Chapter 11

Chapter 11 The Formation and Multiplication of Capital

September 30, 2015

Chapter 10 showed how productive capital, though kept, during the progress of production, in a continual state of employment, and subject to perpetual change and wear, is yet ultimately reproduced in full value, when the business of production is at an end.

Since, then, wealth con

But let us trace the disposal of this surplus of 1000 dollars to every imaginable destination. Suppose, for instance, that in-

resown or planted, without having undergone any transmutation; perhaps the wood, that might have been used as firing to warm superfluous apartments, may have been converted into palings or other carpenter’s work; and what was cut down in the first instance as an item of revenue, be so employed, as to become an item of capital.

stead of being buried, they have been spent by the cultivator upon an elegant entertainment. In this case, this whole value has been destroyed in an afternoon; a sumptuous feast, a ball, and fireworks, will have swallowed up the whole. The value thus destroyed exists no longer in the community= it no longer forms an item in the aggregate of wealth; for those persons, into whose hands the identical pieces of silver have come, have given an equivalent in wines, refreshments, eatables, gunpowder, &c., all which values are reduced to nothing; the gross national capital, however, is no more diminished in this case than in the former. A surplus value had been produced; and this surplus is all that has been destroyed, so that things remain just as they were.

Now, the only way of augmenting the productive capital of individuals, as well as the aggregate productive capital of the community, is by this process of saving; in other words, of re-employing in production more products created than have been consumed n their creation. Productive capital cannot be accumulated by the mere scraping together of values without consuming them; nor any otherwise, than by withdrawing them from unproductive, and devoting them to reproductive con- sumption. There is nothing odious in the real picture of the accumulation of capital; we shall presently see its happy con- sequences.

Again, suppose these 1000 dollars to have been spent in the purchase of furniture, plate, or linen. Still there is no reduc- tion of national productive capital; although it must be al- lowed there is no accession; for in this case, nothing more is gained than the additional comforts the cultivator and his fam- ily derive from the newly purchased moveables. The form under which national capital is accumulated, is com- monly determined by the respective geographical position, the moral character, and the peculiar wants of each nation. The accumulations of a society in its early stages consist, for the most part, of buildings, implements of husbandry, live stock, improvements of land; those of a manufacturing people chiefly of raw materials, or such as are still in the hands of its workmen, in a more or less finished state; and in some part, of the necessary manufacturing tools and machinery. In a na- tion devoted to commerce, capital is mostly accumulated in the form of wrought or unwrought goods, that have been bought by the merchant for the purpose of re-sale.

Fourthly and lastly, suppose the cultivator to add this excess of 1000 dollars to his productive capital, that is to say, to re- employ it in increasing the productive powers of his farm as circumstances may require, in the purchase of more beasts of husbandry, or the hire and support of more labourers; and in consequence, at the end of the year, to gather produce enough to replace the full value of the 1000 dollars, with a profit, in such manner, as to make them capable of yielding a fresh product the year after, and so on every year to eternity. It is then, and then only, that the productive capital of the commu- nity is really augmented to that extent.

A nation that at the same time directs its energies to all three branches of industry, namely, agriculture, manufactures, and commerce, has a capital compounded of all three different forms of production; of that amazing quantity of stores of every kind, that we find civilized society actually possessed of; and which, by the intelligent use that is made of them, are constantly renovated, or even increased, in spite of their enor- mous consumption, provided that the industry of the commu- nity produces more than is destroyed by its consumption. It must on no account be overlooked, that, in one way or other, a saving such as that we have been speaking of, whether expendec productively or unproductively, still is in all cases expended ano consumed; and this is a truth, that must re- move a notion extremely false, though very much in vogue- namely, that saving limits and injures consumption. No act of saving subtracts in the least from consumpclon, provided the thing saved be re-invested or restored to productive employ- ment. On the contrary, it gives rise to a consumption perpetu- ally renovated and recurring; whereas there is no repetition of an unproductive consumption. 98 I do not mean to say, that each nation has produced and laid by the identical article that composes its actual capital. Val- ues, in some shape or other, have been produced and laid by; and these, through various transmutations, have assumed the form most convenient foi the time being. A bushel of wheat saved will feed a mason as well as a worker in embroidery. In the one case, the bushel of wheat will be reproduced in the shape of the masonry of a house; in the other, under that of a laced suit.

