used in the construction of a railway, a public telegraph line, a theatre, a hotel, etc., may be said to be placed in the course of exchange. The exchange is not effected all at once, but little by little, with an indefinite number of people. Yet there is an exchange, and the " consumers " of the railway, the telegraph line, the theatre or hotel, are not the owners, but the persons who from time to time use them.

Exchangeability of wealth

It is too narrow an understanding of production to confine it merely to the making of things. Production includes not merely the making of things, but the bringing of them to the consumer. The merchant or storekeeper is thus as truly a producer as is the manufacturer or farmer, and his stock or capital is as much devoted to production as is theirs. But it is not worth while now to dwell upon the functions of capital, which we shall be better able to determine hereafter.

Let me call attention to what is often forgotten, namely that the terms "Wealth," "Capital," "Wages" and the like, as used in Political Economy are general terms. Nothing can be generally affirmed or denied of them that cannot be affirmed or denied of the whole class of things they represent. The failure to bear this in mind has led to much confusion of thought, and permits fallacies, otherwise transparent, to pass for obvious truths. Wealth is a general term, and the idea of wealth, it must be remembered, involves the idea of exchangeability. Thus the possession of wealth to a certain amount is potentially the possession of any or all species of wealth to that equivalent in exchange. And, consequently, so of capital.

Further discussion (and practice) on economic definitions: http://www.henrygeorge.org/def1.htm