This lesson is studied in the Classical Liberal Arts Academy’s HUM-431 Economics course.
The Third “Partner” in Production
This chapter tells how wealth serves as an aid in the production of more wealth. Nature and man seldom work entirely alone in production. Certain tools, instruments, and machines are nearly always present. Man calls nature to his aid in the furnishing of motive forces, but domestic animals can do nothing without certain instruments—such as plows and wagons. Nature cannot serve man through the power of the wind except by means of windmills or ships. The application of steam power and electricity necessarily requires engines, motors, and all the complicated machinery of the modern factory or railway system. Even in the simplest tasks, where man is working almost alone with nature, some tool, such as a spade, a scythe, a rake, a fishing net, or a bow and arrow, is necessary.
Therefore, the successful production of wealth requires not only the contributions of nature and the labor of man, but also certain articles of wealth, which we call capital. The term capital is used in economics and business in several senses, and it is necessary to have a clear idea of each of these meanings. For the present we are concerned with the first meaning only, for which we have this definition:
Capital consists of all wealth except land (land being understood to include also water and all natural resources—in short, nature).
This is to say, capital consists of produced wealth. The other meanings of the term capital will be studied later.
Production Without Capital
The importance of capital will be easily understood if we try to picture the conditions under which wealth would be produced without the aid of capital. One can hardly conceive of men getting even the necessary food to keep them alive with nothing to work with but their bare hands. The earliest human beings probably did this at first, but it must have been a laborious and discouraging task. The best they could do was to find and pick wild fruits and berries, and perhaps occasionally catch birds, animals, or fish with their bare hands. Real hunting, without any instruments for catching and killing game, was, of course, impossible. The same was true of fishing without hooks, lines, or nets. Farming could not be carried on without tools. The early settlers in America had a hard enough time at first, although they brought a variety of tools and instruments with them. If they had been set ashore without such aids in the struggle for life, it is likely that not a single one would have survived.
The Beginning of Capital
Little is known about the beginning of capital. Its use must have originated ages ago among early men. In some way, early man must have conceived the idea that he could kill more game if he had some sort of weapon. Probably he first tried a stick or club. Then came the notion of a spear. To make it would take time from his hunting. But one day his luck was good and he brought home a supply of food. Resisting the temptation to consume it all at once, he laid aside enough to keep him for a day or two. During these days he did not have to hunt. He devoted them to the labor of making a spear. His wisdom was proved in the next day’s hunting, when he found that with his new weapon he could in a few hours get more game than in a whole day before.
It was now easier to lay up extra food, and he spent a few days making a bow and arrows. Again the result was an increase in the product of his hunting. In the course of time there followed nets for catching fish, the catching and training of animals, and rude instruments to scratch up the ground for simple farming.
Of course, no one early man did all this. We are merely trying to picture the probable way in which the first crude capital appeared and how it was slowly increased and improved during many generations.
Modern Capital
In modern times the development of capital has been enormous, and today there is almost no such thing as the production of wealth without the use of capital.
The following table contains an estimate (historical) of the total wealth in the United States:
ESTIMATED WEALTH OF THE UNITED STATES IN 1922
(in millions of dollars)
- City real estate and mines………………………. 87,801
- Farm real estate……………………………….. 59,900
- Livestock……………………………………… 9,986
- Farm implements and machinery……………………. 2,907
- Agricultural products………………………….. 13,242
- Gold and silver coin and bullion…………………. 3,838
- Railroads and their equipment……………………. 12,830
- Public service plants and equipment………………. 11,767
- Mining products………………………………… 2,346
- Manufacturing machinery, tools, etc………………. 12,002
- Manufactured products………………………….. 43,461
- Imported merchandise…………………………… 1,719
- Automobiles……………………………………. 4,380
- Clothing, personal ornaments, furniture, etc……… 18,278
- Total……………………………………….. 284,457
(This table is retained for illustration; modern totals would differ greatly.)