The form in which the value saved is so saved and re-employed productively, makes no essential difference.

The saving is made with more or less advantage, according to the circumstances and intelligence of the person making it. Nor is there any reason why this portion of capital should not have been accumulated, without ever having for a moment assumed the form of specie. It may be that an actual product of the farm has been saved and 47Jean-Baptise Say, A Treatise on Political Economy prodigal to be a public pest, and every careful and frugal per- son to be a benefactor of society. 100 Every adventurer in industry, that has a capital of his own embarked in it, has ready means of employing his saving pro- ductively; if engaged in husbandry, he buys fresh parcels of land; or, by judicious outlays and improvements, augments the productive powers of what already belongs to him; if in trade, he buys and sells a greater quantity of merchandise. Capitalists have nearly the same advantage= they invest their whole savings in the same manner as their former capital is invested, and increase it pro tanto, or look out for new ways of investment, which they are at no loss to discover; for the moment they are known to be possessed of loose funds, they seldom have to wait for propositions for the employment of them; whereas the proprietors of lands let out to farm, and individuals that live upon fixed income, or the wages of their personal labour, have not equal facility in the advantageous disposal of their savings, and can seldom invest them till they amount to a good round sum. Many savings are therefore consumed, that might otherwise have swelled the capitals of individuals, and consequently of the nation at large. Banks and associations, whose object is to receive, collect, and turn to profit the small savings of individuals, are consequently very favourable to the multiplication of capital, whenever they are perfectly secure.

It is fortunate, that self-interest is always on the watch to pre- serve the capital of individuals; and that capital can at no time be withdrawn from productive employment, without a proportionate loss of revenue.

Smith is of opinion, that, in every country, the profusion and ignorance of individuals and of the public authorities, is more than compensated by the prevalent frugality of the people at large, and by their careful attention to their own interests. 101 At least it seems undeniable, that almost all the nations of Europe are at this moment advancing in opulence; which could not be the case, unless each of them, taken in the aggregate, produced more than it consumed unproductively. 102 Even the revolutions of modern times appear to have been rather favourable than otherwise to the progress of opulence; for they are no longer, as in ancient days, followed by continued hostile invasion, or universal and protracted pillage; whereas, on the other hand, they have commonly overthrown the bar- riers of prejudice, and opened a wider field for talent and enterprise. But it is still a question, whether this frugality, which Smith gives individuals credit for, be not, in the most numerous classes of society, a forced consequence of a vi- cious political organization. Is it true, that those classes re- ceive their fair proportion of the gross produce, in return for their productive exertions? How many individuals live in constant penury, in the countries considered as the most wealthy! How many families are there, both in town and coun- try, whose whole existence is a succession of privations; who, with every thing around them to awaken their desires, are reduced to the satisfaction of the very lowest wants, as if they lived in an age of the grossest barbarism and national poverty!

The increase of capital is naturally slow of progress= for it can never take place without actual production of value, and the creation of value is the work of time and labour, besides other ingredients. 99 Since the producers are compelled to con- sume values all the while they are engaged in the creation of fresh ones, the utmost they can accumulate, that is to say, add to reproductive capital, is the value they produce beyond what they consume; and the sum of this surplus is all the additional wealth that the public or individuals can acquire. The more values are saved and reproductively employed in the year, the more rapid is the national progress towards prosperity. Its capital is swelled, a larger quantity of industry is set in mo- tion, and saving becomes more and more practicable, because the additional capital and industry are additional means of production.

Thus I am forced to infer, that, though unquestionably there is an annual saving of produce in almost all the nations of Europe, this saving is extorted much more commonly from urgent and natural wants, than from the consumption of su- perfluities, to which policy and humanity would hope to trace it. Whence arises a strong suspicion of some radical defect in the policy and internal economical systems of most of their governments.

