Progress and Poverty

To understand the subject matter at hand, terms like “wages,” “capital,” and “wealth” must be examined and defined. Wages are the “compensation paid to a hired person for his services” of any kind rather than manual labor only (31). “Capital” is a more ambiguous term to define. For Scottish economist Adam Smith, capital is “[t]hat part of a man’s stock which he expects to afford him a revenue, is called his capital” (32). His definition includes machines, instruments of trade, buildings, money, and useful abilities. British political economist David Ricardo suggested that “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labor” (33). Ricardo also excluded from capital those features that were not directly engaged in production.

A common way to define capital is “that portion of wealth which its owners do not propose to use directly for their gratification, but for the purpose of obtaining more wealth” (44). In other words, capital is “wealth devoted to procuring more wealth” (36). Political economy relies on three factors of production: capital, land, and labor. Thus, the definition of “capital” must exclude everything that can be defined as either labor or land. Capital can also be described as “wealth in course of exchange,” in which “exchange” includes the “reproductive and transforming forces of nature” (46).

Herein lies the difference between capital and wealth. Capital is only “wealth devoted to a certain purpose” (41). It is one of the components of wealth, the objective of which is to help production. Like “capital,” “wealth” is also a vague term, the ambiguities of which are linked to defining capital: “Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth” (38). The concept of wealth excludes other categories, such as things that have exchange value (bonds and promissory notes) but cannot be considered true wealth. Wealth can be defined as that which comprises natural products “that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the gratification of human desires” (40).

Adam Smith left a significant impact on the way that the relationship between wages and capital is conceived: “The produce of labor constitutes the natural recompense or wages of labor” (50). From simple to complex societies, the relationship between labor and wages had been the same. In a simple society, a man is paid for gathering eggs: his labor is the source of his wages. An industrial society is more complex, but the process is the same. There also is no distinction between self-employment and working for an employer.

Wages do not come from capital but from labor. Being paid a wage “always implies the previous rendering of labor by the employee” (56). It is production that is “the mother of wages” (55). Labor always comes before wages, and wages cannot exist without production. This causal effect is important to understanding more complex economic phenomena: “As the laborer who works for an employer does not get his wages until he has performed the work, his case is similar to that of the depositor in a bank who cannot draw money out until he has put money in” (60).

The common misconception about wages being derived from capital originates from the fact that the object of labor is not obtained immediately, as is the case in mining, architecture, and farming. After all, “the creation of value does not depend upon the finishing of the product; it takes place at every stage of the process of production” (64). Division of labor, which represents different parts of the same complex process, demonstrates that value is not created simultaneously. Wages come from labor, whereas “[c]apital has never to be set aside for the payment of wages when the produce of the labor for which the wages are paid is exchanged as soon as produced; it is only required when this produce is stored up” (68).

There is another related assumption in political economy about capital: that the maintenance of labor is also financed by capital. This proposition is “not self-evident, but absurd” (71). It is linked to another fallacy: that food and shelter are necessary for productive labor, which limits industry by capital. In reality, it is sourced from the wealth that is set aside for providing subsistence rather than wealth that furnishes production: “It is not necessary to the production of things that cannot be used as subsistence, or cannot be immediately utilized, that there should have been a previous production of the wealth required for the maintenance of the laborers while the production is going on” (73).

On the most basic level, it is the daily labor in a community that “supplies the community with its daily bread” (76). This process does not involve an advance of capital given to laborers. What the laborers consume comes in return for the work they performed. A general principle is at play here: “The demand for consumption determines the direction in which labor will be expended in production” (75). Production and consumption are akin to “a curved pipe filled with water” (78) in which the quantity of water poured into the pipe from one end comes out from the other. Similarly, workers involved in production “receive in subsistence and wages but the produce of their labor” (78).

Capital is not required to support labor engaged in production or to pay the workers’ wages. Its function is different: “Capital […] consists of wealth used for the procurement of more wealth, as distinguished from wealth used for the direct satisfaction of desire” that is, “of wealth in the course of exchange” (79). In other words, the function of capital is to grow the labor’s power to generate more wealth. In the context of the Industrial Revolution, capital works to make labor more efficient. At the same time, capital allows labor to “avail itself of the reproductive forces of nature” (79), such as planting seeds to get corn. Finally, capital facilitates the division of labor.

It is important to examine additional details about the role of capital. Capital does not provide the materials that labor transforms into wealth. It is not responsible for wages or maintaining laborers as they work. Capital sets no limits on industries. It may, however, limit the productivity of industries and their forms, such as the division of labor or a particular use of tools. However, such limitations are infrequent, and “it is evident that it is not from any scarcity of capital that the poverty of the masses in civilized countries proceeds” (86).

Understanding the nature of capital is important to see its role in society. In turn, its nature emphasizes the fact that capital is not the source of wages:

If each laborer in performing the labor really creates the fund from which his wages are drawn, then wages cannot be diminished by the increase of laborers, but, on the contrary, as the efficiency of labor manifestly increases with the number of laborers, the more laborers [. . .] the higher the wages should be (87).