The Principles of Political Economy
by John Stuart Mill


Book 1, Chapter 4


Of Capital


    1. It has been seen in the preceding chapters that besides
the primary and universal requisites of production, labour and
natural agents, there is another requisite without which no
productive operations, beyond the rude and scanty beginnings of
primitive industry, are possible: namely, a stock, previously
accumulated, of the products of former labour. This accumulated
stock of the produce of labour is termed Capital. The function of
Capital in production, it is of the utmost importance thoroughly
to understand, since a number of the erroneous notions with which
our subject is infested, originate in an imperfect and confused
apprehension of this point.
    Capital, by persons wholly unused to reflect on the subject,
is supposed to be synonymous with money. To expose this
misapprehension, would be to repeat what has been said in the
introductory chapter. Money is no more synonymous with capital
than it is with wealth. Money cannot in itself perform any part
of the office of capital, since it can afford no assistance to
production. To do this, it must be exchanged for other things;
and anything, which is susceptible of being exchanged for other
things, is capable of contributing to production in the same
degree. What capital does for production, is to afford the
shelter, protection, tools and materials which the work requires,
and to feed and otherwise maintain the labourers during the
process. These are the services which present labour requires
from past, and from the produce of past, labour. Whatever things
are destined for this use -- destined to supply productive labour
with these various prerequisites -- are Capital.
    To familiarize ourselves with the conception, let us consider
what is done with the capital invested in any of the branches of
business which compose the productive industry of a country. A
manufacturer, for example, has one part of his capital in the
form of buildings, fitted and destined for carrying on his branch
of manufacture. Another part he has in the form of machinery. A
third consists, if he be a spinner, of raw cotton, flax, or wool;
if a weaver, of flaxen, woollen, silk, or cotton, thread; and the
like, according to the nature of the manufacture. Food and
clothing for his operatives, it is not the custom of the present
age that he should directly provide; and few capitalists, except
the producers of food or clothing, have any portion worth
mentioning of their capital in that shape. Instead of this, each
capitalist has money, which he pays to his workpeople, and so
enables them to supply themselves: he has also finished goods in
his warehouses, by the sale of which he obtains more money, to
employ in the same manner, as well as to replenish his stock of
materials, to keep his buildings and machinery in repair, and to
replace them when worn out. His money and finished goods,
however, are not wholly capital, for he does not wholly devote
them to these purposes: he employs a part of the one, and of the
proceeds of the other, in supplying his personal consumption and
that of his family, or in hiring grooms and valets, or
maintaining hunters and hounds, or in educating his children, or
in paying taxes, or in charity. What then is his capital?
Precisely that part of his possessions, whatever it be, which is
to constitute his fund for carrying on fresh production. It is of
no consequence that a part, or even the whole of it, is in a form
in which it cannot directly supply the wants of labourers.
    Suppose, for instance, that the capitalist is a hardware
manufacturer, and that his stock in trade, over and above his
machinery, consists at present wholly in iron goods. Iron goods
cannot feed labourers. Nevertheless, by a mere change of the
destination of these iron goods, he can cause labourers to be
fed. Suppose that with a portion of the proceeds he intended to
maintain a pack of hounds, or an establishment of servants; and
that he changes his intention, and employs it in his business,
paying it in wages to additional workpeople. These workpeople are
enabled to buy and consume the food which would otherwise have
been consumed by the hounds or by the servants; and thus without
the employer's having seen or touched one particle of the food,
his conduct has determined that so much more of the food existing
in the country has been devoted to the use of productive
labourers, and so much less consumed in a manner wholly
unproductive. Now vary the hypothesis, and suppose that what is
thus paid in wages would otherwise have been laid out not in
feeding servants or hounds, but in buying plate and jewels; and
in order to render the effect perceptible, let us suppose that
the change takes place on a considerable scale, and that a large
sum is diverted from buying plate and jewels to employing
productive labourers, whom we shall suppose to have been
previously, like the Irish peasantry, only half employed and half
fed. The labourers, on receiving their increased wages, will not
lay them out in plate and jewels, but in food. There is not,
however, additional food in the country; nor any unproductive
labourers or animals, as in the former case, whose food is set
free for productive purposes. Food will therefore be imported if
possible; if not possible, the labourers will remain for a season
on their short allowance: but the consequences of this change in
the demand for commodities, occasioned by the change in the
expenditure of capitalists from unproductive to productive, is
that next year more food will be produced, and less plate and
jewellery. So that again, without having had anything to do with
the food of the labourers directly, the conversion by individuals
of a portion of their property, no matter of what sort, from an
unproductive destination to a productive, has had the effect of
causing more food to be appropriated to the consumption of
productive labourers. The distinction, then, between Capital and
Not-capital, does not lie in the kind of commodities, but in the
mind of the capitalist -- in his will to employ them for one
purpose rather than another; and all property, however ill
adapted in itself for the use of labourers, is a part of capital,
so soon as it, or the value to be received from it, is set apart
for productive reinvestment. The sum of all the values so
destined by their respective possessors, composes the capital of
the country. Whether all those values are in a shape directly
applicable to productive uses, makes no difference. Their shape,
whatever it may be, is a temporary accident: but once destined
for production, they do not fail to find a way of transforming
themselves into things capable of being applied to it.

