What Is Capital?

Output and income can be decomposed as the sum of income to capital and income to labor:

National income = capital income + labor income

But what is capital? What are its limits? What forms does it take? How has its composition changed over time?

This question is central to this investigation.

Human capital consists of an individual’s labor power, skills, training, and abilities.

I exclude human capital in this book.

I define capital as the sum total of nonhuman assets that can be owned and exchanged on some market.

Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.

Human capital cannot be owned by another person or traded on a market (not permanently, at any rate). This is a key difference from other forms of capital. One can of course put one’s labor ser vices up for hire under a labor contract of some sort. In all modern legal systems, however, such an arrangement has to be limited in both time and scope. In slave societies, of course, this is obviously not true: there, a slave- holder can fully and completely own the human capital of another person and even of that person’s offspring. In such societies, slaves can be bought and sold on the market and conveyed by inheritance, and it is common to include slaves in calculating a slaveholder’s wealth. I will show how this worked when I examine the composition of private capital in the southern United States before 1865. Leaving such special (and for now historical) cases aside, it makes little sense to attempt to add human and nonhuman capital. Throughout history, both forms of wealth have played fundamental and complementary roles in economic growth and development and will continue to do so in the twenty-first century. But in order to understand the growth process and the inequalities it engenders, we must distinguish carefully between human and nonhuman capital and treat each one separately. Nonhuman capital, which in this book I will call simply “capital,” in- cludes all forms of wealth that individuals (or groups of individuals) can own and that can be transferred or traded through the market on a permanent basis. In practice, capital can be owned by private individuals (in which case we speak of “private capital”) or by the government or government agencies 514-55881_ch01_2P.indd 46514-55881_ch01_2P.indd 46 12/4/13 3:41 PM12/4/13 3:41 PM Income and Output —-1 —0 —+1 47 (in which case we speak of “public capital”). There are also intermediate forms of collective property owned by “moral persons” (that is, entities such as foun- dations and churches) pursuing specific aims. I will come back to this. The boundary between what private individuals can and cannot own has evolved considerably over time and around the world, as the extreme case of slavery indicates. The same is true of property in the atmosphere, the sea, mountains, historical monuments, and knowledge. Certain private interests would like to own these things, and sometimes they justify this desire on grounds of effi- ciency rather than mere self-interest. But there is no guarantee that this de- sire coincides with the general interest. Capital is not an immutable concept: it reflects the state of development and prevailing social relations of each society. Capital and Wealth To simplify the text, I use the words “capital” and “wealth” interchangeably, as if they were perfectly synonymous. By some definitions, it would be better to reserve the word “capital” to describe forms of wealth accumulated by hu- man beings (buildings, machinery, infrastructure, etc.) and therefore to ex- clude land and natural resources, with which humans have been endowed without having to accumulate them. Land would then be a component of wealth but not of capital. The problem is that it is not always easy to distin- guish the value of buildings from the value of the land on which they are built. An even greater difficulty is that it is very hard to gauge the value of “virgin” land (as humans found it centuries or millennia ago) apart from im- provements due to human intervention, such as drainage, irrigation, fertiliza- tion, and so on. The same problem arises in connection with natural resources such as petroleum, gas, rare earth elements, and the like, whose pure value is hard to distinguish from the value added by the investments needed to dis- cover new deposits and prepare them for exploitation. I therefore include all these forms of wealth in capital. Of course, this choice does not eliminate the need to look closely at the origins of wealth, especially the boundary line be- tween accumulation and appropriation. Some definitions of “capital” hold that the term should apply only to those components of wealth directly employed in the production process. For in- stance, gold might be counted as part of wealth but not of capital, because 514-55881_ch01_2P.indd 47514-55881_ch01_2P.indd 47 12/4/13 3:41 PM12/4/13 3:41 PM Income and Capital -1— 0— +1— 48 gold is said to be useful only as a store of value. Once again, this limitation strikes me as neither desirable nor practical (because gold can be a factor of production, not only in the manufacture of jewelry but also in electronics and nanotechnology). Capital in all its forms has always played a dual role, as both a store of value and a factor of production. I