History of Economic Analysis part 64 pps

So far as this point is concerned, there seems to be no difference at all between Mill and Marshall. Both recognized the importance that the desire to hold money, rather than to spend it on goods and services, may acquire in certain situations—crises and depressions in particular. And the only difference there is on this point between Mill and Keynes is this: the former confined this excess demand for money to situations of this kind, of which it is one of the consequences and which therefore cannot be explained by it; whereas the latter considered the excess demand for money in depressions only as the most spectacular form of a phenomenon that, in less spectacular forms, is well-nigh ubiquitous or is well-nigh ubiquitous at least in certain phases of capitalist evolution, so that it may become the cause of either cyclical downturns or ‘secular stagnation.’ Malthus seems to have taken the latter view. 11 A much more important reason for Malthus’ dissent from Say and much more basic to his principle of effectual or effective demand was, however, his opinion that saving, even if promptly invested, may lead to deadlock if carried beyond a certain optimal point (op. cit., ch. 7, 3). He did not go as far as Lauderdale, 12 who was the real anti-saver of the age. He granted to the pro-savers even more than he should have done, namely, that increase in capital cannot be effected in any other way than by saving. But he maintained that, carried beyond an optimum point, saving would create an untenable situation: the effectual demand for consumers’ goods from capitalists and landlords would not increase enough to take care of the increased supply of products that results from an ever- increasing conversion of revenue into capital; and the effectual demand for consumers’ goods from laborers, though it would increase indeed, cannot constitute a motive for further accumulating and employment of capital. It is this which constitutes Malthus’ fundamental objection to Say’s law. The mistake involved will be analyzed below. But it cannot be charged to Keynes. Though many passages in Malthus and also in Lauderdale undoubtedly are suggestive of part of today’s (or yesterday’s) anti-saving argument, I cannot help thinking that Lord Keynes should not have approved of Malthus’ every word so sweepingly. 13 However, the idea of a schedule of aggregate demand for consumers’ goods taken as a whole, though without any awareness of the problems this concept raises, 14 is in fact present in Malthus’ analytic set-up, and it may be therefore claimed with justice that he anticipated Wicksell, who was the next first-flight economist to adopt it. Since the question of general gluts will come up again in the next chapter, I leave the matter at this point. And since neither Say, nor Malthus, nor Mill was aware of the problems of determinateness of equilibrium that the monetary factor may raise, we shall leave this aspect for the next Part. But some readers may welcome a summary with further reference to Keynes’s analysis, which accordingly I shall present now. Keynes, of course, never meant to contradict the proposition that has been called Say’s law above. This shows in his warning that his Aggregate Supply Function and Aggregate Demand Function 15 must not be confused with 11 This is how I interpret, as did Lange (op. cit. p. 61), the passage in Malthus, Principles (footnote on pp. 361–2 of the 1st ed.). 12 Malthus, in referring (op. cit. p. 352 n.) to Chapter 4 on Parsimony in Lauderdale’s Inquiry and in expressing the opinion that Lauderdale went ‘as much too far in deprecating accumulation as some other writers [Smith included] in recommending it,’ wrote a sentence that is worth quoting both because of its wisdom and because it is so characteristic of the man: ‘This tendency to extremes is exactly what I consider as the great source of error in political economy.’ History of economic analysis 592 13 See General Theory, pp. 362–4 and especially the essay on Malthus in Keynes’s Essays in Biography (1933, pp. 139 47) on the controversy between Malthus and Ricardo on our subject, where generous enthusiasm carried Keynes beyond all bounds of reason. There he punctuated his report with applause for Malthus and derogatory comments on Ricardo’s ‘blindness’ and became blind himself to obvious weaknesses in the former’s and to all the strong points in the latter’s argument. But the collection of extracts he presented is nevertheless interesting, especially because it contains some pieces that have not as yet been published elsewhere. 14 Therefore, the principal comment to make upon Malthus’ dissent from Say is not that he may not have done justice to possible elements of truth in Say’s practical conclusions, but that he did not understand the theory at the back of them. 15 For the meaning of these terms, see General Theory of Employment, Interest and Money, p. 25. The warning, with respect to the concept of aggregate supply price occurs on p. 24, n. 1. This does not alter the fact that this terminology is misleading supply and demand functions ‘in the ordinary sense.’ But he believed that Say’s law asserts ‘that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output’ (op. cit. p. 26); that is, he interpreted Say’s law as Lange did later on. Our own interpretation may be restated as follows if, in order to facilitate comparison, we waive our objection to the concepts of aggregate demand price and aggregate supply price: the law asserts that aggregate demand price of output as a whole is capable of being equal to its aggregate supply price for all volumes of total output; or, alternatively, that equilibrium within total output is possible for all volumes of output whereas equilibrium is not possible for all outputs of shoes; or, still differently, that there is no such thing as equilibrium or disequilibrium of total output irrespective of the relations of its components to one another. 16 If correct, this interpretation seems to remove Keynes’s objection. Actually this is not so, however. For the weaker proposition which asserts only the possibility of equilibria at all levels of total output and no identity of ‘demand for and supply of total output’ still yields the further proposition—which is, however, not equivalent to it—that competition between firms always tends to lead to an expansion of output up to the point of full utilization of resources or maximum output. 17 And this is the proposition to which Keynes really meant to object. Since, however, the only reason he had for objecting was that people do not spend their whole income on consumption and do not necessarily invest the rest 18 —thus barring, according to Keynes, the way toward ‘full employment’—it would have been more natural not to object to this proposition either, just as we do not object to the law of gravitation on the ground that the earth does not fall into the sun, but to say simply that the operation of Say’s law, though it states a tendency correctly, is impeded by certain facts which Keynes believed important enough to be inserted into a theoretical model of his own. 19 So it gets down to this. A man of the name of J.B.Say had discovered a theorem of considerable interest from a theoretical point of view that, though 16 From this it is no great step to a more usual formulation, which will be familiar to many readers, viz., that total output is always in neutral equilibrium. In itself it is meaningless, since there is no equilibrium of output as a whole. But I believe that some at least of the writers who expressed themselves in that way meant just this. If so, they stated a true proposition although in a very misleading way. 17 If readers refer to the second paragraph on p. 26 of the General Theory, they will find that Keynes formulates this proposition much more strongly as the drift of his argument requires. But General economics 593 there is no justification, from any standpoint, for going beyond the formulation of the text—unless it be that Say was just as much given to overstatement. 18 This statement is crude. Possibly rigidity of wages constitutes another reason. But we cannot go into this here. See below, Part V, ch. 5. 19 This would have made Keynesian theory a special case of a more general theory. But Keynes preferred to start from a pattern that contained the obstructions to full employment, which he believed he saw, and then to look upon what he called the classical theory as the theory of the special or limiting case in which those obstructions assume the particular value of zero. rooted in the tradition of Cantillon and Turgot, was novel in the sense that it had never been stated in so many words. He hardly understood his discovery himself and not only expressed it faultily but also misused it for the things that really mattered to him. Another man of the name of Ricardo understood it because it tallied with considerations that had occurred to him in his analysis of international trade, but he also put it to illegitimate use. Most people misunderstood it, some of them liking, others disliking what it was they made of it. And a discussion that reflects little credit on all parties concerned dragged on to this day when people, armed with superior technique, still keep chewing the same old cud, each of them opposing his own misunderstanding of the ‘law’ to the misunderstanding of the other fellow, all of them contributing to make a bogey of it. 5. CAPITAL Under this heading we shall carry on our discussion about the ‘classic’ analysis of the structure of the productive process beyond the point reached in Chapter 5. But first we must attend to some matters of terminology. (a) Terminological Squabbles about Wealth and Income. No better illustrations than these squabbles can be found for what has been said above on the futility of the ‘method’ of hunting for the meaning of words, which nevertheless we cannot afford to neglect entirely (1) because the manner in which writers conceptualize may serve as a measure of their analytic maturity or experience; (2) because it is interesting to see how they fitted recalcitrant facts into the conceptual arrangements they adopted; and (3) because in many cases terminological discussion is only the garb of more significant things and in particular reveals parts of a writer’s analytic set-up or model. 1 The chief divisions of ‘classic’ economics being production and distribution, the first question seems to be what it is that is being produced and consumed. The answer was Wealth. 