    2. As whatever of the produce of the country is devoted to
production is capital, so, conversely, the whole of the capital
of the country is devoted to production. This second proposition,
however, must be taken with some limitations and explanations. A
fund may be seeking for productive employment, and find none,
adapted to the inclinations of its possessor: it then is capital
still, but unemployed capital. Or the stock may consist of unsold
goods, not susceptible of direct application to productive uses,
and not, at the moment, marketable: these, until sold, are in the
condition of unemployed capital. Again, artificial or accidental
circumstances may render it necessary to possess a larger stock
in advance, that is, a larger capital before entering on
production, than is required by the nature of things. Suppose
that the government lays a tax on the production in one of its
earlier stages, as for instance by taxing the material. The
manufacturer has to advance the tax, before commencing the
manufacture, and is therefore under a necessity of having a
larger accumulated fund than is required for, or is actually
employed in, the production which he carries on. He must have a
larger capital, to maintain the same quantity of productive
labour; or (what is equivalent) with a given capital he maintains
less labour. This mode of levying taxes, therefore, limits
unnecessarily the industry of the country: a portion of the fund
destined by its owners for production being diverted from its
purpose, and kept in a constant state of advance to the
government.
    For another example: a farmer may enter on his farm at such a
time of the yea, that he may be required to pay one, two, or even
three quarters' rent before obtaining any return from the
produce. This, therefore, must he paid out of his capital. Now
rent, when paid for the land itself, and not for improvements
made in it by labour, is not a productive expenditure. It is not
an outlay for the support of labour, or for the provision of
implements or materials the produce of labour. It is the price
paid for the use of an appropriated natural agent. This natural
agent is indeed as indispensable (and even more so) as any
implement: but the having to pay a price for it, is not. In the
case of the implement (a thing produced by labour) a price of
some sort is the necessary condition of its existence: but the
land exists by nature. The payment for it, therefore, is not one
of the expenses of production; and the necessity of making the
payment out of capital, makes it requisite that there should be a
greater capital, a greater antecedent accumulation of the produce
of past labour, than is naturally necessary, or than is needed
where land is occupied on a different system. This extra capital,
though intended by its owners for production, is in reality
employed unproductively, and annually replaced, not from any
produce of its own, but from the produce of the labour supported
by the remainder of the farmer's capital.
    Finally, that large portion of the productive capital of a
country which is employed in paying the wages and salaries of
labourers, evidently is not, all of it, strictly and
indispensably necessary for production. As much of it as exceeds
the actual necessaries of life and health (an excess which in the
case of skilled labourers is usually considerable) is not
expended in supporting labour, but in remunerating it, and the
labourers could wait for this part of their remuneration until
the production is completed; it needs not necessarily pre-exist
as capital: and if they unfortunately had to forego it
altogether, the same amount of production might take place. In
order that the whole remuneration of the labourers should be
advanced to them in daily or weekly payments, there must exist in
advance, and be appropriated to productive use, a greater stock,
or capital, than would suffice to carry on the existing extent of
production: greater, by whatever amount of remuneration the
labourers receive, beyond what the self-interest of a prudent
slave-master would assign to his slaves. In truth, it is only
after an abundant capital had already been accumulated, that the
practice of paying in advance any remuneration of labour beyond a
bare subsistence, could possibly have arisen: since whatever is
so paid, is not really applied to production, but to the
unproductive consumption of productive labourers, indicating a
fund for production sufficiently ample to admit of habitually
diverting a part of it to a mere convenience.
