Clarence Ayres on the economic concept of capital
The excerpt below is from ‘The theory of economic progress (1944)‘ by Clarence Ayres. He argues that economists essentially understand capital as a kind of moral or even spiritual concept while they use prices to measure this moral value. He chides them for not paying attention to the difference between the asset and the liability side of the balance sheet and obfuscating the two. Today, his criticism is still valid. The modern scholar might state that his idea that, when it comes to labour, ‘skill’ is neglected is somewhat outdated as economists nowadays use the concept of ‘human capital’.
But it does seem that the ‘dignity of work’, mentioned by Ayres as a core moral concept of economists, gets less attention from economists than in 1944?
The identity of these two processes of capital equipment with capital funds has never been established by any specific demonstration. It is rather implicit in the whole way of thinking which has been traditional in economics, and in this tradition it has been assumed rather than discovered or demonstrated. As Professor Fetter pointed out, it was assumed before the classical system of ideas was formulated and is one of the basic assumptions of that intellectual system. This is the assumption of the creative potency of funds. It finds expression in two forms: in what Veblen used to call “conjectural history,” and in the analysis of production. Nearly all economic writers have indulged at some time or other in chapters on “the progress of opulence” in which they have in imagination represented the accumulation of “wealth” as proceeding and conditioning industrial development, and professional historians have taken their cue and done their best to discover the sources of the (conjectural) funds which, supposedly, made later industrial development possible. These efforts have been notably unsuccessful, so that economic orthodoxy has never been able to cite history to its purpose at all extensively or with any great force of conviction. Nevertheless the historical assumption remains as a challenge to any other way of thinking to show how on any other basis Western society could be conceived to have developed as it has. Fortunately there is a profusion of evidence with which to meet this challenge.
But the chief preoccupation of economists has been with the analysis of production, as they have called it. In this analysis the major task of classical political economy there has been not thought of apology for or justification of the established order or its symbol capital. It did not even have the conscious purpose of furnishing “laws conducive to abundant and reliable supplies of capital and labor at reasonable prices.” Nevertheless it is in this main body of economic theory, if at all, that the duality of the concept of capital is explained and justified.
Economic theory has never been concerned with physical production in the sense of what goes on in factories and machine shops. Learned opinion has usually credited William Petty with a more realistically physical conception of the productive process than was true of later and maturer economic thinking because Petty analyzed production in terms of manhours in terms of the corn necessary to the physical sustenance of the laborer. But this is plainly not jobanalysis in the engineering sense. No less than later economists, Petty was fascinated by the subtleties of the pricing mechanism into which like his successors he tried to read a social meaning. Already, in the seventeenth century, the problem of economic theory was not to analyze what was actually going on in mine and factory but to establish a relationship between price and value. The problem is to establish a price equivalence between the value which is extractable from commodities in consumption and the value which has been put into them in production. Since value is by immemorial tradition a subjective phenomenon, its cost equivalent must also be subjective; and since for social reasons capital is the factor which is chiefly at issue, the analysis must from the outset do two things. It must identify capital with labor, and it must subjectify labor. Both of these projects were well underway by the time of William Petty. Petty’s corn has a more physical appearance than the plainly subjective “toil and trouble” in terms of which Adam Smith reckoned labor cost. But why corn? Why not skill? At no time in history could any genuine attempt to understand the physical operations of production have failed to take cognizance of labor’s “knowhow” as having at least no less significance for the production of goods than spiritual anguish. Not only did Petty ignore the realities of production; the truth is that whereas later economists thought of general discomfort, Petty thought specifically of hunger as the particular form of anguish which labor incurred in the exercise of production.
From this point on, the classical analysis of the factors of production has been in terms of spiritual wear and tear. The terminology which has been generated by this effort has been encyclopedic, ranging all the way from Petty’s corn to disutility, and nowadays, opportunity. But always the effect has been the same. Many critics have noted that the socalled factors of production are really distributive, and that their relation to value is one of imputation. That is, land, labor, capital, and management are identified not by virtue of what they do in the shop but by virtue of what they receive in the division of social income under the rubrics of rent, wages, interest, and profits, payment of which imputes to their recipients some sort and degree of social value. Furthermore it is generally agreed that the problem of imputation is most acute with respect to labor and capital. By common consent the profits of management are not a fixed charge on society since they vary directly with economic frictions and might be expected to approach zero as a limit in a state of perfect competitive equilibrium. Orthodox theory has also long since ceased to concern itself with the claims of landlords. More than a century ago Ricardo proved that rent plays no part in the determination of prices but is only a differential corresponding to physical differences between different parcels of land. Unfortunately this demonstration proves too much. As a number of students have lately seen, both capital and labor can be treated in the same way. Their receipts also can be shown to vary with physical circumstances; and any one may be proved not to determine price if the theory of imputation be observed with respect to the others, as it was in the case of Ricardo’s theory of rent. But this anomaly has not been recognized by orthodox opinion generally, in which therefore capital and labor continue to stand by themselves as the major factors for consideration in the imputation of value.
