Varieties Of Economic Goods





Passive Capital Goods



Labor spends itself on materials, and these,

in their rawest state, are furnished by nature herself. They "ripen"

as the work goes on. Every touch that is put on them imparts to them

more of the utility which is the essence of wealth. They are

technically "goods," or concrete forms of wealth, from the moment when

they begin to acquire this utility, though for a time they are in an

unfinished state. The function of materials, raw or partly finished,

in the physical operation of industry is a passive one, since they

receive utility and do not impart it. The iron is passive under the

blows of the blacksmith's hammer; leather is passive under the action

of the shoemaker's sewing machine; a log is passive under the action

of the lumberman's saw, etc. The materials which are thus receiving

utilities under the producers' manipulations constitute a distinct

variety of capital goods, while the implements which help to impart

the utilities constitute another variety, and both kinds are present

in all stages of industrial evolution. Savages use raw materials and

tools for fashioning them.



Active Capital Goods



The hammer which fashions the iron, the awl

which pierces the leather, and the saw that cuts the log into boards

have an active function to perform. They do not receive utilities,

but impart them. They manipulate other things and are not themselves

manipulated; and except as unavoidable wear and tear injure or destroy

them, they are not themselves at all changed by the processes in which

they take part. They are the workman's active assistants in the

attacks that he makes on the resisting elements of nature. Passive

instruments, then, and active ones--things which receive utility, as

industry goes on, and those which impart utility--constitute the two

generic kinds of capital goods. What is commonly called "circulating

capital" is a permanent stock of passive capital goods; and, in like

manner, what is usually known as "fixed capital" is such a stock of

capital goods of the active kind. The materials and the unfinished

goods that are scattered through a modern mill and receiving utility

are what the manufacturer would at this moment identify if he were

asked to point out the things in which he has circulating capital

invested; while the mill, the machinery, the land, etc., which are

imparting utility, are what he can point to as now constituting his

fixed capital. At a later time there will be other goods of both kinds

in his possession, and these will at that time embody the two kinds of

capital. While a primitive man would have little occasion to use the

term capital goods, he would possess both varieties of the goods

which the term denotes.



Varieties of Active Capital Goods



Mere hand tools act as armatures

attached to the person of the worker, and they enable him effectively

to attack resisting substances. The hammer fortifies the blacksmith's

hand against the injuries it would suffer if he delivered blows with

his fist, and it multiplies the efficiency of the blows. Machines,

however, substitute themselves for the person of the worker and carry

the tool through its movements. A steam hammer, so called, is an

engine that gets power from a boiler and wields an armature, which is

the real hammer, much as a smith would do it, though with far greater

force and effect. Machines do rapidly and accurately what a manual

laborer would, without them, have to do slowly and imperfectly, by

carrying the armature in his own hand and moving it by his own

muscular strength. Tools and machines impart "form utility" to

materials. Vehicles which carry goods impart "place utility" to them

by putting them where they are more useful than they would be

elsewhere. Buildings protect goods and workers alike, and enable the

operation of transforming them to go on successfully. They also make

it possible to store goods at a time when they are not needed and take

them out for use when they are needed. In doing this, buildings help

to impart "time utility" to the merchandise that is put into them by

keeping them intact till the time comes when they will be useful.

Tools, machines, reservoirs of water, canals, roadways, buildings, and

even land itself are active capital goods, and are, for that reason,

component elements of that part of the permanent productive fund which

is known as fixed capital. They aid workers in their efforts to bring

materials into usable shapes, and this is as true of the hole in the

earth in which a savage stores provisions as it is of a fireproof

warehouse in a modern city.



Materials which are at first Passive and later pass into the Active

State



The hammer itself has to be made out of raw material, and,

while it is in the making, the material that enters into it is as

passive as anything else. While the ore is smelting and while the

steel is forging, the future hammer is in a preliminary stage of its

existence and is discharging a passive function. When it is completely

finished, its period of activity begins, and from this time on it

helps to manipulate other things. The materials which enter into

consumers' goods go through no such transition. The leather remains

passive till, in the form of a pair of shoes, it clothes its user's

feet; and at this point it ceases to be a capital good at all. The

steel of the hammer is first a passive good and later an active one.



