# Transactions and Proceedings of the New Zealand Institute/Volume 10/Article 2

Art. II.—On Mill's Fourth Fundamental Theorem respecting Capital.
By John Carruthers, M. Inst. C.E.
[Read before the Wellington Philosophical Society, 12th January, 1878.]
In John Stuart Mill's "Principles of Political Economy" wealth is defined to be "all useful or agreeable things which possess exchangeable value;" capital is defined to be "a stock previously accumulated of the products of former labour." (Preliminary Remarks, p. 6, People's Edition, 1869.)
These definitions are almost the same, as scarcely anything possesses exchangeable value except the products of former labour.
Natural productions which can be and have been appropriated, are useful and have exchangeable value; they are, therefore, by the definition, wealth; but as they are not the product of former labour they are not capital. The natural grasses on the Canterbury plains, for instance, are wealth but not capital; artificial grasses in the same field are both wealth and capital.
Monopolies are also wealth but not capital; they are useful to the owner, and are exchangeable for commodities, but are not the product of former labour.
With these two exceptions, everything defined by the one word is also defined by the other; that is, capital is an accumulated stock of the products of former labour, and wealth is the same thing with monopolies added; for the sole right to the use of land or of any other free gift of nature, is only a monopoly.
When thus stated the necessity of a radical change in the definition of one or both words becomes apparent.
I propose to define wealth to be "everything in the world which is useful or agreeable to man;" and capital to be the "ownership of that wealth."
This definition of capital would require some limitation in order to bring it more nearly into accordance with the usual meaning of the word, but for my present purpose it is not necessary to be more minute, more especially as by doing so my paper would reach to an unwieldy length.
​Health, strength, education, mechanical skill, and all other useful personal gifts and acquirements are wealth, and every free man is a caxntalist to the extent of owning his own personal powers of body and mind. The health, strength, skill and intelligence of a slave are, however, as far as they are transferable, part of his master's capital.
The sun's warmth and light, air, rain, laud, and all other useful natural agents are wealth. Where they cannot be appropriated by any individual, the ownership is common to all, and all are capitalists; where they have been appropriated, as in the case of land, the owner becomes the sole capitalist as regards them.
The wealth of the world consists of natural agents which we receive unconditionally; of our personal mental and bodily acquirements; and of wealth which has been produced by the labour of man to eke out the supply that nature has unconditionally given, and which is not sufficient for our subsistence. This last we may call "commodities."
The stock of commodities in the world is perpetually being consumed and replaced by others produced by the unceasing labour of man. It is like the sea, from which the sun is perpetually taking away, but to which all that is taken away is returned by the rivers after it has passed over and fertilised the land. But for this circle of evaporation and rainfall, the earth would be a sterile waste; but for the circle of consumption and production, man would be reduced to a state no better than that of the brutes.
Our stock of commodities would not keep us alive more than two or three years at the furthest, and if labour ceased, that short time would see the almost total extinction of civilised man. "The accumulated wealth of centuries" is a thing of imagination. All the commodities in the world, which were not produced by the present generation, would not, even if converted by miracle into bread, at their exchange value as compared with that of bread, give us a single good meal. Accumulated capital there may be; that is, some families may increase, in every generation, their ownership of the wealth produced by others, but this can only be done to a small extent; the capital of all the banks in England represents but a very small part of the wealth which the labour of Englishmen produces every year.
It is not important to any individual in what form his capital may be. He may hold cash, or land, or he may have a stock of commodities in his store which would be of no use to himself, if he could not exchange them; but, by the help of trade, his capital will give him whatever form of exchangeable wealth he may wish. Practically, he is not the owner of any particular commodity but of a share, proportioned to his capital, of all the commodities of the world.
​Commodities which are removed from the circle of consumption and reproduction practically cease to be wealth, and their owner to be a capitalist. A steam-engine which is not at work might as well be in the moon for all the usefulness to man which it possesses, and the owner gets no benefit from it. If instead of a steam-engine, a stock of food and clothing is stored up, it is also lost to the world; the selfish owner may live on it for years, but when it is consumed he has no more capital. Had he given his stock to workmen, on condition that they should work for him, he would have done them good, by furnishing them with food, and his stock of wealth would have been larger than ever, for labour can, under ordinary conditions, produce more than the labourers consume when producing it. Such a man is a miser in the truest meaning of the word; fortunately, no one does store up actual wealth in this way; if hoarded at all, it is always converted into capital in the form of gold, and the storing of gold does no mjury to the community. The hoarder loses a revenue which he might have had, but which he generously leaves to be divided between all his brother money-owners throughout the world.