2 But this only served to raise discussions on what this wealth is or, since it is obviously identical with the goods produced and distributed (or, possibly, their value), what ought to be included in these. These discussions display a surprising degree of analytic immaturity. Authors wavered between wealth considered as a fund or stock and wealth considered 1 Of this the reader can best convince himself by a perusal of Malthus’ Definitions in Political Economy (1827), which may be called the standard work of the genus and, to repeat, merits much History of economic analysis 594 more attention than it has received. Among other things it contains one of the best criticisms of Ricardo’s theoretical set-up ever written (ch. 5). Also one cannot fail to admire the wisdom of the Rules for the Definition of Terms (ch. 1). 2 Many authors, Senior in particular, in making Wealth the fundamental concept of economic theory, emphatically disclaimed any idea of implying that Wealth was more important than Happiness, Welfare, Virtue, and the like. As for Ricardo, it suffices to point out that the argument for free trade that is so important a part of his work was entirely a welfare argument. as a flow of goods; 3 they sometimes even failed to make it clear whether they meant a social total or wealth per head; they gravely discussed the ‘problem’ of the relation between wealth (‘riches’) and value or the ‘problem’ of the relation between social (national) wealth and private wealth; in defining goods some were insensitive to redundance or irrelevance of criteria; and even some of those who did not hold either a social philosophy according to which labor alone produces the whole product or a labor theory of value insisted on the element of human exertion as a definiens of wealth or economic goods. To adduce instances of blemishes of this kind would serve no useful purpose. It is sufficient to state that that discussion substantially centered on A.Smith’s definition—material objects that are useful and transferable and cost labor to acquire or produce—and that Senior partly improved and partly condensed this into ‘all things that have exchange value.’ The improvement consisted in the replacement of the labor-cost requirement by the requirement of ‘limitation of supply’: Senior at least realized clearly the logical relation between the two, that is, the fact that limitation of supply is the logically decisive criterion and that difficulty of attainment comes in only as one of the factors that limit supply. But J.S.Mill did not see this clearly although he also defined wealth by choosing ‘all useful and agreeable things’ for genus proximum and exchange value for differentia specifica. The way in which economists dealt with recalcitrant cases may be illustrated by the case of human services not embodied in any physical commodity. No difficulty arose for those who, like Lauderdale and J.B.Say, did not restrict the concept of economic goods to material objects. 4 But those who did were faced by a spurious problem, that is, a problem that owed its existence solely to their own conceptualization. We have already noticed, first, an egregious instance of a verbal solution of a verbal difficulty (Ferrara’s handling of a ‘material’ goods concept). Second, we may notice a device adopted by Senior. He counted human beings and their ‘health, strength, and knowledge, and all the other natural and acquired powers of body and mind’ as articles of wealth, a thing which was done, then and later, by a great many economists. 5 And then he declared that, for example, a lawyer does not sell services 3 The latter meaning prevailed as the popularity of the phrase, Distribution of Wealth, suffices to show. It was the meaning adopted in the Wealth of Nations. 4 The question of nonmaterial wealth is, of course, wider than that, for such wealth also comprises claims (which cancel out in a closed domain) and such things as patents and good will. The question of what to do with them continued to attract undeserved attention throughout the century and even beyond. Böhm-Bawerk’s first publication was on Rechte und Verhältnisse…(1881). There is no need for us to go into this, however. 5 E.g. by Walras. There is a slight advantage in doing this: the three agents of production, land, labor, and capital, then receive more symmetrical treatment. I take the opportunity to advert in passing to the attempts that recur from time to time at evaluating statistically the economic value of General economics 595 man. One of the best performances of this kind that belongs, however, to the next period is Ernst Engel’s Der Wert des Menschen (1883). but sells himself—the difference between him and a slave being that he does so by his own will and for his own benefit and only for a definite time and purpose, whereas the slave is sold by his owner and for good. The objections to this, however, should not be that, legally, Senior’s construction is nonsense and that there is no such thing as a ‘sale’ for a limited time and purpose: for the construction might still be analytically convenient. The true objection is that this conceptual arrangement offers no advantage and is completely unnecessary. But it acquires a certain interest from the fact that Marx—and later on Walras—adopted it also. 6 It was only toward the end of the period under survey—and then not so much in England as on the continent of Europe—that economists started the discussion on what ‘should be’ called