The Use of Capital Goods Universal



There is no doubt that capital

goods are used in the most primitive industry. Implements existed in

times too remote for tracing; and even if they had not been used, raw

material would have been indispensable. People living in an economic

stage so ultraprimitive as to use no mediate goods whatever could

sustain life only by plucking wild fruit or gathering fish or other

food stuff by hand, and so long as they could do this their industry

might conceivably consist in getting consumers' goods by labor only.

The rudest pick, shovel, or ax and the simplest hunting implement are

early types of what, in "capitalistic production," is represented by

mills with their intricate machines, ships, railroads, and the like.

Primitive industry has capital but is not highly capitalistic, since

labor and a little capital in simple forms are all that it requires.

These primitive capital goods are still essential.



Capital



It might seem that we have already described the nature of

capital, but we have not. We have described the kinds of goods of

which it consists. A sharp distinction is to be drawn between two ways

of treating capital goods, and only one of these ways affords a

treatment of capital properly so called. To attain that concept we

must think of goods as in some way constituting a stock which abides

as long as the business continues. And yet the things themselves

separately considered do not abide. Goods are perishable things; no

one lasts forever, and some last only a very short time. Raw materials

best serve their purpose when they are quickly transformed into usable

goods and taken out of the category of productive instruments. Tools

may last longer, but they ultimately wear out and have to be replaced.



How Capital Goods Originate and Perish



If you watch a particular

mediate good of the passive kind, say wood in a growing tree, you see

it beginning its career as an absolutely raw material, and then under

the hand of labor, aided by tools, receiving utility till it takes its

final form in some article for a consumer's use, say a dining table.

Little labor is applied to it during the first stage of the process,

that in which the tree is guarded and allowed to grow to a size that

fits it for conversion into lumber; but the cutting, carrying, sawing,

and fashioning are done by labor and tools, and under their

manipulations the wood "ripens" in the economic sense--that is, it

becomes quite fit for consumption. It is ready to serve a consumer as

a table, and, when this service begins, the wood that up to this point

has been a passive capital good, constantly receiving utilities, will

cease to be a capital good at all and begin slowly to wear out in the

service of its owner.[1]



[1] In the economic sense consumption is the utilization

rather than the destruction of the thing consumed, though

many things go rapidly to destruction in the process. Food is

destroyed in the moment of using; clothing perishes more

slowly by use, and furniture and dwellings more slowly still.

Some things that go gradually to destruction during the

process of utilization do not perish the more rapidly because

of it. A vase, a statue, or a picture is consumed, in the

economic sense, by a person's act of looking at it and

getting pleasure from it; but this does not hasten its

deterioration except as keeping such an ornament where it can

be seen exposes it to deterioration or accident. Climbing a

hill to get a view "consumes" the hill in a true sense, and

looking from the summit over a wide stretch of picturesque

country even consumes--that is, utilizes--the landscape; and

certainly this act does not injure the thing utilized. The

general fact, however, that goods for final use are, as a

rule, injured or destroyed either by the act of consumption

or by the exposures that are incidental to it, justifies the

use of this term to express the receiving of a service from

the usable article. It is a process in which the commodity

acts on men's sensibilities and, as a general rule, exhausts

itself while so doing. It is worth remembering that this

exhaustion of the good is not the essential part of

consumption. On the man's side that consists in deriving

benefits from the good, while on the side of the good itself

it consists in conferring benefit on the man--in doing him

good and not in doing itself harm.



The Transition of Goods from one State to Another



The beginning of

its service in the purchaser's dining room takes the wood of the table

out of the category of producers' goods; but there is some raw

material that is never destined to emerge from that category and enter

another. Its last state of existence as a good will be that in which

it is embodied, not in an article for consumers' use, but in an active

tool. Our tree might have furnished some of its wood for a

wheelbarrow, and if so, that part of it would have been a capital good

until it ceased to be an economic good at all. If we watch it as it

grows toward its economic maturity, we see it sawed, planed, and

otherwise fashioned under the laborer's hand, and maintaining during

all this time its passive attitude, just as does the wood that is

destined to constitute a table. When the wheelbarrow is completed, it

does not, like the table, begin to minister directly to consumers'

wants, but begins actively to aid some laborer in a further productive

operation. It carries mortar to the wall of an unfinished building and

is thus taken out of the list of passive goods--recipients of

utility--and is ranged with other active tools which impart utility.