The "actual cost" of a commodity may be said to be the labour which has been expended in producing it, including a proportionate part of that which had been expended in making the tools used in its prodiiction. If the commodity be made in an out-of-the-way place, the extra labour employed in conveying to the workmen, the food, clothing, and other things they consume, should also be added, the food itself, however, and the other things, or rather the labour of producing them should not be added, nor the labour equal to that necessary to convey them to people not living in an out-of-theway place, for they would have been consumed in any case, or if not, it would not be because the workmen were idle, but because they were not capitalists.
The "proper cost" of a commodity is the actual cost it would take, under fairly judicious direction, to produce a similar commodity or a different one which would be equally, and in the same manner, agreeable or useful to man. A chemist may spend great labour in digging minerals from the earth and extracting from them hydrogen and oxygen, and in makmg these combine to form water. The "actual cost" of the water thus produced would be the labour expended by the chemist; the "proper cost" would be the labour required to draw a bucket of water from the spring.
A disregard of this obvious distinction has cost, and is still costing the world very dearly, in false political economy, and is the root of half the popular errors in the theory of money.
There are so few commodities of which the actual and proper cost are greatly different that it is forgotten that they can be different.
​All writers on Political Economy call money wealth. By Mill's definition, and also by that which I have suggested, it is so. It is something useful, as an implement of commerce, and possesses exchangeable value. By my definitions it would also be called a commodity, but it is a commodity of which the actual cost is great and the proper cost is nothing. If the several nations composing the community who use gold and silver as a medium of exchange, passed a law that in future these should not be money but that certain printed pieces of paper should take their place, and that after the present holders of money had been presented with one of those pieces of pajper in exchange for each sovereign he possessed, no more should be printed except a small defined number to be printed annually in order to cover expected losses and to meet the expected increased demand due to increased commerce, we should have a new commodity costing nearly nothing and which would possess all the useful qualities possessed by money.
Metallic money is in fact like the water made by the chemist, a costly commodity, which is useful in the same manner, and only to the same degree, as another commodity which costs nothing.
It is not more wise to use gold as a medium of exchange, where paper would do as well, and to employ an army of skilful, intelligent, and enterprising workmen to dig it out of the ground, than it would be to employ the same men in quarrying minerals containing oxygen and hydrogen, and then to hire a chemist to mint them into water for household use, whlle, at the same time, a river was passing the doors. Whether wise or not, still it is done. Workmen are employed digging gold; when a man gets a nugget, he is entitled, by long established custom, to be rewarded by a tax, levied on the whole world, proportioned to the weight of the nugget. He has no trouble in levying this tax; he simply takes his nugget to a capitalist, who gives him such commodities in exchange for it as the miner may choose, and the nugget thenceforward, whether coined into money or not, is a token certifying that the bearer has paid directly, or at second or later hand a tax due by the whole community. Like all debts contracted by the community for unproductive expenditure, this debt is twice paid, or rather is still due although it has been already paid. The finding of the nugget did not increase the total quantity in the world, of those commodities which the miner took in exchange for it. All that he got must therefore have been taken from some one who would otherwise have got them. The consumers of those kinds of commodities, therefore, paid the debt, but they paid it to the manufacturer of the commodities, who got it in the shape of higher prices, instead of to the capitalist who advanced the goods to the miner. The latter was not paid, but the token he held being a ​convenient instrument for passing capital from one man to another, he has no difficulty in disposing of it and it takes its place as a circulating medium.
Money is therefore valuable to the owner in the same way as any other acknowledgment of indebtedness. As a commodity, its proper cost is nothing, but it is a token proving a legal claim to a share of the wealth of others.