income, individual or national, that produced another not exactly fascinating literature later on. 7 But we must not infer from this that the economists of that period overlooked income aspects: elements of what we now call Income Analysis were, on the contrary, much in evidence in their writings. The reason why the word Income does not occur in them more often 8 is simply that they used other words. Wealth was one of them. We have seen that the ‘classics’ were not very clear concerning the differences between funds and flows, and between wealth and the services of 6 In Marx’s schema workmen do not sell labor (i.e. services) but their labor force or power (Arbeitskraft). It might be urged that, in this case, this arrangement is not otiose but serves a definite analytic purpose. We shall, in fact, see that it comes in handily for his exploitation theory. But, quite independently of other objections to this theory, a little reflection will show that his argument could also have been couched in terms of the labor services themselves. Moreover, the reason why Marx liked his arrangement so much—he considered it as one of his main contributions to economic theory—derives from a factual assumption that is patently false: he conceives that the ‘capitalist,’ having bought the laborer’s ‘force,’ then decides arbitrarily how many hours the workman is to work. This is not so even where the labor contract does not specify hours: for these as well as other conditions are always implied. An instructor in economics may be simply ‘appointed,’ but he knows well enough how many hours of teaching that means at the institution he contracts with; and this applies to all kinds of einployments. The reader should make sure that he understands why it is no objection to say that workmen, having no other sources of income but their labor power, have no choice but to accept ‘any’ conditions—even in cases where as a matter of fact this is or was true. With Senior, however, this construction served no such purpose and in fact none except to remove an entirely imaginary difficulty. At the bottom of this difficulty was a disability that Senior shared with most economists of his and even a later time: they found it surprisingly difficult to grasp the distinction between wealth and service of wealth—so much so, in fact, that there was some novelty about it even in 1906 when Irving Fisher, in Nature of Capital and Income, insisted upon it. 7 Toward the end of the period under survey two factors helped to start that discussion: first, the growing interest in income statistics (Robert D.Baxter’s National Income appeared in 1868), and, second, the growing interest, on the Continent especially, in the problems of the income tax (A.Held’s Die Einkommensteuer appeared in 1872). 8 This applies to the English ‘classics.’ Continental writers of the period did use it more. We have already noticed in ch. 4 above the works of Storch and Sismondi. History of economic analysis 596 wealth. Mostly, however, they actually meant flows of income goods (or even services) when they spoke of wealth, so that at least in part we have already been commenting on their concept of income when dealing with wealth. This applies in particular to A.Smith, whose wealth is simply the ‘whole annual produce of a country’s land and labour,’ which, alternatively, he also called Gross Revenue (Book II, ch. 2, Modern Library ed., p. 271). Barring technicalities, this is substantially what we mean by Gross National Product. This quantity minus ‘the expence of maintaining…capital’ is his Neat Revenue or (again: substantially) our Department of Commerce National Income. Most economists of the period discussed these definitions—some, like Say, accepting them with minor amendments; 9 others, like Ricardo, 10 finding fault with them. A.Smith then gave what he evidently thought was only another way of formulating the same thing: ‘neat revenue’ or, as we should say, income was what people, individually and collectively, ‘without encroaching upon their capital…can…spend upon their subsistence, conveniences, and amusements’ (ibid., p. 271). This is the basis of what became known in Germany as the Hermann-Schmoller income definition. 11 The modern discussion on what it means to keep capital intact or to maintain capital—another spurious problem—grew from that root. On Productive and Unproductive Labor. We digress for a while in order to touch briefly upon the famous controversy on productive and unproductive labor. The only reason why this dusty museum piece interests us at all is that it affords an excellent example of the manner in which the discussion of meaningful ideas may lose sight of their meanings and slip off into futility. In the case before us, two meaningful distinctions may be discerned. The one 9 I do not think that Marx was right in charging Say with the ridiculous mistake of overlooking depreciation. All Say intended was to emphasize the basic importance of the ‘gross’ concept. See Theorien über den Mehrwert. 