Capital Depends on Saving
Let us go back again to our early man, in order to learn more about the nature of capital. In order to have capital, he had to have more food than he needed to satisfy his immediate wants, and he had to forego the pleasure of immediately consuming his whole supply. He had to make the sacrifice of saving.
This is one of the most important facts about capital. If all persons used up, for the satisfaction of their immediate wants, everything they acquired, there would be no capital. Capital is accumulated only out of the surplus which can be spared after the satisfaction of immediate wants. This requires saving.
Our present mass of capital is the result of the savings of many thousands of people. Whenever anyone saves something from wages, salary, or other income and deposits it in a bank, buys stocks or bonds, or lends it to someone in business, so much is added to the fund of capital. Capital is likewise accumulated when a business man saves part of his profits and uses it to enlarge his business, to build an addition to his factory, to add to the stock of goods, or to buy new machinery. The farmer accumulates capital when he saves to build a barn or purchase new equipment.
Production with Capital Is a Roundabout Process
The experience of early man brings out another important truth about capital. What he most desired was food; namely, the game he killed. Yet he spent a whole day doing no hunting at all, but making a spear. He could have obtained some food that day if he had hunted, instead of making the spear. He did not seek his food directly, but went after it in a “roundabout way.”
A modern example shows the same principle. One seldom proceeds in the most direct way to produce the things he wants. A series of steps is first undertaken whose purpose is to aid in finally producing the desired product. For example, men do not make shoes directly from the materials furnished by nature. First, some dig iron from the earth. Others mine coal. These materials are used to make machinery. Buildings are constructed to house the machinery. Leather and other materials are prepared through many processes in different places. Finally, the workers in the shoe factory produce the shoes.
We thus see what is meant by capitalistic production and why it is called a “roundabout process.”
Two Ways of Satisfying Human Wants
It is evident that in this roundabout process many articles are produced which cannot directly satisfy any human want. No one could get satisfaction from the use of shoe-making machinery itself. Such machinery is desired only because it aids in the production of shoes.
It appears, then, that wealth satisfies human wants in two ways: either directly or indirectly. Food satisfies directly the want of nourishment. Clothing, houses, and many other goods satisfy wants directly. On the other hand, tools, machines, and materials used in production satisfy wants indirectly.
All such articles whose purpose is to aid in the production of other wealth are called intermediate goods.
Wealth That Satisfies Wants Indirectly
A large portion of the world’s wealth consists of these intermediate goods, which cannot serve us directly. Entire factories, railroads, and warehouses exist not to satisfy wants directly, but to assist in producing other goods that will do so.
Much of modern industry is engaged in making goods that serve only this indirect purpose. Machines are often made whose sole purpose is to produce other machines.
Some Capital Satisfies Wants Both Directly and Indirectly
It must not be supposed, however, that capital used in production can never serve man directly. Many kinds of capital, while aiding in production, also directly satisfy wants. Food, for example, is necessary to sustain workers and is therefore both directly useful and indirectly productive. Buildings may serve as both shelter and places of work.
Almost All Wealth Aids in Production
Nearly every kind of wealth that satisfies wants directly also aids in the production of more wealth. This is true of schools and colleges, where people are trained for productive work. Even recreation and exercise contribute to a worker’s efficiency and therefore to production.
Capital Increases the Productivity of Industry
The fact that intermediate goods do not satisfy wants directly raises an important question: Why are people willing to save and devote labor to producing them?
The answer is that, in the long run, they result in a greater abundance of goods that do satisfy wants directly. The roundabout process of production is more productive. It was this fact that led early man to save food and make tools. The result was a greater supply of food and other goods.
A more modern example may be seen in agricultural development. Early settlers with little capital produced small crops. By saving and investing, they acquired better tools, machinery, and equipment, which increased their productivity and improved their standard of living.
Conclusion
Capital, then, is worth all that it costs in saving and sacrifice. The whole modern system of production rests upon capital. Without it, modern civilization would not be possible, and human life would remain at a much more primitive level.
