We Should Abolish “Capital”

– by Steve Roth

Originally posted at Wealth Economics

“Capital” is polysemous; it has multiple meanings. People, notably including economists (who should know better), constantly muddle those meanings together even within a single sentence, so that nobody including the speakers and writers themselves knows, or can know, what the speaker is saying. It’s a centuries-old dumpster fire — conceptual and empirical.

Marxists say that capital is a social relation among people, which seems like an alluring but opaquely abstruse definition that’s far removed the word’s widespread, everyday usage(s). Marxists aren’t wrong, they just have the wrong word. Ownership is a social relationship among people — obviously so, in straightforward everyday terms. If you own something, that means nobody else does. That’s what ownership means.

For Robinson Crusoe alone on his island, ownership was meaningless, completely non-pertinent. That changed when Friday arrived.1

Putting aside that linguistic misprision, here are three other primary meanings of capital that you hear quite commonly.

1. Long-lived, real-world (productive) stuff that humans have produced. (For national accountants, appropriately, land is not capital.) People tend to think of tangible things like drill presses and factories, but modern national accounts very much include intangible goods in their measure of “fixed capital” a.k.a. “fixed assets.” They tally structures, equipment, and a steadily increasing share of intellectual property (they used to call this category “software”).
2. Wealth — assets and net worth. Some of those assets (“nonfinancial assets”) are direct-control rights over real stuff; if you own a house, you can live in it. Some (“financial assets”) are claims against the balance-sheet assets of other people/economic units; there’s a related liability on some other balance sheet(s). The terms of those ownership rights are diverse; a stock equity share, for instance, gives you the right to a pari passu share of any distributed dividends. But owning an Amazon share doesn’t let you take Jeff Bezos’ company car for a spin. We can think of financial assets as indirect claims on real stuff, but in our financially complex world, that ownership/rights/claims pathway is impossibly diffuse. If you own a Treasury bond, that’s an indirect claim on what real stuff, exactly?
3. Wealthy people. This is a popular usage on the left in particular. “Capital is taking all the money!” Cue dumpster fire. If you want people to actually, really understand what you’re saying, say “the wealthy.” (People who own stuff, both financial and nonfinancial assets.) The sentiment here is well intended. Wealthy people are the ones who get all the unearned “property” income for just owning things. But the muddled meanings sabotage and befuddle the message. Capital doesn’t receive income; the owners of capital do.

If I had my way, capital would always mean long-lived, real-world stuff that humans produced. It’s a pretty clear and useful shorthand term that’s straightforwardly understood (though there are fine points that require some clarity). Otherwise, say “wealth” or “assets.”

As always, comments from my gentle readers are very welcome.

1. Hat tip to Matt Bruenig for giving me this aha! Crusoe understanding. The takeaway: the rights of ownership are arguably exclusive, not inclusive. It’s not (just) that you can live in your house and have a picnic on the lawn, it’s that nobody else can.