The same thing is true of the steel that is destined to compose the

head of a modern woodman's ax or the stone that is in process of

fashioning into the rude hatchet of some primitive savage. As raw or

partly wrought material it is a passive capital good; later it becomes

an instrument of the active sort.



The Ultimate Perishability of all Kinds of Goods artificially

Made



In the end both kinds of material will cease to be capital

goods. The raw stuff that goes into food, clothing, furnishings, or

the like will become consumers' goods, while the raw material of tools

will, in its final form, the tools themselves, have one more lease of

life as capital goods. In the end, however, as wheelbarrows, axes,

hatchets, and the whole long list of active implements are used up,

they cease to be capital goods because they cease to be economic goods

at all. They are as truly ordained to be ultimately used up as are

food and clothing, and this is true of the most durable things that

are artificially made. Walls, roadways, bridges, and buildings slowly

deteriorate till the time comes when for productive purposes their

room is worth more than their company.



Why the Perishability of Capital Goods does not put Capital out of

Existence



Perishability is the most striking trait of capital

goods. Each particular one comes and goes, but there is always a stock

of them on hand; for when one is on the point of going, another is

ready to take its place and keep up the succession. New tools replace

old tools; new materials replace those that are finished and

withdrawn, and so it comes about that a stock of such things abides

forever. Not one of the individual instruments is permanent, for each

one only does its part in keeping up an endless procession. It is the

procession that is always there--a moving series of individual goods,

not one of which has more than a transient economic career. Each one

helps to keep up the supply of permanent capital just as each man,

taking his turn in an endless succession of laborers, serves during

his brief life to keep up the permanent force of laboring humanity.

Men come and go, but "labor"--a mass of working humanity--abides; and

so capital goods come and go, but a stock of them abides, kept up by

perpetual replacement. We may trace the career of any single

instrument from a beginning to an end; but we may, on the other hand,

cease to look at any instruments that we single out and identify and

look rather at the procession of them; and if we do this, we look at a

body which never wastes away, though the things that compose it are,

separately considered, forever wasting.



There are many kinds of transient things which, by the same process of

renewal, constitute permanent entities. Composing a human body at this

moment are certain tissues that can be separately identified; and if

we watch any one of them, we shall see it going in a short time to

destruction. Yet the body lasts while life continues. Indeed, the

evidence of the life itself is the discarding and replacing of the

tissues. A living body is a durable thing, though the particular

tissues that at any one time compose it are not so. In a like way

drops of water make a river, and this is a permanent thing, however

rapidly its composition changes. The waterfall that drives the

machinery of a mill is permanent, though no particular particle of

water remains in it for more than a moment. Society is permanent,

though the men who compose it are short-lived. In an exactly similar

way a body of capital goods is maintained as a perpetual

instrumentality of production. This is capital properly so called.

It is, as it were, a quasi-living body, perpetuated by the constant

replacement of the component parts, which are destroyed as its normal

activities go on.



The Difference between Capital Goods and Capital Summarized



The

distinction between capital goods, on the one hand, and capital, on

the other, is, then, like that between particular tissues and a living

body, or like that between particular particles of water in the river

and the river that flows forever. We can single out and watch certain

drops of the water as they flow from a spring, and we can trace them

through their brief careers, and say truly that the river is composed

of fickle and transient stuff; but we cannot say that the river is

transient. That is perpetuated by the renewing of the supply of water

as the original drops disappear. We can mentally watch a particular

man, as he enters the social force of workmen, labors for a time, and

drops out of the line, and can see that society is composed of

transient material; but society itself is an abiding thing. So we can

study a particular bit of ore or wool or leather or a particular

hammer or spindle or sewing machine, and in those cases we shall be

studying capital goods and finding how perishable they are; but we

shall also see that a stock of them always abides as the capital of

economic society. We can cease to look at individual things and study

the permanent fund of productive wealth, which is made up of goods

like ore, wool, leather, hammers, spindles, and sewing machines. The

identity of the things which make up this stock is forever changing.