Every saving or increase of capital lays the groundwork of a perpetual annual profit, not only to the saver himself, but like- wise to all those whose industry is set in motion by this item of new capital. It is for this reason that the celebrated Adam Smith likens the frugal man, who enlarges his productive capi- tal but in a solitary instance, to the founder of an almshouse for the perpetual support of a body of labouring persons upon the fruits of their own labour; and on the other hand, com- pares the prodigal that encroaches upon his capital, to the roguish steward that should squander the funds of a chari- table institution, and leave destitute, not merely those that derived present subsistence from it, but likewise all who might derive it hereafter. He pronounces, without reserve, every Again, Smith thinks that the moderns are indebted for their comparative opulence, rather to the prevalence of individual frugality, than to the enlargement of productive power. I ad- mit, that some absurd kinds of profusion are more rare now- a-days than formerly; 103 but it should be recollected, that such profusion can never be practised, except by a very small num- ber of persons; and if we take the pains to consider how widely the enjoyment of a more abundant and varied consumption is

ill-executed tapestry, infinitely dearer than the modern paperings. By the recent discovery of the efficacy of sulphuric acid in destroying the mucilaginous articles of vegetable oils, they have bcen rendered serviceable in lamps on the Argand principle of a double current of air, which before could only be lighted with fish oil, twice or thrice as dear. This discov- ery has of itself placed the use of those lamps, and the fine light they give, within reach of almost every class. 106 diffused, particularly among the middle classes of society, I think it will be found, that consumption and frugality have increased both together; for they are by no means incompat- ible. How many concerns are there in every branch of indus- try, that, in times of prosperity, yield enough produce to the adventurers to enable them to enlarge both their expenses and their savings? What is true of one particular concern, may possibly be true of the national production in the aggre- gate. The wealth of France was progressively increasing dur- ing the first forty years of the reign of Louis XIV, in spite of the profusion, public and private, that the splendour of the court occasioned. The stimulus given to production by Colbert, multiplied her resources faster than the court squan- dered them. Some people supposed, that this very prodigal- ity was the cause of their multiplication; the gross fallacy of which notion is demonstrated by the circumstance, that after the death of that minister, the extravagancies of the court con- tinuing at the same rate, and the progress of production being unable to keep pace with them, the kingdom was reduced to an alarming state of exhaustion. The close of that reign was the most gloomy that can be imagined.

For this improvement in frugality, we are indebted to the ad- vances of industry, which has, on the one hand discovered a greater number of economical processes; and, on the other, everywhere solicited the loan of capital, and tempted the hold- ers of it, great or small, by better terms and greater security. In times when little industry existed, capital, being unprofit- able, was seldom in any other shape than that of a hoard of specie locked up in a strong box, or buried in the earth as a reserve against emergency= however considerable in amount, it yielded no sort of benefit whatever, being in fact little else than a mere precautionary deposit, great or small. But the moment that this hoard was found capable of yielding a profit proportionate to its magnitude, its possessor had a double motive for increasing it, and that not of remote or precaution- ary, but of actual, immediate benefit; since the profit yielded by the capital might, without the least diminution of it, be consumed and procure additional gratifications. Thencefor- ward it became an object of greater and more general solici- tude than before, in those that had none to create, and in those that had one to augment, productive capital; and a capital bearing interest began to be regarded as a property equally lucrative, and sometimes equally substantial with land yield- ing rent. To such as regard the accumulation of capital as an evil, insomuch as it tends to aggravate the inequality of hu- man fortune, I would suggest, that, if accumulation has a con- stant tendency to the multiplying of large fortunes, the course of nature has an equal tendency to divide them again. A man, whose life has been spent in augmenting his own capital and that of his country, must die at last, and the succession rarely devolves upon a sole heir or legatee, except where the na- tional laws sanction entails and the right of primogeniture. In countries exempt from the baneful influence of such institu- tions, where nature is left to its own free and beneficent ac- tion, wealth is naturally diffused by subdivision through all the ramifications of the social tree, carrying health and life to the furthest extremities. 107 The total capital of the nation is enlarged at the same time that the capital of individuals is subdivided.