Having now explained the definitions which I believe to represent most accurately what wealth and capital really are, as well as the less important ones which it was necessary for the purposes of my paper also to explain, I will proceed to my main work, which is to test the arguments employed by Mill in the 9th part of chap. V. book I. of his "Political Economy," by substituting these definitions for those employed by him. The greater clearness of view which we get will enable us to detect the fallacies which the confusion of his definitions prevented him from seeing.
His fourth fundamental theorem respecting capital may be shortly stated to be, that by purchasing commodities a capitalist is not an employer of labour and does no good to the working classes, but that by keeping retainers, grooms, gardeners, and others working for him, or by giving away his income in alms, he does good to them and tends to raise their rate of wages.
His illustrations are very telling and well selected. A man, he says, may spend part of his income in employing workmen to build houses, dig artificial lakes, and lay out pleasure grounds; or he may spend the same sum in buying velvet and lace. If he has been in the habit of buying velvet and then changes his expenditure to hiring bricklayers, there is, at once, additional work for bricklayers, and the velvet-makers do not lose their employment, for they are employed making corduroy and other things for the bricklayers, so that the work given to the latter is clear gain to the working classes.
He gives several other illustrations, but none, I think, in which the fallacy lies so deeply hidden as in the one I have selected. At first sight his argument looks unanswerable, but it is really quite erroneous.
There is in the world a certain store of commodities, part of which is suitable to the wants of the rich, and part to those of the poor. The capitalist may select which of these he will take for his share, but he cannot turn velvet into corduroy, nor Chateau Lafitte into gin. The proportions of these which have been produced have been decided by men whose occupation and interest it is to estimate, as closely as they can, the quantity of each that will be required, and any sudden upsetting of their calculations is pretty certain to do harm. The philanthropic capitalist will find it very difficult to do any immediate good to anyone whom he would care to benefit, ​except at the expense of the very class whose well-being he wishes to promote.
If he does not buy the velvet which was manufactured in the expectation that he would buy it, velvet will fall in price, the manufacturer will lose money, and the wealthy classes who wear velvet having more of it to divide between them will each get more; that is, they will pocket the money the manufacturer lost.
Not having bought velvet, the capitalist has money to spare, and, in accordance with his kind intentions, he lays it out in corduroy and other commodities which the working classes use. These he distributes, as a gift, to people who, but for his bounty, would have had to go without them. Surely he is now doing good? He certainly is doing good to those who receive these good things, but all they get is taken from those who, if he had not interfered, would have got them; that is, the rest of the working classes, for whose use the commodities were manufactured. Our philanthropist's benevolence has, in fact, been paid for solely and entirely by the working classes. The capital he has parted with has gone bodily into the pocket of the corduroy manufacturer, who has been made happy by the rise in prices created by the unexpected and unprovided for demand. This is always the result of spasmodic benevolence; the working man pays for it.
The half million of money which has just been sent to India, or rather the wealth which is represented by it, came entirely from the poorer classes. The rich gave money which passed undiminished into the pockets of the grain merchants. Their alms did not reduce the quantity of bread they eat; they perhaps bought less velvet, thus benefiting those still richer, who did not require to retrench even in their consumption of velvet; but the real privation was borne by the labouring men, from whose stock all the grain was taken which was sent to feed the starving ryots.
If a rich man wishes to share his wealth, after it has once been produced, with the poor, he must give them that which he would otherwise have used himself; he must let them walk in his garden and eat the fruit and pluck the flowers; he must take them drives in his carriage; give them velvet to wear which would otherwise have decked his wife; share his Chateau Lafitte with them, in short he must really be self-sacrificing; if he gives them that which was manufactured for the use of others, he is only using his wealth so as to compel other people to do good to the objects of his compassion.
A capitalist has no power over the past, but he has over the future. Let us see how his endeavours to do good will be rewarded the second year.