The authenticity of capital was thus established by its identification with labor. For nobody challenges the moral claim of labor. In contrast to feudal attitudes modern society has all along made a fetish of the dignity of work. Contemporaneously with William Petty, Locke based his whole theory of property on the indefeasible claim which is established when man mixes his labor with the soil. The right of laborer to the product of his toil was one of those rights which seemed to the philosophers of the eighteenth century to be inalienable. So strong is this sentiment that it dominated even the mind of the revolutionary Marx, who made it the basis of the claim of the proletariat to the “surplus value” of which they had been immemorially robbed. The laborer is worthy of his hire. If the same is true of capital, it is enough.
But the complementary nature of capital and labor does not derive from the working partnership of capi talists and laborers, very fortunately perhaps. Indeed the founders of the classical tradition were singularly candid in their treatment of the actual working relations of owners and employees. “From the writings of many, if not most, of them can be culled passages expressing a benevolent attitude to the claims of labor,” as Mr. Hobson says. The truth is that whatever the spotted actuality, owners and employees must be partners, since capital and labor are complements; and they are complements not because of any actuality but by virtue of their conceptional character as intellectual abstractions. This is true of labor no less than capital. From what human quality, for example, do the supposed rights of labor devolve? Clearly they have nothing to in common with technical skill, which appears in quite another universe of discourse. Locke said nothing about property rights being established by the degree of skill with which men till the soil. The quality in terms of which labor is identified with capital is wholly subjective, a spiritual quality, a creative potency, a matter of dignity and anguish, hunger toil and trouble, disutilities endured, opportunities forgone.
In the last analysis classical political economy is a theory of final causes in the theological sense. Production having been conceived as the creation of value, the question is: By virtue of what creative potency do labor and capital contribute jointly to this process? The answer to this question is implicit in the word “virtue.” Modern usage retains this expression as a cliche, but in the past it was taken literally. To all the simpler peoples, creation is indeed a matter of virtue of mana, as the polynesians say. Even today this is the popular conception of genius. In “creative” activity man mixes his personality with the inert materials of nature and so endows inanimate objects with something of his virtue. “Claims” and “rights” can be conceived in no other terms. It has often been remarked that Locke established the right of property on grounds identical with those of the rights of kings, which he denied. In this respect the virtue of labor is not only identical with that of capital; it is one with all the mystic potencies which have prevailed since the dawn of history.
Thus classical theory justified the duality of capital by extending its schizophrenia to the whole economic process. Capital means two things: the physical equipment of industry, and the funds by which control is exercised. It is the physical equipment which conditions actual industrial operations; but it is the funds which impart “value” and establish claims. In like fashion labor also means two things. It means the exercise of skill, which is the actuality of industrial production; but it also means the infusion of creative potency which likewise imputes value and establishes all rights and claims. All the terms which are used in the formulas of value theory are similarly schizophrenic. Thus for example we speak of the “productivity” of either labor or capital, meaning in some cases the ratio of physical product to number of machines or manhours of operation, and in others the ratio of creative potency to pecuniary remuneration. It is for this reason that the anomaly of capital passed unnoticed for so many generations and continues to persist even after it has been explicitly recognized. The confusion of the concept of capital is concealed in a general confusion, and it can be resolved only by a resolution which is likewise general.
Certainly the concept of capital is not altogether responsible for this general confusion. Something of the sort was bound to result from the effort to find a meaning in the price system which it does not have, and the condition was further aggravated by the “discovery” of a conjunction between price and the metaphysics of value. But economic theory has never been merely intellectual exercise. The effort to establish a relation between price and value has been made in the interest of understanding what is happening in the economy of modern Western civilization. Two sorts of things are happening, each of which can be indicated by a single word: industrialism and capitalism. These two aspects of the modern economy are in fact quite distinct. Nevertheless in the apprehension of modern society during the past four hundred years they have been identified; and this identification, symbolized by the word “capital,” has imparted its own peculiar quality of confusion to the economic thinking of this entire period