After the death of Louis XIV, the public and private expendi- ture of France have been still further increasing; 104 and to me it appears indisputable, that her national wealth has advanced likewise= Smith himself admits that it did; and what is true of France is so of most of the other states of Europe in some degree or other.

Turgot 105 falls in with Smith’s opinion. He expresses his be- lief, that frugality is more generally prevalent now than in former times, and gives the following reasons= that, in most European countries, the interest of money was, on the aver- age, lower than it had ever before been, a clear proof of the greater abundance of capital; therefore, that greater frugality must have been exerted in the accumulation of that capital than at any former period; and, certainly, the low rate of in- terest proves the existence of more abundant capital= but it proves nothing with regard to the manner of its acquirement in fact, it may have been acquired just as well by enlarged production as by greater frugality, as I have just been demon- strating. However, I am far from denying, that in many particulars, the moderns have improved the art of saving as well as that of producing. A man is not easily satisfied with less gratifica- tions than he has been accustomed to= but there are many which he has learnt to procure at a cheaper rate. For instance, what can be more beautiful than the coloured furniture pa- pers that adorn the walls of our apartments, combining the grace of design with the freshness of colouring? Formerly, many of those classes of society that now make use of paper hangings, were content with whitewashed walls, or a coarse Thus, the growing wealth of an individual, when honestly acquired and reproductively employed, far from being viewed with jealous eyes, ought to be hailed as a source of general prosperity. I say honestly acquired, because a fortune amassed by rapine or extortion is no addition to the national stock; it is

litical convulsions, there is always a sensible contraction of capital, a stagnation of industry, a disappearance of profit, and a general depression while the alarm continues= and, on the contrary, an instantaneous energy and activity highly favourable to public prosperity, upon the re-establishment of confidence. The saints and madonnas of superstitious nations, the splendid pageantry and richly decorated iools of Asiatic worship, gave life to no agricultural or manufacturing enter- prise. The riches of the fane and the time lost in adoration would really purchase the blessings that barren prayers can never extort from the object of idolatry. There is a great deal of inert capital in countries, where the national habits lead to the extended use of the precious metals in furniture, clothes, and decorations. The silly admiration bestowed by the lower orders on the display of such idle and unproductive finery, is hostile to their own interests. For the opulent individual, who vests 20,000 dollars, in gilding, plate, and the splendour of his establishment, has it not to lay out at interest, and with- draws it from the support of industry of any kind. The nation loses the annual revenue of so much capital, and the annual profit of the industry it might have kept in activity. rather a portion of capital transferred from the hands of one man, where it already existed, to those of another, who has exerted no productive industry. On the contrary, it is but too common, that wealth ill-gotten is ill-spent also. The faculty of amassing capital, or, in other words, value, I apprehend to be one cause of the vast superiority of man over the brute creation. Capital, taken in the aggregate, is a powerful engine consigned to the use of man alone. He can direct towards any one channel of employment the successive accumulations of many generations. Other animals can command, at most, no more than their respective individual accumulations, scraped together in the course of a few days, or a season at the ut- most, which can never amount to any thing considerable= so that, granting them a degree of intelligence they do not seem possessed of, that intelligence would yet remain ineffectual, for want of the materials to set it in motion.

Moreover, it may be remarked, that the powers of man, re- sulting from the faculty of amassing capital, are absolutely indefinable; because there is no assignable limit to the capi- tal he may accumulate. with the aid of time, industry, and frugality.

Hitherto we have been considering that kind of value only, which is capable, after its creation, of being, as it were, incor- porated with matter, and preserved for a longer or shorter period. But all the values producible by human industry, have not this quality. Some there are, which must have reality, be- cause they are in high estimation, and purchased by the ex- change of costly and durable products, which nevertheless have themselves no durability, but perish the moment of their production. This class of values I shall define in the ensuing chapter, and denominate immaterial products. 108

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