What is Actual Capital versus not
Key to successful taxation and public policy is clear crisp language and definitions.
Actual Capital as defined by Adam Smith or Henry George, was a very different concept from what is called "capitalism" currently. Thomas Piketty in his book on capital defined capital as basically all wealth. But according to Henry George, that is not actual capital unless it is used as capital.
- WEALTH is:
- “All material things produced by labor for the satisfaction of human desires and having exchange value.”
- This means that wealth must have all of these characteristics:
- Wealth is material. Human qualities such as skill and mental acumen are not material, hence cannot be classified as wealth.
- Wealth is produced by labor. Land possesses all the essentials of wealth but one — it is not a product of labor, therefore it is not wealth.
- Wealth is capable of satisfying human desire. Money is not wealth; it is a medium of exchange whereby wealth can be acquired. Nor are shares of stock, bonds or other securities classifiable as wealth. They are but the evidences of ownership. None of these satisfy desire directly; if they are destroyed, the sum total of wealth is not decreased.
- Wealth has exchange value.
- Source: http://www.henrygeorge.org/def2.htm
Capital
Of course most financial mavens and economists don't use this narrow definition. Thus actual capital is:
- Actual Capital is that portion of produced Wealth used in the process of production or in the course of exchange.
Capital is a factor in production as is:
- Labor
- Land
- Raw Materials, Georgists include "Raw Materials" under their definition of land, which causes more confusion than helpful but helps them narrow their focus on taxing "land" without modernizing it to account for all sources of economic rent.
Production of things and services are what drive the economy and keep all of us clothed, housed and well fed, when things are well run and regulated.
Actual capital deserves protection. Actual wage compensation the same. Wealth from land rents, inherited property rents, etc... should not be protected. Wages include things like savings, retirements and debt acquired to sustain life from a persons wages. But if a person deserves all the products of his own labor and inspiration. His Children do not. That is why I consider myself a heretical Georgist so I don't have to argue this point.
- For More Detail:
- Georgist Defintions of Labor, Capital Wealth
THE TYRANNY OF WORDS
Often the corruption of society starts with the corruption of language and George Orwell tried to explain in his writings, including "1984." The sophism of the "tyranny of words" is corrupting and leads to dysfunctional economic policy.
The retired VP of Dun and Bradstreet, Roy A. Foulke, in 1949 wrote an article in the New York Daily news called the "Tyranny of Words" about how modern business and economists. It explains the sophism of modern business language. My Friend Rick DiMar reproduced the whole of this on his facebook page.
Adam Smith On Production
“In WEALTH OF NATIONS, Adam Smith pointed out, over and over again,”
“that all production is divided into three streams:
- one in the form of wages to employees,
- one in the form of rent to landowners,
- and one in the form of PROFITS to suppliers of capital.” [Tyranny of Words]
He explains:
“These terms, as used by Adam Smith, carry connotations that are somewhat different from their meaning in our present-day industrial life. ” [Tyranny of Words]
- “In wages to employees is included payments to officers of corporations, to proprietors and to partners for their services, as well at to labor.” [Tyranny of Words]
- “The payment of rent represents the return to the landowner on the value of the land in its natural state without improvements of any kind, and not the payment of a monthly or yearly sum, which today has generally come to include two payments, economic rent on the value of land, and a return on capital (i.e., the improvement)” [Tyranny of Words]
- “Profit, according to Adam Smith, is the return to capital after the payment of all wages and the rent of the land in its natural state has been deducted from production.” [Tyranny of Words]
And then Smith carefully observed:
“‘When those three different sorts of revenue belong to three different persons, they are readily distinguished; but when they belong to the same they are sometimes confounded with one another, at least in common language.’” [Tyranny of Words]
Of course that meaning got confused, on purpose sometimes. So,
“Because of the confusion in the term ‘profit’ as used by Smith in 1776 as the return to capital, and by the general public as the excess of income over cost, Henry George in 1879 decided to substitute the word ‘interest’ in place of the word ‘profit’ as used by Smith to represent return on capital.” [Tyranny of Words]
Which of course, was in turn deliberately obfuscated as the rise of modern financial institutions pushed "interest" as a main goal:
“It is possible that substitution in terms—though carefully explained with great clarity—has been the source of steadily increasing confusion in the mind of the pragmatic businessman.” [Tyranny of Words]
So the author calls it:
The ACCOUNTING PROFIT of business, representing the excess of income over cost . . .” [Tyranny of Words]
Therefore
“has nothing to do with economics.” [Tyranny of Words]
By which he means that business profits are not the same thing as "the profit to investors" as a person. A corporation is an institution, not a person. At least til clever lawyers got involved:
“Few business corporations were in existence in 1879.” [Tyranny of Words]
He notes:
“Not until 1886 did the Supreme Court decide that a corporation was a person in the meaning of the ‘due process’ clause of the federal Constitution. That decision gave an element of unprecedented security to the existence of the large corporation, which was just becoming a dynamic power in our economic life.” [Tyranny of Words]
Sources and Citations
- Citations (note you may need a facebook account to see it):
- Doc #145: Accounting (unearned) profit vs. economic (earned) profit
- https://www.facebook.com/notes/common-wealth-tax/doc-145-accounting-unearned-profit-vs-economic-earned-profit/1123980124381796/
- http://www.henrygeorge.org/def2.htm
- Further Reading
- https://holtesthoughts.blogspot.com/2015/09/georgist-definitions-of-labor-capital.html
- Disambiguating Capital from Simple Wealth
- Piketty, Capital Versus Unearned wealth
- The Trouble with Capitalism
- Lincoln the Marxist
- Confusing Capital with Rental Opportunities
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