The same list of things we shall never find in the stock on any two

dates, but a supply of similar things forever abides. Capital is this

permanent fund of productive goods, the identity of whose component

elements is forever changing. Capital goods are the shifting component

parts of this permanent aggregate. They are the particular

instruments that, each during its own brief economic lifetime, take

their places in the endless procession of things which in its entirety

is an abiding productive agent--the co-worker of labor and its

perpetual assistant in creating consumers' wealth.



The Business Man's View of Capital



It is as such an abiding entity

that a business man regards capital. He describes it nearly always as

a sum of money. Thus the capital of a manufacturer is "a million

dollars" because a stock of instruments worth that amount is kept

intact in his possession. It is not allowed to waste away, however

much the constituent parts of it may shift. The waste and renewal

which business entails leave the equivalent of the million dollars

always on hand, though never in the literal shape of money. A stock of

shifting goods always worth a million dollars is, by a figure of

speech, described as a million dollars "invested in the goods."[2]



[2] We here put out of sight all questions connected with the

changing purchasing power of money. This is, in ordinary

times, the business man's habit. He considers his capital

intact if the number of dollars invested originally in his

business still appears on his inventory as representing the

net surplus of his assets over his liabilities. If a currency

were undergoing rapid inflation, a fixed amount of invested

money would represent a shrinking stock of capital goods.

This stock would last always, but would grow smaller by a

true standard of measurement. All that we are at present

interested in knowing is that practical usage treats capital

as a permanent fund of productive wealth, and most

conveniently describes it as a fixed amount of money

"invested" in goods of a productive kind. What is thought of

as "money" abides. Of course the practical man does not

regard it as actually composed of currency.



The Chief Attribute of Capital



A chief attribute of capital,

properly so called, is permanence. If a man's productive fund does not

last, he is impoverished. The farmer keeps on hand a more or less

constant supply of the implements he has to use. He takes a part of

the proceeds of the sale of his crops, puts it into the shape of

implements and materials, and in this way keeps an amount of them on

hand as the auxiliary capital of agriculture. Particular goods are not

constant, but the sum of money or quantum of wealth "invested" in the

moving procession of them is so. At any one instant the capital is

composed of particular instruments which can be sought out and

identified, but at no two instants are the goods the same.



The Reasons for describing Capital as a Sum of Money



This fact

explains the general practice of describing capital in terms of money.

The manufacturer just referred to will speak of his capital as "a

million dollars" and consider that sum as a "permanent investment"

because he knows that while the goods that now represent that value

will soon pass from him, the "dollars"--that is, the value which is

equivalent to the dollars--will abide. There is, moreover, no failure

on his part to discriminate between his capital and literal money, for

he knows in what his productive fund consists, and is fully aware that

only the minutest part of it is in the shape of actual currency.



Instruments of production compose the fund, but the dollars serve to

describe it. They indicate the amount and the abiding quality of it,

since they describe what he has invested or embodied in the shifting

things and can, by a fair sale, get out of them.



