Capital’s role in the technological specification of production and as a source of income called interest or profit encompasses theories of production and accumulation and theories of value and distribution. The subject has perplexed economists because capital produces a return which keeps capital intact and yields an interest or profit which is thus permanent, while consumption goods produce a unique return (utility) equal to cost and are destroyed in use.
The pre-industrial classical economists thought of capital as stocks of food and provisions advanced to labour; it was the accumulation of stocks making possible the division of labour which was of importance. This position is reflected in J.S.Mill’s (1886 [1848]) statement that to ‘speak of the “productive powers of capital”…is not literally correct. The only productive powers are those of labour and natural agents.’ Capital was at best an intermediate good determined by technology and thus subject to exogenous or ‘natural’ laws, rather than human or economic ‘laws’.
By Marx’s time, factory-labour working with fixed machinery had become widespread, and he was impressed by the increase in the ratio of ‘dead’ labour, which had gone into producing the machines, to the living labour which operated them. Marx’s idea of a ‘mode of production’ made capital a social, rather than a purely technological, relation; it was not the machinery, but the operation of the laws of value and distribution under capitalism that produced revolutionary implications. This integration of production and distribution challenged Mills’s separation and clearly raised the question of the justification for profit or interest as a permanent return to capital.
Jevons was among the first to note the importance of the time that labour was accumulated in stock. Böhm-Bawerk’s Austrian theory of capital built on time as a justification for interest in answer to Marx. The Austrians considered human and natural powers as the original productive factors, but ‘time’, which allowed more ‘roundabout’ production processes using intermediate inputs, was also productive. Longer average periods of production would produce greater output, but in decreasing proportion. It was the capitalists’ ability to wait for the greater product of longer processes, and the workers’ haste to consume, which explained the former’s profit.
Clark extended Ricardo’s classical theory of differential rent of land to physical capital goods, considering diminishing returns to be a ‘natural law’ of production. In Clark’s explanation it is the capital goods themselves which are considered productive, their return equal to their marginal product. Determination of capital’s ‘marginal’ contribution requires that it be ‘fixed’ while the amount of labour employed varies, but ‘transmutable’ into the appropriate technical form when different quantities are used with a ‘fixed’ quantity of labour.
L.Walras shifted emphasis from physical capital goods to their services as the ‘productive’ inputs and the return to owning the goods themselves which can then be analysed as the exchange and valuation of the permanent net revenues they produce.
Wicksell (1934) was critical of Walras, rejected ‘time’ as a productive factor, and was sceptical of the application of marginal theory to aggregate capital, for the ‘margin’ of the capital stock could not be clearly defined. The problem was in the fact that ‘land and labour are measured each in terms of their own technical unit’ while ‘capital…is reckoned as a sum of exchange value…each particular capital good is measured by a unit extraneous to itself’, which meant that the value of capital, equal in equilibrium to its costs of production, could not be used to define the quantity used to calculate its marginal return because ‘these costs of production include capital and interest. …We should therefore be arguing in a circle’ (Wicksell 1934). Wicksell’s argument recalls the original classical view of capital as an intermediate good, a produced means of production, rather than an ‘original’ productive factor.
Fisher made a sharp distinction between the flow of income and the capital stock that produced it; since discounting future income converts one into the other, the key to the problem is in the role of individual preferences of present over future consumption, or the ‘rate of time preference’ in determining the rate of interest. The greater the preference for present goods, the higher the rate of time discount and the lower the present value of future goods represented by the stock of capital.
Keynes’s General Theory assumption of a fixed stock of capital and the absence of a clear theory of distribution left open the analysis of capital and the determination of the rate of interest or profit to complement the theory. Neoclassical theorists (based in Cambridge, USA) added a simplified version of Clark’s theory via an aggregate production function relating homogeneous output to the ‘productive’ factors: labour and aggregate capital, in which the ‘quantity’ of capital would be negatively associated with its price, the rate of interest. This preserved the negative relation between price and quantity of traditional demand theory. Cambridge (UK) economists rejected capital as a productive factor, arguing that the value of the heterogeneously produced means of production comprising ‘aggregate capital’ could not be measured independently of its price, which was a determinant of the value used to identify its quantity. These theoretical disputes came to be known as the ‘Cambridge Controversies’ in capital theory.
A crucial role was played in these debates by Sraffa’s (1960) theory of prices, which furnished formal proof of Wicksell’s criticisms by demonstrating that changes in the rate of interest (or profit) in an interdependent system could affect the prices of the goods making up the means of production in such a way that the sum of their values representing the aggregate ‘quantity’ of capital might rise or fall, or even take on the same value at two different rates of interest. These demonstrations came to be known as ‘capital reversal’ and ‘reswitching’ and clearly demonstrated that the negative relation between the quantity of aggregate capital and the rate of interest had no general application. Such criticism does not apply to the analysis of individual capital goods, although a general equilibrium in which the rate of return is uniform requires the comparison of competing rates of return and thus ratios of profits to the value of the capital goods that produce them. Modern theorists agree only on the inappropriateness of aggregate capital concepts.
J.A.Kregel
University of Groningen
References
Mill, J.S. (1886 [1848]) Principles of Political Economy, London.
Sraffa, P. (1960) Production of Commodities by Means of Commodities, Cambridge, UK.
Wicksell, K. (1934) Lectures on Political Economy, London.
Further reading
Harcourt, G.C. (1972) Some Cambridge Controversies in the Theory of Capital, Cambridge, UK.