The velvet-maker finding the demand for velvet slack will not ​produce so much next time, indeed, having lost part of his capital, he has not the command of the same quantity of commodities to give his workmen as he had before, so he is obliged to dismiss some of them, and would, therefore, not be able to produce so much, even if he wished to. The corduroy maker having, however, made money, and finding the demand for his wares brisk, employs more men and produces more corduroy. The total employment given by the two manufacturers together is therefore the same, and no injury to the working class has been produced by the mere transfer of capital from one of them to the other, no wealth in short has been lost or destroyed. There will be next year more corduroy made and less velvet. Our philanthropist has succeeded in doing good to the working classes to this extent; so long as he continues his bounty it is at his own expense and not at that of others. The rich man's charity, however, seldom or never does good; it generally returns into the pockets of the rich, and does so in this case, for his bounty is so much saved in poor rates to the neighbouring gentry.
If he tries Mill's other expedient of employing labour in building houses (not, however, for the poor to live in), in digging artificial lakes, and in making pleasure gardens, his success will be if possible still smaller. The self-sacrifice shown in making a personal display of wealth by having a fine garden instead of by wearing velvet is not of the kind that does much good to anyone.
We will assume that after having made his annual purchase of velvet, he resolves that in future he will be an employer of labour, and, to simplify the question, that he has told the velvet-maker of his intentions, so that the latter does not make so much velvet but employs his wealth in some other way. Under his old style of proceeding his income would have been accumulating until the velvet which he was about to buy was manufactured and until the requisite sum had been got together. It would probably have been placed in the bank as it came in, and the bank would have taken good care that it was not left there lying idle. It would have been lent out to manufacturers who would have procured with the money the wealth it gave them a right to, and this wealth would have been given to workmen in exchange for their labour, which would be devoted to some profitable employment in producing new wealth to replace that which they consumed. This must now stop, the philanthropist wants his money from day to day to pay his gardeners, so the manufacturer's labourers are thrown out of work, the manufacturer not having means to pay them. The gardeners, however, get the commodities which the manufacturer's men got before, and so on the average no harm is done. There has been a transfer of work from manufacturer's men to gardeners, and the labouring classes neither gain nor lose.
​The wealth which has been produced to replace that consumed by all the workmen concerned is also much the same as if no change had taken place in our philanthropist's expenditure. Had no such change taken place there would have been employed a certain number of velvet makers whose produce would have been quite useless to the working classes. There would also have been employed an equal number of manufacturers' men, whose produce might or might not have been useful, according to their employment.
The change having taken place, there are employed the same number of gardeners, whose produce is nil, also the same number of velvet-makers who, having been thrown out of employment, have taken to some other trade, where their produce, like that of the manufacturer, may or may not be useful to workmen.
The nett results of these endeavours to do good are—when charity is tried, a reduction in the poor rates; when keeping retainers is tried, a slight derangement of trade.
As to the theorem itself, the illustration of which we have now discussed, it is partly a truism, partly an error.
It will perhaps be best to examine separately the two sentences of which it is composed. "What supports and employs productive labour is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour, when completed." In other words, the labourer is supported by the food and other things he gets while at work, and this food is part of the food at the time in the world. This, of course, is a truism. The velvet- weaver is supported by the food he gets, and if he got no food he would make no velvet, however strong the demand for velvet might be.
"Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour." This sentence is very confused. The capitalist's own demand for commodities is the only cause of the employment of labour. The demand of others may decide the direction of that labour. A farmer, for instance, of a backwoods farm in Canada, with his stock of potatoes and pork, is a capitalist. He knows that his stock will soon be exhausted, and therefore labours to replace it. He consumes his present stock, not for the purpose of renewing it, but to keep himself alive. His own demand for commodities is the sole cause of his labour, and it gives also the direction of his labour. He meets the demand by growing more potatoes and pork. If he has neighbours who can produce ​these commodities better than he can, he will grow wheat or something else for which they have a demand, in the hope of trading with them. His produce will then depend for its direction on their demand. All other capitalists are influenced by the same motives. They know that their stock, however ample, will not last long; they therefore labour to replace it; if they can, they get others to help them, and, as an inducement, let these others share their present stock. All trade is founded on this simple principle.
Mill, like Ricardo before him, has got confused by giving to the word capital, which means the ownership of wealth, the definition which should be given only to wealth. He uses the word sometimes in the usual—sometimes in the defined sense.
