1. Capital (1) What is the basis of capital -- i.e., of private property in the products of another's labor?
"Even if capital cannot be reduced to simple theft or fraud, it still needs the assistance of legislation to sanctify inheritance."
[ Jean-Baptiste Say, Traie d'economie politique, third edition, 2 volumes, Paris, 1817, I, p. 136, footnote ] How does one become an owner of productive stock? How does on become owner of the products created by means of this stock?
Through positive law . [Say, II, p. 4]
What does one acquire with capital, with the inheritance of a large fortune, for example?
"The person who acquires, or succeeds to a great fortune, does not necessarily acquire or succeed to any political power.... The power which that possession immediately and directly conveys to him, is the power of purchasing; a certain command over all the labor, or over all the produce of labor, which is then in the market."
[ Smith, Wealth of Nations, I, pp. 26-7 ] Capital is, therefore, the power to command labor, and its products. The capitalist possesses this power not on account of his personal or human properties but insofar as he is an owner of capital. His power is the purchasing power of his capital, which nothing can withstand.
Later, we shall see how the capitalist, by means of capital, exercises his power to command labor; but we shall then go on to see how capital, in its turn, is able to rule the capitalist himself.
What is capital?
"A certain quantity of labor stocked and stored up. .."
[ Smith, p. 295 ] Capital is stored up-labor.
(2) Bonds, or stock, is any accumulation of the products of the soil or of manufacture. Stock is only called capital when it yields its owner a revenue or profit.
2. The Profit of Capital The profit or gain of capital is altogether different from the wages of labor. This difference manifests itself in two ways: firstly, the profits of capital are regulated altogether by the value of the stock employed, although the labor of inspection and direction for different capitals may be the same. Furthermore, in many large factories, the whole labor of this kind is committed to some principal clerk, whose wages never bear any regular proportion to the capital of which he oversees the management. And the owner of this capital, though he is thus discharged of almost all labor, still expects that his profits should bear a regular proportion to his capital. [Smith, p. 43]
Why does the capitalist demand this proportion between profit and capital?
He could have no interest in employing these workers, unless he expected from the sale of their work something more than was sufficient to replace the stock advanced by him as wages; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock. [Smith, p. 42]
So the capitalist makes a profit first on the ages and secondly on the raw materials advanced by him.
What relation, then, does profit have to capital?
It is not easy to ascertain what are the average wages of labor even in a particular place and at a particular time, and it is even more difficult to determine the profit on capital. Variations of price in commodities which the capitalist deals in, the good or bad fortune both of his rivals and of his customers, a thousand other accidents to which his goods are liable in transit and in warehouses, all produce a daily, almost hourly, variation in profits. [Smith, pp. 78-9] But although it may be impossible to determine, with any degree of precision, the average profits of capital, some notion may be formed of them from the interest of money . Wherever a great deal can be made by the use of money, a great deal will be given for the use of it; wherever little can be made, little will be given. [Smith, p. 79]
"The proportion which the usual market rate of interest ought to bear to the ordinary rate of clear profit, necessarily varies as profit rises or falls. Double interest is in Great Britain reckoned what the merchants call a good, moderate, reasonable profit, terms which... mean no more than a common and usual profit."
[ Smith, p. 87 ] What is the lowest rate of profit? And what is the highest ?
The lowest rate of ordinary profit on capitals must always be something more than what is sufficient to compensate the occassional losses to which every employment of capital is exposed. It is this surplus value only which is the neat or clear profit. The same holds for the lowest rate of interest. [Smith, p. 86]
The highest rate to which ordinary profits can rise may be such as, in the price of the greater part of commodities, easts up the whole of the rent of the land and reduces the wages of labor expended in preparing the commodity and bringing it to market to the lowest rate, the bare subsistence of the laborer. The workman must always have been fed in some way or other while he was about the work; but the rent of land can disappear entirely.
Examples: the servants of the East India Company in Bengal. [Smith, pp. 86-7]
Besides all the advantages of limited competition which the capitalist can exploit in such a case, he can keep the market price above the natural price, by quite honorable means.
Firstly, by secrets in trade, where the market is at a great distance from the residence of those who supply it; that is, by concealing a change in price, an increase above the natural level. The effect of this concealment is that other capitalists do not invest their capital in this branch of industry.
