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I have been spending more time on the idea that “capital goods” are “capital,” and I cannot understand how that can be true from an accounting or tax perspective because capital goods are consumed and treated as a cost of production (depreciation) over the course of their useful lives, whereupon the are no longer carried on the accounting books as an asset or a liability, even still used in production.
Whatever Adam Smith meant by the terms “capital” and “capital goods” in TWN, he did not coin either term. I have found prior uses of both terms using Google books, and his usage is consistent with the prior uses.
My impression is that both terms were used by accountants (and, eventually, insurers tax collectors) to distinguish between income (profits) and the underlying investment (capital) of a business. Capital goods are long-lived goods purchased by the business that are used to produce goods and wear out over time due to the production process. Such goods were correctly recognized as a consumption of capital that offsets any profits. At some point, capital goods became subject to the accounting fiction of depreciation, affecting the insured value of capital goods and, with the adoption of direct income taxes, allowing the cost of capital goods to be applied over their useful live rather than all at once for tax purposes. Profits distributed to shareholders were called dividends, and profits retained by the business were accumulated on the balance sheet as capital, all as the book value of capital goods diminished to zero.
Because capital goods are physical assets that are consumed from an accounting/tax perspective, they cannot be accumulated and, therefore, cannot be considered capital under capitalism. Or am I missing something?
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Capital goods supposedly transfer their value (in utils or SNALT) to the products they create, and, according to the neoclassical view, they even have an additional productivity to boot, so they create more value than their own.
According to economic theory, both Marxists and NC, capitalists do not accumulate this or that item; they accumulate the value embedded in items. The items may change, but value doesn’t. It transmutes itself as it jumps from item to item….
Moreover, according to Irvin Fisher, this view is intimately connected with capitalization:
Fisher, Irving. 1896. What is Capital? The Economic Journal 6 (24, December): 509-534.
Here is a schematic description of his argument:
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Jonathan,
If neoclassicals and Marxists want to assign a portion of the value of an end product as arising from the capital goods that helped produce them, they can do so by dividing the depreciation for a period by the number of end products produced in that period to get the per unit contribution of the capital goods.
Regardless, capitalists depreciate the cost of their capital goods over time as an operating expense to smooth out their profits taxes. From an accounting perspective, there is no way around the fact that capitalists consume their capital goods, they do not accumulate them.
If economists want to theorize a different system in which capital goods are accumulated (which I don’t think they have to do, they can just admit that depreciation, amortization and depletion are ways to reflect the contribution of capital to an end product), that system is not capitalism. If they do choose to do the right thing and look to accounting tricks like depreciation to understand capital’s contribution to the cost of the end product, then the contribution of capital goods in all cases reduces down to monetary units, but I don’t know if that tells us anything about the value of capital’s contribution.
Personally, I think the reason why they insist on capital being a material thing is they want to avoid admitting that money and finance are central to capitalism. They want to continue in a world where physical commodities are bartered and no money exists, thus keeping the discussion in the cooperative world of industry and avoiding even acknowledging the predatory world of business (aka Finance). The irreduciability of material capital goods is what allows them to argue an outsized share of the value of the end product should go to capital.
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irving fisher was the student of gibbs—at the time considered the greatest american theoretical physicist. he was also a student of sumner–a sociologist—hence ‘social physics’.
fisher (like s keen) also made a wrong prediction which cost him his reputation. .
in my area people view children as resources —investments in future or capital —or as commodities and income–things you buy and use like pets or toys until you want new and different ones.
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From an accounting perspective, there is no way around the fact that capitalists consume their capital goods, they do not accumulate them.
I don’t mean to begin a debate on this issue, just a couple of notes:
1. I don’t think economists think capitalists accumulate any given capital good. Obviously, individual capital goods depreciate. But in the view of economists, capitalists not only replenish the overall capital stock, they also cause it to grow. For them, one of the key hallmarks of capitalism is a growing physical capital stock, made of an-ever shifting array of capital goods and measured in value-read-money-in-‘constant-prices’ (figure below).
2. One has to distinguish accounting from so-called economic depreciation. Accounting depreciation is determined by accounting rules. So-called economic depreciation is determined, supposedly, by the (productive) value of the capital good. In practice, national accounting statistics measure depreciation differently that company accountants.
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I don’t mean to begin a debate on this issue, just a couple of notes: 1. I don’t think economists think capitalists accumulate any given capital good. Obviously, individual capital goods depreciate. But in the view of economists, capitalists not only replenish the overall capital stock, they also cause it to grow. For them, one of the key hallmark of capitalism is a growing physical capital stock overall made of an-ever shifting array of capital goods and measured in value-read-money-in-‘constant-prices’ (figure below). 2. One has to distinguish accounting from so-called economic depreciation. Accounting depreciation is determined by accounting rules. So-called economic depreciation is determined, supposedly, by the (productive) value of the capital good. In practice, national accounting statistics measure depreciation differently that company accountants.
I don’t mean to begin a debate, either. I was just trying to make sure my point was being understood and looking for any guidance or understanding you and others might offer. Your comments were helpful in clarifying things for me, which should allow me to make my argument better.
Ultimately, “capital stock” seems to be a vague concept that continues to exist solely so that economists can gesticulate and yell “ta-daaaa” in justifying capitalists’ outsized distribution of value. They’ve taken an accounting rule that grants a tax benefit and turned it into an economic parlor trick that cannot be justified because capitalists themselves don’t measure their performance that way. If there is a conflict between accounting and economics, accounting must win.
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