The velvet-maker has a capital which he employs in making velvet; here "capital" means wealth. He gives his wealth to the weavers who help him to make the velvet, and thus to renew his stock of wealth. Again, the velvet-buyer has a capital which he devotes to buying the velvet. Here "capital" means not wealth, but the ownership of wealth; a right to a share of the wealth produced in the world, which share is taken in the form of velvet. The velvet-maker does not want velvet for himself; like the farmer, he produces things he does not want, so as, by trade, to get the things he does want. His own demand for commodities has made him work, and his neighbours' demand for velvet has given the direction to his work.
There has been only one portion of wealth employed in making the velvet, that of the velvet-maker. The wealth of the velvet-buyer has been employed about something else. He also has been making something he did not want, so that he could get what he did want, which was velvet. Mill's arguments are founded on the erroneous supposition that there were two portions of wealth employed about it.
If the velvet-buyer put his money into the bank, as supposed in my illustration, it would have been unnecessary for the velvet-maker to have any capital at all; he could have borrowed it from the bank, and thus the velvet-buyer would have supplied almost directly the commodities which maintained the velvet-weavers while they were at work.
It will thus appear that Mill's fourth theorem is erroneous, and the corollaries he draws from it equally so. If a capitalist spends his wealth in employing retainers of any kind, he does no more good to the working classes than if he spent it by exchanging it for velvet or diamonds.
His own demand for commodities is the only cause that his own stock of wealth is employed in feeding and clothing labourers while they are engaged in producing new wealth. If he does not himself produce the very commodities he wants, it is merely because it is more convenient to ​himself to produce others and to obtain those he wants by trade, but it is practically his wealth that is employed in their production.
If a benevolent capitalist wishes to benefit the working classes he cannot do so by giving away his wealth in charity; he only reduces the poor rates and thus benefits his wealthy neighbours. He cannot do so by employing labour in work, the produce of which is not to be enjoyed by the working classes themselves. He has but one path open to him, and that is to devote his wealth to the production of those commodities which labouring men generally use, and to give those commodities to workmen, not in alms, but in exchange for labour, which is to be employed in producing a still larger stock of the same. In other words, he must become a manufacturer and must conduct his business so as to make it pay. If he conducts it so as to lose money he is wasting the wealth entrusted to him and might as well buy velvet at once; the effect on the working classes would be the same.
If he makes money by his business he will become still richer and he must at last get rid of his wealth in some way. How is he to do it? Wealth is like the genius which had to be kept constantly employed or it would destroy its master. Unless it is constantly and properly employed its owner becomes a public enemy, and if it is properly employed it will perpetually increase, and make its owner's responsibility still greater. It is almost impossible to get rid of wealth without doing harm. One way would be to gradually turn it into gold and to throw the gold into the sea. There would be no destruction of wealth more than there would be in throwing so many small pieces of paper away, and even less, for the "proper cost" of gold as a medium of exchange is absolutely nothing; the ownership only of it would be transferred to all other owners of money in the world. This would be therefore giving the wealth principally to the rich, and it would, by increasing the exchange value of gold, be an incentive to further gold mining, a most wasteful expenditure of labour; it would also increase the national debt, and is, on the whole, not to be recommended. Another plan would be to gradually invest it in the national debt and present it to the nation. This would benefit rich and poor and is probably the best means open to a man who having done his share of labour had earned and wished to enjoy the leisure which an old man should have.
A younger man possessed of the requisite energy and knowledge could do still better. He might by engaging lecturers and by other means succeed in impressing on the working classes the vast benefit, even in a merely material way, which education would give to their children, and he might, to some extent, pay the expenses of their education; he might get museums, libraries, and other educational institutions established; forward ​science by providing some of the more expensive tools required, and by paying scientific men, so that they might devote more of their time to scientific studies.
He can do none of these things, except at the cost of the working classes; all the wealth devoted to the work would be diverted from the production of material comforts, which, if produced, they would enjoy, and no one has a right to make his poorer fellow-citizens pay for anything, unless he, after careful consideration aided by the best knowledge open to him, is fully convinced that the privation he compels them to suffer is compensated by the advantages they will get in exchange.
It is not too much to say that an expenditure equal to that represented by the national debt of England would be well invested, if it could be made the means of rousing the working classes of England to insist on every one of their children being as well educated as might be done, without throwing any unbearable burthen on the country.