    It will be observed that I have assumed, that the labourers
are always subsisted from capital: and this is obviously the
fact, though the capital needs not necessarily be furnished by a
person called a capitalist. When the labourer maintains himself
by funds of his own, as when a peasant-farmer or proprietor lives
on the produce of his land, or an artisan works on his own
account, they are still supported by capital, that is, by funds
provided in advance. The peasant does not subsist this year on
the produce of this year's harvest, but on that of the last. The
artisan is not living on the proceeds of the work he has in hand,
but on those of work previously executed and disposed of. Each is
supported by a small capital of his own, which he periodically
replaces from the produce of his labour. The large capitalist is,
in like manner, maintained from funds provided in advance. If he
personally conducts his operations, as much of his personal or
household expenditure as does not exceed a fair remuneration of
his labour at the market price, must be considered a part of his
capital, expended, like any other capital, for production: and
his personal consumption, so far as it consists of necessaries,
is productive consumption.

    3. At the risk of being tedious, I must add a few more
illustrations, to bring out into a still clearer and stronger
light the idea of Capital. As M. Say truly remarks, it is on the
very elements of our subject that illustration is most usefully
bestowed, since the greatest errors which prevail in it may be
traced to the want of a thorough mastery over the elementary
ideas. Nor is this surprising: a branch may be diseased and all
the rest healthy, but unsoundness at the root diffuses
unhealthiness through the whole tree.
    Let us therefore consider whether, and in what cases, the
property of those who live on the interest of what they possess,
without being personally engaged in production, can be regarded
as capital. It is so called in common language, and, with
reference to the individual, not improperly. All funds from which
the possessor derives an income, which income he can use without
sinking and dissipating the fund itself, are to him equivalent to
capital. But to transfer hastily and inconsiderately to the
general point of view, propositions which are true of the
individual, has been a source of innumerable errors in political
economy. In the present instance, that which is virtually capital
to the individual, is or is not capital to the nation, according
as the fund which by the supposition he has not dissipated, has
or has not been dissipated by somebody else.
    For example, let property of the value of ten thousand pounds
belonging to A, be lent to B, a farmer or manufacturer, and
employed profitably in B's occupation. It is as much capital as
if it belonged to B. A is really a farmer or manufacturer, not
personally, but in respect of his property. Capital worth ten
thousand pounds is employed in production -- in maintaining
labourers and providing tools and materials; which capital
belongs to A, while B takes the trouble of employing it, and
receives for his remuneration the difference between the profit
which it yields and the interest he pays to A. This is the
simplest case.
    Suppose next that A's ten thousand pounds, instead of being
lent to B, are lent on mortgage to C, a landed proprietor, by
whom they are employed in improving the productive powers of his
estate, by fencing, draining, road-making, or permanent manures.
This is productive employment. The ten thousand pounds are sunk,
but not dissipated. They yield a permanent return; the land now
affords an increase of produce, sufficient, in a few years, if
the outlay has been judicious, to replace the amount, and in time
to multiply it manifold. Here, then, is a value of ten thousand
pounds, employed in increasing the produce of the country. This
constitutes a capital, for which C, if he lets his land, receives
the returns in the nominal form of increased rent; and the
mortgage entitles A to receive from these returns, in the shape
of interest, such annual sum as has been agreed on. We will now
vary the circumstances, and suppose that C does not employ the
loan in improving his land, but in paying off a former mortgage
or in making a provision for children. Whether the ten thousand
pounds thus employed are capital or not, will depend on what is
done with the amount by the ultimate receiver. If the children
invest their fortunes in a productive employment, or the
mortgagee on being paid off lends the amount to another
landholder to improve his land, or to a manufacturer to extend
his business, it is still capital, because productively employed.