10 Principles, ch. 26. This chapter read so strangely even to Ricardo himself that he felt it desirable to insert qualifying footnotes. But on referring to this chapter, the reader will find that on the last page of it (including footnote) Ricardo successfully corrected an error committed by A.Smith and another error committed by Say. The first four paragraphs of the chapter seem to restrict the net income of a country to profits and rent, and to treat wages like depreciation charges. The reason given for this misleading arrangement is that only profits and rent constitute the national surplus from which taxes and savings can come. But profits are, according to Ricardo himself, not or not wholly a disposable surplus, and wages, according to his own admission, do contain, in general, some disposable surplus—another example of Ricardo’s exasperating way of first insisting on a proposition with tremendous energy and then blowing it up himself. But the argument points to a unitary concept of profits plus rent—wholly foreign to Ricardo’s usual reasoning—from which Marx may have learned something. The argument also points toward a conception of income that may have some uses and certainly has a great hold on the popular mind, namely, the conception of income as a surplus over necessities. 11 Hermann, see above, ch. 4. Gustav Schmoller, ‘Die Lehre von Einkommen…,’ Zeitschrift für die gesamte Staatswissenschaft, 1863. General economics 597 springs from the fact that a private-enterprise system generates incomes that provide for consumption in two ways: directly for the consumption of those who ‘earn’ them, and indirectly for the consumption of those who are ‘supported’ by them, for example, children and the retired aged. It stands to reason that the relation between the two, in our example determined (in part) by the age distribution of the population, is no matter of indifference but on the contrary one of the most important characteristics of a society’s economic life. Controversies about the question whether or not there are also types of employment that, for some purposes or for all, should be treated as ‘supported’ out of the incomes earned in the business process, for example, whether public officers should be so treated on the ground that their incomes derive from the taxation of other incomes, may be entirely meaningful. 12 The other meaningful distinction springs from the fact that services of labor (or of natural agents) that are directly bought and consumed by households, such as the services of servants, teachers, and physicians, occupy a position in the economic process that is different from the position of services of labor that are bought and ‘consumed’ by firms and have, economically speaking, still to go through a business process. That this is not a distinction without a difference—although, of course, these services, in the form of products, also reach the consumers’ sphere eventually—is readily seen from the fact sufficiently expressed by the common slogan that these services are paid from some firm’s capital, whereas the former are paid from some household’s income or revenue. 13 So soon as the servant has received his wages or their equivalent in goods, there is no further problem. When the factory worker has received his wages, further problems arise of selling the product he has helped to produce, of lags, risks, discounts, and so on, all of which are pertinent to the determination of those wages themselves. Thus the distinction is indeed relevant to the structure of the economic process and imposes itself upon the analyst at many turns of his way (e.g. in matters of the wage-fund doctrine, see below, subsec. 6f). It will be seen that these two distinctions are entirely independent of one another: each has meaning without reference to the other. But both—and a lot of confusion in addition—were bequeathed to the writers of that period by A.Smith. On the first page of his Introduction, he placed great emphasis upon ‘the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.’ For lack of space, I must leave it to the reader to satisfy himself that, with an admixture of extraneous matter, this passage really adumbrates the meaning of our first distinction. Only it does so hazily and, by employing the vague term ‘useful,’ gives the clue to all the confusion that disfigured the subsequent controversy on productive and unproductive labor, though this phrase does not figure in Book I of the Wealth of Nations. This phrase does emerge in Chapter 3 of Book II, where A.Smith, having experienced physiocratic influence, developed his theory of Accumulation. He had no use, of course, for the physiocratic proposition that only labor employed in agriculture is productive any 12 Compare the controversies that have arisen in our own time in connection with the statistics of national income on the question whether or not public administration should be considered as an industry like any other so that there would be no analytically relevant difference between the salary of a government official and the wages of, say, a workman in a motor-car factory. 