therefore decided that it was sim- pler not to impose a rigid distinction between wealth and capital. Similarly, I ruled out the idea of excluding residential real estate from capital on the grounds that it is “unproductive,” unlike the “productive capi- tal” used by firms and government: industrial plants, office buildings, ma- chinery, infrastructure, and so on. The truth is that all these forms of wealth are useful and productive and reflect capital’s two major economic functions. Residential real estate can be seen as a capital asset that yields “housing ser- vices,” whose value is measured by their rental equivalent. Other capital assets can serve as factors of production for firms and government agencies that produce goods and ser vices (and need plants, offices, machinery, infrastruc- ture, etc. to do so). Each of these two types of capital currently accounts for roughly half the capital stock in the developed countries. To summarize, I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some mar- ket.8 It consists of the sum total of nonfinancial assets (land, dwellings, com- mercial inventory, other buildings, machinery, infrastructure, patents, and other directly owned professional assets) and financial assets (bank accounts, mutual funds, bonds, stocks, financial investments of all kinds, insurance poli- cies, pension funds, etc.), less the total amount of financial liabilities (debt).9 If we look only at the assets and liabilities of private individuals, the result is private wealth or private capital. If we consider assets and liabilities held by the government and other governmental entities (such as towns, social insur- ance agencies, etc.), the result is public wealth or public capital. By definition, national wealth is the sum of these two terms: National wealth = private wealth + public wealth Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets). As I will show, private wealth accounts for nearly all of national wealth almost everywhere. 514-55881_ch01_2P.indd 48514-55881_ch01_2P.indd 48 12/4/13 3:41 PM12/4/13 3:41 PM Income and Output —-1 —0 —+1 49 This has not always been the case, however, so it is important to distinguish clearly between the two notions. To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in nonslave societies), it is not limited to “physical” capital (land, buildings, infrastructure, and other material goods). I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corpora- tion that holds patents, as is more commonly the case). More broadly, many forms of immaterial capital are taken into account by way of the stock market capitalization of corporations. For instance, the stock market value of a com- pany often depends on its reputation and trademarks, its information systems and modes of organization, its investments, whether material or immaterial, for the purpose of making its products and ser vices more visible and attrac- tive, and so on. All of this is reflected in the price of common stock and other corporate financial assets and therefore in national wealth. To be sure, the price that the financial markets sets on a company’s or even a sector’s immaterial capital at any given moment is largely arbitrary and un- certain. We see this in the collapse of the Internet bubble in 2000, in the fi- nancial crisis that began in 2007–2008, and more generally in the enormous volatility of the stock market. The important fact to note for now is that this is a characteristic of all forms of capital, not just immaterial capital. Whether we are speaking of a building or a company, a manufacturing firm or a ser vice firm, it is always very difficult to set a price on capital. Yet as I will show, total national wealth, that is, the wealth of a country as a whole and not of any par- ticular type of asset, obeys certain laws and conforms to certain regular patterns. One further point: total national wealth can always be broken down into domestic capital and foreign capital: National wealth = national capital = domestic capital + net foreign capital Domestic capital is the value of the capital stock (buildings, firms, etc.) located within the borders of the country in question. Net foreign capital—or net foreign assets—measures the country’s position vis-à-vis the rest of the world: more specifically, it is the difference between assets owned by the 514-55881_ch01_2P.indd 49514-55881_ch01_2P.indd 49 12/4/13 3:41 PM12/4/13 3:41 PM Income and Capital -1— 0— +1— 50 country’s citizens in the rest of the world and assets of the country owned by citizens of other countries. On the eve of World War I, Britain and France both enjoyed significant net positive asset positions vis-à-vis the rest of the world. One characteristic of the financial globalization that has taken place since the 1980s is that many countries have more or less balanced net asset positions, but those positions are quite large in absolute terms. In other words, many countries have large capital stakes in other countries, but those other coun- tries also have stakes in the country in question, and the two positions are more or less equal, so that net foreign capital is close to zero. Globally, of course, all the net positions must add up to zero, so that total global wealth equals the “domestic” capital of the planet as a whole.