Why Abstract Terms are used in popularly describing Capital



In

certain connections money is, in unintelligent thinking, confused with

real capital in ways that we should guard against. In avoiding such

errors we need to be even more careful that we do not miss the truth

that is at the basis of the common mode of describing capital. A

permanent fund that is spoken of as a million dollars invested in a

business does not suggest to any one a literal pile of a million

silver or paper dollars or of a hundred thousand gold eagles. It

suggests what is actually in the business, a procession of things each

of which comes into the man's possession and then leaves him, and

helps him to keep the constant stock of goods that at any time is a

potential million of dollars. A permanent body of any kind, if it is

made up of shifting tissues, is commonly described by the use of an

abstract term. A waterfall, made as it is of rapidly changing drops of

water, is spoken of as a "water power," since the power is the abiding

thing. An endless series of living human beings is described as

"humanity," since that remains through all personal changes. An

endless series of workingmen is described as "labor," and we study the

"wages of labor," the "relations of labor to capital," etc., because

these are permanent relations. Men come and go, but labor continues

and is the source of a permanent income. It is actually the fact that

in speaking of the "labor problem" or the "relation of capital and

labor" we usually think of "labor in the abstract," as we might term

it; but this is very far from implying that we consider a series of

generations of actual workingmen as an abstraction. We may, using

terms in a like way, speak of the problem of interest as concerning

"capital in the abstract"; but this is far from meaning that we

consider an endless series of material instruments of industry an

abstraction. We describe these real things by the use of an abstract

term, just as we describe a thousand other realities. A "fund," a

"value," a "permanent quantum of wealth," is capital; but with the

abstract notion the mind always merges the thought of the concrete

entity. It is the tools of industry that, in their endless march,

come into and go out of the industrial field that we think of even

when we use the abstract term. This term, however, saves us from the

danger of thinking merely of particular tools that we can identify and

trace to their final destruction when we form the concept of capital.



The Importance of discriminating between the Concept of Capital Goods

and that of Capital



Very great is the importance of keeping sharply

distinct the two concepts of productive wealth of which one is

described by the term capital goods and the other by the term

capital. In the one case we think of a particular thing which we

identify, keep in mind, and watch as it goes through its

transformations, does its final work, and perishes. The brilliant

studies of Professor Boehm-Bawerk are based on the idea that such a

tracing of the biography of a particular instrument is the true way to

solve the problem of interest. Yet the very term interest itself

suggests the existence of what we have defined as permanent

capital--an abiding fund or sum of wealth that every year yields as an

income a certain percentage of itself. The "hundred dollars" yields

five dollars; that is, the fund yields a twentieth of the amount

which, amid all the changes of its constituent parts, it continues to

embody. It is true, indeed, that a study of all capital goods which

have existed or will exist, with due attention to their relations to

each other, would reveal the fact that they maintain such an endless

procession as has been here described, and it would thus bring before

the mind such a concept of capital as the business man has and

describes by the monetary form of expression. By making a synthetic

study of capital goods in general, and not separate studies of

particular goods as they come and go, we can obtain a grand resultant

of the action of all of them, which is nothing less than permanent

capital doing its continuous work. Such a comprehensive study of

capital goods, if it is carried far enough, becomes a study of the

abiding entity, capital. Allowing ourselves, however, to put the

abiding entity out of sight and merely to trace the origin, growth,

and productive action of separate instruments of production would be

disastrous. The undying body in which the particular things are

tissues absolutely needs to come into view. The very mention of a

problem of interest--of the percentage of itself that a fund of a

given amount can annually earn--puts before us at once the permanent

entity, capital, and the problems relating to it.[3]



[3] Consumers' goods may be regarded in the two distinct

ways in which it is necessary to regard capital goods. We may

look at particular articles for consumption, as they begin

their careers by ministering to their owners' needs, and

follow them as they wear out and finally perish. This gives a

conception of them which is analogous to the conception of

capital goods rather than to that of capital. On the other

hand, we may look at the permanent stock of usable articles,

which is maintained by the constant coming of new ones to

replace those which are worn out, and in this way we get a

conception of permanent consumers' wealth. The flow of

finished goods from the shops to the users offsetting the

concurrent destruction of such articles in the users' hands,

has the effect of maintaining a permanent fund of consumers'

wealth consisting of perishable goods the identity of which

is always changing; and this fund is analogous to permanent

capital as we have defined it. Professor C. A. Tuttle has

advocated the use of the generic term wealth to denote the

two continuing funds which we have here termed, on the one

hand, capital, and, on the other hand, the permanent stock of

consumers' wealth. We have preferred to use the term wealth

in a sense that is generic enough to include both capital and

capital goods, and both the permanent stock of consumers'

goods and the particular articles that, in turn, compose it.

Wealth consists of effectively useful concrete things

regarded either as particular articles that can be identified

and watched till they perish in the using, or as an abiding

stock of articles of this genus, each one of which has in

itself only a transient existence. See an article on "The

Wealth Concept," by Professor Charles A. Tuttle, in the

Annals of the American Academy of Political and Social

Science, for April, 1891, and other articles by the same

author.