13 As will be pointed out presently, this must not be confused with the case of people who live on derived income in the sense intended under the first distinction, e.g. the case of the retired aged. History of economic analysis 598 more than he had use for the ‘mercantilist’ proposition that only labor employed in export industries is. But pouring away the physiocrat wine, he retained the bottles and filled them with wine of his own: he defined labor as productive that ‘adds to the value of the subject upon which it is bestowed’ (op. cit. p. 314) and exemplified this by the case of factory workers who, as he adds by way of explanation (ibid. p. 316), live on ‘that part of the annual produce of the land and labour which replaces capital’ (with a profit); and he defined labor as unproductive that does not add (exchange) value to anything and exemplified this by the labor of the menial servant and that ‘of some of the most respectable orders in the society’ such as the sovereign ‘with all the officers both of justice and war who serve under him’ and ‘are maintained by part of the annual produce of the industry of other people.’ Two things are clear: he had got hold of our second distinction; and he had confused it with the first. The first man to see this quite clearly was Marx, who adopted our second distinction, giving A.Smith ample credit for having uncovered so important an element of the structure of capitalist society, and pointing out that this piece of insight was, in the work of A.Smith, wrapped in considerations that Marx thought superficial and in any case quite unconnected with it. 14 Of course, nobody missed the point entirely—most writers made, tacitly or explicitly, use of it when analyzing the demand for labor. But when they discussed the distinction as such, they lost sight of it and always thought of the first distinction. Nor is this all. We have seen that this distinction also may be made meaningful. But giving themselves up to the associations evoked by the terms ‘useful’ and ‘productive,’ economists concentrated on such ‘issues’ as which activities were worthy of these honorific epithets. Teachers and civil servants did not like to be called ‘unproductive,’ feeling—sometimes rightly and sometimes wrongly—that this phrase was intended to carry a derogatory meaning. 15 And so a meaningless discussion became a standard item of nine- 14 Marx elaborated this at length in his discussion of Smithian doctrine in the Theorien über den Mehrwert. From his standpoint the decisive distinction was between labor that does ‘produce surplus value’ and labor that does not. But the distinction between labor that is paid from business capital and labor that is paid from ‘revenue’ is preferable: a servant might work more hours than are embodied in the ‘value’ of his labor and hence might be ‘exploited’ just as may a factory worker. The former’s employer may also derive a surplus. The point is, to continue in Marxist language, that this surplus need not be ‘realized’ in any market. 15 Some such feelings assert themselves again each time modern economists discuss, for the purposes of national-income statistics, the conceptual treatment to be accorded to government salaries. General economics 599 teenth-century textbooks in spite of the increasing awareness of its futility, which eventually killed it. An account of all the ramifications and of all the misspent ingenuity that sometimes went into it would fill a volume. But it could serve one purpose only, namely, to display the word-mindedness of economists and their inability to tell a real problem from a spurious one. 16 [J.A.S. intended to have this digression On Productive and Unproductive Labor printed in small type so that the average reader could skip it easily.] (b) The Structure of Physical Capital. 17 On its most abstract level, the analysis of economic choice, which is really all that is involved in what we are accustomed to learn in the particular form of a theory of value, can be carried out in terms of unspecified things called ‘goods’ that have no other properties than those of being desired and of being scarce. It stands to reason, however, that in order to make headway beyond the most arid generalizations we must pick, from our vision of reality, further restrictions upon economic choice such as are implied in our ‘know-how’ or, less colloquially, in the limitations of a given technological horizon, which will permit some, and exclude other, transformations of our initial stock of goods. In any case, we must postulate given wants, a given technological horizon, given environmental factors such as land and personnel of given kinds and qualities, and a given stock of produced goods with which to start. But this is not enough. This initial stock of goods is neither homogeneous nor an amorphous heap. Its various parts complement each other in a way that we readily understand as soon as we hear of buildings, equipment, raw materials, and consumers’ goods. Some of these parts must be available before we can operate others; and various sequences or lags between economic actions impose themselves and further restrict our choices; and they do this in ways that differ greatly according to the composition of the stock we have to work on. 18 We express this by saying that the stock of 16 This discussion induced a related one on the concepts of productive and unproductive consumption that may be illustrated by a statement of Senior’s (op. cit. p. 57): ‘if a judge…required by his station to support an establishment costing £2,000 a year, should spend £4,000, half of his consumption would be productive and the other half unproductive.’ Productive consumption, then, was ‘that use of a product which occasions another product.’ The idea that commodities and services do not leave the economic process for good as soon as they enter the sphere of the households that consume them, but that they ‘produce’ there the productive services of the members of these households, turns up again and again. In our day it has been adopted by Leontief, in whose system households are treated as an industry that consumes productively like any other. 17 Some readers will find this subsection difficult reading. It attempts to explain an unconventional view of the role of physical ‘capital’ within the logic of the economic process that might be pressed into this phrase: from the standpoint of analysis, capital means a set of restrictions. This will become quite clear before long, and I believe that the reader will derive some benefit from taking the trouble involved in mastering this subsection. 18 The stock of wealth of all kinds that exists at an instant of time has been called Capital by Irving Fisher (Nature of Capital and Income, 1906, p. 52), who has successfully shown that, properly thought out, the capital definitions of most, if not all, of History of economic analysis 600 goods existing at any instant of time is a structured quantity or a quantity that displays structural relations within itself that shape, in part, the subsequent course of the economic process. Naturally we wish, for the purposes of pure theory, to reduce these structural characteristics to as few and as general ones as possible, steering as best we can between the Scylla of unmanageable lifelikeness and the Charybdis of sterile simplicity. Ever since the time of Cantillon and Quesnay, when scientific model-building began, economists have, of course, been aware of all this. In the preceding chapter we have already had a glimpse of the manner in which the writers of the ‘classic’ period took— haltingly—the first two steps in the analysis of the structural properties of the economic process: the one was to recognize capital as a ‘requisite’ of production and the other was to adopt the physiocrat (Cantillon-Quesnay) idea of ‘advances.’ We have now to fill in the more important of the remaining elements of this analysis, which constitutes what is commonly known as theory of capital. The reader need not be afraid that we shall have to wade through another morass of verbal controversy. The theory of capital does indeed enjoy a reputation for this kind of thing that is rivaled by few other fields. People kept on asking the meaningless question: What is Capital? And some have tried to answer it by speculations about the original meanings of the words caput, capitale, and the like. Senior even held that ‘the term Capital has been so variously defined that it may be doubtful whether it have any generally received meaning’ (Outline, p. 59). In a sense, this is true. 19 But it is true only: first, owing to relatively minor faults of conceptualization committed by the individual authors, and these we can disregard if their analytic intention is clear enough; second, owing to the wish, the father of so many futile controversies, to have a unitary or all-purpose concept of capital, and this wish I do not share; third, owing to the not less unwarranted wish of many authors to approximate the ‘capital’ that is useful in their analysis to either the asset or the liability side of a business concern’s balance sheet; fourth, owing to occasional waverings between physical capital concepts, on the one hand, and monetary concepts, on the other, which will be noticed in the next footnote. For the rest, the matter is much simpler than it looks because there really is only one dominant analytic purpose to describe that practically all the leading economists tried to serve. Since it was a requisite of production, capital consisted of goods. 20 More- the writers of the period under survey come precisely to this. We shall not adopt Fisher’s concept here but instead we shall simply use the excellent Smithian term Stock. This will make it easier to distinguish it from various other meanings of the term Capital without adding each time: ‘in our sense.’ 19 Readers interested in the history of economists’ use of the term are referred to Irving Fisher (op. cit. ch. 4, 2) or to the chapter on the concept of capital in the second volume of Böhm-Bawerk’s great work. 20 But even those authors who expressed themselves most strongly in favor of a physical capital concept sometimes drifted into the preserves of a monetary one. Ricardo and J.S.Mill, among others, occasionally penned sentences which carry meaning only if they refer to monetary capital. This has been critically noticed, for the first time I think, by Tchernychevsky, in L’économie politique jugée par la science (1874), an elaborate analysis of Mill’s Principles. It is still more obvious in the Manual of Mill’s follower, Fawcett. With Mill, capital is ‘expended’ on raw General economics 601 . of its wisdom and because it is so characteristic of the man: ‘This tendency to extremes is exactly what I consider as the great source of error in political economy.’ History of economic analysis. standard work of the genus and, to repeat, merits much History of economic analysis 594 more attention than it has received. Among other things it contains one of the best criticisms of Ricardo’s. above the works of Storch and Sismondi. History of economic analysis 596 wealth. Mostly, however, they actually meant flows of income goods (or even services) when they spoke of wealth, so that