18 Clark: apostle of two-factor economics - Part III: nineteenth-century Americas critics

American Journal of Economics and Sociology, The,  Nov, 2003  by Kris Feder

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George attributed much of the inconsistency to confusion between wealth as reckoned by the businessman and wealth as studied in political economy. Wealth to the individual businessman includes all exchangeable assets, real or financial. Political economy, however, must adopt a social point of view. Real capital is increased by real net investment, that is, by producing new capital faster than old capital depreciates. Financial wealth is increased merely by exchanging rights to existing wealth, that is, by credit transactions; it "adds nothing to the common stock." (47) It is a fallacy of composition to suppose that aggregate wealth can be measured by summing business wealth, for every credit is balanced by a corresponding debit. (48) "Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth." (49) As he sifted through various definitions of economic terms, George noted:

   As commonly used the word "wealth" is applied to anything having an
   exchange value. But when used as a term of political economy it must
   be limited to a much more definite meaning, because many things are
   commonly spoken of as wealth which in taking account of collective
   or general wealth cannot be considered as wealth at all. Such
   things have an exchange value, ... but they are not truly wealth,
   inasmuch as their increase or decrease does not affect the sum of
   wealth. Such are bonds, mortgages, promissory notes, bank bills,
   or other stipulations for the transfer of wealth. Such are slaves
   ... Such are land, or other natural opportunities, the value of
   which is but the result of the acknowledgment in favor of certain
   persons of an exclusive right to their use ... Increase in
   land values does not represent increase in the common wealth, for
   what landowners gain by higher prices, the tenants or purchasers
   who must pay them will lose. (50)

In The Science of Political Economy, George referred to the two sources of value as "value from production" and "value from obligation." Value from obligation arises from exchange agreements and represents a transfer of rights to existing wealth, not production of new wealth. According to George, Adam Smith had failed to distinguish consistently between the two sources of value. "This therefore has been the point on which the political economy founded by Adam Smith has been constantly at sea." (51)

Clark's "capital goods" are roughly equivalent to George's "wealth," and George's distinction affords an apt critique of Clark's theory of capital. By confusing exchange with production, Clark disguises the fundamental distinction between land and wealth. Wealth is produced and exchanged, but land can only be exchanged.

In Clark's static model, capital remains fixed in total amount as it moves fluidly among the material bodies of produced capital goods and land. The odd implication appears to be that when land values rise, the quantity of produced capital goods must necessarily fall to maintain a fixed total value of assets. Suppose, however, that the assumption of fixed "capital" is relaxed. According to Clark, capital is accumulated by saving, that is, by diverting labor from the production of consumer goods to the production of capital goods. It is obvious that nonproduced land cannot be accumulated in this way. Fortunately, the marginal productivity model also requires that land and other "capital goods" be perfect substitutes in production, so presumably no difficulty is presented by the fact that the land portion of "capital" remains fixed in amount while the produced portion grows. Moreover, according to Clark, capital is increased when land prices rise. When any parcel of land becomes more valuable, capital "transmigrates" into that parcel. A general increase in land values, other things equal, implies an increase in aggregate capital.