Adam Smith Modern İdeas on Capital

Adam Smith and His Early Critics:
The First of the Modern Ideas on Capital

Adam Smith was the first to produce an analysis of the place of capital in production. His ideas were vague and indefinite, as later controversy proved; but none the less, he grasped the essen­tials of the use of capital. Although he believed that labor was the source of all value, he also said that the productivity of the laborer increased with the subdivision of labor, this in turn being dependent upon the quantity of capital available. Furthermore, the number of laborers could not be increased except by the augmentation of capital. In his opinion capital was accumulated by the savings of individuals, not as a social contribution but in the pursuit of self-interest. However, one who saved was a public asset; and a spender was a liability. It is impossible to discover what Smith believed to be the source of capital's productivity or its relative contribution to the value of the total product. As with so many other questions, Smith left his followers to debate the point and find explanations.

Criticisms of Smith as well as alternative explanations of the function of capital came from Lord Lauderdale who in 1804 published An Inquiry into the Nature and Origin of Public Wealth and into the Nature and Causes of Its Increase. He argued that Smith had not really given capital its due as a factor in production. Then he proceeded to analyze capital as an inde­pendent factor, productive in itself. Capital, as he saw it, either supplanted a certain amount of labor, or performed services which labor could not do. In either case capital was productive. Pur­suing this point further, it was shown that not only were industry and labor limited by capital but it was also possible for a country to be oversupplied with capital. This resulted in Lauderdale's belief in a potential overproduction of consumer's goods. Parsi­mony, or saving, as a source of capital was denied in favor of labor itself as a source.

F. B. W. von Hermann (1795-1868) must also be rated as a critic of Adam Smith, although he supported many of the master's doctrines. In 1832 he published his Staatswirtschaftliche Untersuchungen which criticized Smith's discussion of capital on the two points that it did not go deeply enough into the nature, operation, and interrelations of capital, and that capital was not treated consistently throughout. Such objections did not destroy the original soundness of the idea, however. Hermann defined capital as "all producers of income which have durability and exchange value." Capital was divided into use capital and in­dustrial capital, the latter being further broken down into loan and productive capital. His unique contribution to the theory of capital was that land, being a durable source of income, was capital. For purposes of the critical analysis, Hermann made capital a separate entity from any of the incorporated forms which it might assume, such as a machine or a tool. The purpose of this was to show that total capital was never destroyed, being replenished out of the income it produced.

Ricardo's point of view on capital was thoroughly in line with his labor theory of value: Capital was stored-up labor. That he was never completely satisfied with such a definition was borne out by his correspondence with McCulloch, and by his belief that value might be increased without labor. Of two objects brought to the market each requiring the same expenditure of labor, the superior price of one which arrived later was due to the longer period for which profits were withheld. This was obviously payment for waiting time. The idea was given more careful treatment by Nassau Senior who is credited with the formation of the abstinence theory of capital accumulation. He believed that land and labor were the primary factors in produc­tion, but unless tools were used the productive capacity of a people remained on a low level. In order to provide tools it was necessary to abstain from present consumption (unproductive consumption) in favor of using the resources available to produce more commodities (productive consumption). Abstinence was the term he gave capital; more elaborately defined, capital was wealth produced by labor to be used in the production of more
wealth.

John Stuart Mill described with facility the ideas of the classical school. His discussions of capital reached back to days before Adam Smith for their basis. He seemed to consider capital as the maintenance for workers advanced during periods of ac­tivity until such time as they could get the benefit of their labor. This was not only the essence of the earliest ideas of capital as stock, but also it was a necessary ingredient of Mill's wages-fund exposition of wages. In his more practical sections, his concep­tions of capital appear similar to the stored-up-labor theory of Ricardo.