    Suppose, however, that C, the borrowing landlord, is a
spendthrift, who burdens his land not to increase his fortune but
to squander it, expending the amount in equipages and
entertainments. In a year or two it is dissipated, and without
return. A is as rich as before; he has no longer his ten thousand
pounds, but he has a lien on the land, which he could still sell
for that amount. C, however, is 10,000 l. poorer than formerly;
and nobody is richer. It may be said that those are richer who
have made profit out of the money while it was being spent. No
doubt if C lost it by gaming, or was cheated of it by his
servants, that is a mere transfer, not a destruction, and those
who have gained the amount may employ it productively. But if C
has received the fair value for his expenditure in articles of
subsistence or luxury, which he has consumed on himself, or by
means of his servants or guests, these articles have ceased to
exist, and nothing has been produced to replace them: while if
the same sum had been employed in farming or manufacturing, the
consumption which would have taken place would have been more
than balanced at the end of the year by new products, created by
the labour of those who would in that case have been the
consumers. By C's prodigality, that which would have been
consumed with a return, is consumed without return. C's tradesmen
may have made a profit during the process; but if the capital had
been expended productively, an equivalent profit would have been
made by builders, fencers, tool-makers, and the tradespeople who
supply the consumption of the labouring classes; while at the
expiration of the time (to say nothing of any increase), C would
have had the ten thousand pounds or its value replaced to him,
which now he has not. There is, therefore, on the general result,
a difference to the disadvantage of the community, of at least
ten thousand pounds, being the amount of C's unproductive
expenditure. To A, the difference is not material, since his
income is secured to him, and while the security is good, and the
market rate of interest the same, he can always sell the mortgage
at its original value. To A, therefore, the lien of ten thousand
pounds on C's estate, is virtually a capital of that amount; but
is it so in reference to the community? It is not. A had a
capital of ten thousand pounds, but this has been extinguished --
dissipated and destroyed by C's prodigality. A now receives his
income, not from the produce of his capital, but from some other
source of income belonging to C, probably from the rent of his
land, that is, from payments made to him by farmers out of the
produce of their capital. The national capital is diminished by
ten thousand pounds, and the national income by all which those
ten thousand pounds, employed as capital, would have produced.
The loss does not fall on the owner of the destroyed capital,
since the destroyer has agreed to indemnify him for it. But his
loss is only a small portion of that sustained by the community,
since what was devoted to the use and consumption of the
proprietor was only the interest; the capital itself was, or
would have been, employed in the perpetual maintenance of an
equivalent number of labourers, regularly reproducing what they
consumed: and of this maintenance they are deprived without
compensation.
    Let us now vary the hypothesis still further, and suppose
that the money is borrowed, not by a landlord, but by the State.
A lends his capital to Government to carry on a war: he buys from
the State what are called government securities; that is,
obligations on the government to pay a certain annual income. If
the government employed the money in making a railroad, this
might be a productive employment, and A's property would still be
used as capital; but since it is employed in war, that is, in the
pay of officers and soldiers who produce nothing, and in
destroying a quantity of gunpowder and bullets without return,
the government is in the situation of C, the spendthrift
landlord, and A's ten thousand pounds are so much national
capital which once existed, but exists no longer: virtually
thrown into the sea, as far as wealth or production is concerned;
though for other reasons the employment of it may have been
justifiable. A's subsequent income is derived, not from the
produce of his own capital, but from taxes drawn from the produce
of the remaining capital of the community; to whom his capital is
not yielding any return, to indemnity them for the payment; it is
lost and gone, and what he now possesses is a claim on the
returns to other people's capital and industry. This claim he can
sell, and get back the equivalent of his capital, which he may
afterwards employ productively. True; but he does not get back
his own capital, or anything which it has produced; that, and all
its possible returns, are extinguished: what he gets is the
capital of some other person, which that person is willing to
exchange for his lien on the taxes. Another capitalist
substitutes himself for A as a mortgagee of the public, and A
substitutes himself for the other capitalist as the possessor of
a fund employed in production, or available for it. By this
exchange the productive powers of the community are neither
increased nor diminished. The breach in the capital of the
country was made when the government spent A's money: whereby a
value of ten thousand pounds was withdrawn or withheld from
productive employment, placed in the fund for unproductive
consumption, and destroyed without equivalent.