Labor as a Permanent Entity



The term labor is sometimes used to

describe a permanent aggregation of laborers no one of whom lives and

works through more than a brief period. Labor is thus analogous to

capital and laborers to capital goods. A permanent working force is

composed of perishable beings as a permanent producing fund is

composed of perishable goods. Both are commonly described by the use

of abstract terms, but both are in reality concrete things; and

actually to reduce either to a mere abstraction would be to put a

material entity out of existence. We instinctively speak of a value--a

given number of dollars--in describing a man's capital, but it is

dollars "invested in" productive instruments; and we instinctively

speak of labor when we mean an abiding force of workingmen. Neither

capital nor labor is like an immaterial soul that can live apart from

its body. Each consists of a permanent body with a shifting

composition. A permanent sum, on the one hand, a permanent amount of

working energy, on the other, are always present, but they are in

goods and men respectively. Each may well be described by the use of

an abstract term, and in practical life it commonly is so; but it is a

concrete reality.



Peculiarity of Land as a Capital Good



One reservation needs

to be made when we call capital goods perishable. If we include

land under this term, we must make it an exception to the rule

of destructibility. It is the only thing that does not go out of

existence in the using. It is not a produced good at all and does not

stand, like other goods, in an intermediate position between labor and

the gratification that labor is intended to produce. Work did not

create it and using will not end it. It will be called, in our study,

a capital good, for it is a form of wealth which produces other

wealth. It enters into the permanent productive fund that society is

using.



Differences between Land and Other Capital Goods Important in

Economic Dynamics



It is in a later part of the study which deals

with economic changes--the part which we shall call Economic

Dynamics--that the differences between land and artificially made

goods become prominent, and these differences will receive due

emphasis in their proper place. In studying the law which would govern

economic society if no essential economic changes were taking

place,--in reducing society, as it were, to a static state,--we find

that there is a certain set of characteristics which land shares with

those capital goods which are the products of human industry. In

static studies it is best to group the productive instruments which

men make with the one unmade good which nature furnishes and to

recognize that together they embody the permanent fund of productive

wealth.[4]



[4] What is commonly termed land contains elements which

perish in the using. Such are deposits of coal, ores, or oil,

and those ingredients of loam which are exhausted by tillage.

Such elements of the soil are not land in the economic sense.

How they should be regarded will be shown in a later chapter.



Mobility an Attribute of Capital



Even in a static society capital

would be permanent, while particular capital goods would be

perishable. In dynamic studies another quality of capital, as

distinguished from capital goods, comes into the foreground, namely,

mobility. It is the power to move without loss from one industry to

another. Goods cannot be thus moved with any freedom. A loom cannot be

taken out of a woolen mill and made to do duty in a carpenter's shop,

nor can a circular saw be made available in weaving. When the loom

wears out and needs replacement, it is in the owner's power to procure

either another loom or a circular saw, and if he chooses the latter

alternative, he causes capital to move into the woodworking business.

A whaling ship would not be useful as a cotton mill; but much capital

that was once invested in the whale fishery of New England has since

found its way into manufacturing. The transfer can often be made

without waste. If the earnings of an instrument have sufficed to

replace it with another that is like it, they may suffice for

producing an instrument that is unlike it. Waste, if it occurs,

results from a failure of the original instrument to earn the fund for

replacement. Capital which thus abides but passes from one employment

to another is a body the identity and the character of whose component

parts change. The transfer of capital from one industry to another is

a dynamic phenomenon which is later to be considered. What is here

important is the fact that it is in the main accomplished without

entailing transfers of capital goods. An instrument wears itself out

in one industry, and instead of being succeeded by a like instrument

in the same industry, it is succeeded by one of a different kind which

is used in a different branch of production. Goods have not moved from

one branch to another, but capital has done so.



How Capital itself may be Destroyed



When we speak of capital as

permanent, we mean that using does not destroy it as it destroys the

tissues of which it is composed. Fires, earthquakes, and business

disasters put parts of it out of existence and affect the volume of

the fund as a whole; but production itself leaves it intact. It is

this very production which destroys capital goods and makes it

necessary to replace them.





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