The Living Capital of the United Kingdom

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The Living Capital of the United Kingdom  (1891) 
by Joseph Shield Nicholson


Almost all systematic writers on Political Economy have discussed the question whether or not the skill of the artisan, credit institutions, the national organisation of industry, and other intangible elements in the social fabric should be included in the wealth of the individual or the nation. Adam Smith boldly places under 'fixed capital' the acquired and useful abilities of all the inhabitants or members of the society on the grounds: first, that the acquisition of such talents 'by the maintenance of the acquirer during his education, study, or apprenticeship always costs a real expense, which is a capital fixed and realised as it were in his person'; and, secondly, because the improved dexterity of a workman may be considered in the same light as a machine or instrument of trade 'which facilitates and abridges labour, and which, though it costs a certain expense, repays that expense with a profit.' J. S. Mill, on the other hand, insists at the outset that 'in propriety of classification the people of a country are not to be counted in its wealth. They are that for the sake of which its wealth exists. The term 'wealth' is wanted to denote the desirable objects which they possess, not inclusive of, but in contradistinction to, their own persons.' It is true that at a later stage in his work Mill attempts to distinguish between the skill and the personality of the artisan, and to include the former under wealth and not the latter, but in doing so he destroys the value of his first position. For just as there are close analogies between the living instrument and the dead, as clearly expressed by Adam Smith, there are also differences of vital importance. To take but one example: the interest derived from dead capital must for many purposes be contrasted with the wages obtained for skilled labour.

Without entering further into this very thorny subject of accurate definitions, it may be premised that the application of the term 'capital' to skill and the like will be justified or not according as we wish to emphasise resemblances or differences. In many inquiries we certainly ought to draw a sharp line between capital and labour in the narrow and popular senses of the terms, especially in cases where ethical considerations cannot he altogether excluded. At the same time, however, there are other occasions upon which analogy will be more useful than contrast, and such an occasion is offered by the problem I propose to discuss in the present paper.

Briefly stated that problem is to find the money-value of the 'living capital' of the United Kingdom, that is to say, the 'capital' fixed and embodied in the people as distinguished from the lands, houses, machinery, and the like.

The problem is by no means new, and is, in fact, old enough to possess the interest of a revival. It was a favourite topic with Sir William Petty and his followers in 'political arithmetic.' It maybe worth while to quote Petty's general description of his method, and also to give a particular example. The principle is explained as follows:[1] 'Suppose the people of England to be six millions in number, and that their expense at £7 per head be forty-two millions; suppose, also, that the rent of the lands be eight millions and the yearly profit of all the personal estate be eight millions more; it must needs follow that the labour of the people must have supplied the remaining twenty-six millions, the which being multiplied by twenty (the mass of mankind being worth twenty years' purchase as well as land) makes five hundred and twenty millions as the value of the whole people: which number, divided by six millions, makes above £80 sterling to be the value of each head of man, woman, and child, and of adult persons twice as much; from whence we may learn to compute the loss we have sustained through the plague, by the slaughter of men in war, and by the sending them abroad into the service of foreign princes.' The concluding sentence indicates the uses of the method: but a more interesting example may be given—no less than the most 'thorough' solution of the Irish problem ever attempted, so 'thorough,' indeed, that Petty is careful to explain that it must be looked upon rather as a 'Dream or Resvery than a rational Proposition.'[2] He begins by saying that he has heard many wise men, 'when they were bewailing the vast losses of the English in preventing and suppressing rebellions in Ireland, wish (in such their melancholies) that the people of Ireland being saved that island were sunk under water.' This is the key to the position. The people of Ireland are 'living capital' in a disadvantageous situation. If they were transported to the more populous districts of England and Wales and the Lowlands of Scotland their labour would be worth so much more, and the value and strength of this really 'United' Kingdom would be so much greater. The example is amusing by its grotesque detail, and it is interesting to note that the same argument is applied also with relentless logic to the Highlands of Scotland. The principle, however, on which it is based is perfectly sound, and has recently been much insisted on by American economists. Up to certain limits the increase of population in a given area more than proportionately increases the productive power of the people. The principle is, in fact, one of the main elements in the advantages of division of labour.

Following Petty's example up to the end of last century most writers who made estimates of the national wealth included as the principal item the value of the 'living capital.' In recent times, however, this element has been altogether dropped from the calculation. The omission is, I think, unfortunate in many ways, and especially in that it unconsciously leads people to exaggerate the importance of the material wealth of the nation in the narrowest sense of the term. Some years ago a thrill of gratified pride passed through the country when Mr. Giffen calculated that its materiel wealth (or capital as he called it) was accumulating at the rate of some two hundred and forty millions per annum. A more recent calculation by the same statistician to the effect that, in spite of depression and low prices, accumulations were still going on, though not so rapidly, was also received with undisguised satisfaction—especially hy the owners of dead capital. Mr. Giffen, it is right to bear in mind, took great pains to explain, especially on the last occasion, that his estimate was necessarily made in a very rough manner. The essence of his plan is to begin with national income as the basis, and to capitalise the various kinds of incomes at different numbers of years' purchase. This income is partly obtained from the income-tax returns (and is so far reliable as a minimum), but apart from this calculation a number of arbitrary and conjeotural elements are introduced. There are important classes of income which do not pay income tax, and there are items of property which do not yield income at all, e.g., the furniture in houses and public buildings. Again, of some important classes of income only a certain portion is supposed to be due to capital in the strict sense of the term, that is to say, as distinct from labour. Thus only one-fifth of the incomes of trades and professions (in Schedule D} is accounted for in this way—the remainder being, in the language of the economists, 'wages of superintendence.' Of the income of the lower middle class and the labouring classes a still smaller proportion is set down as due to capital proper. It is plain also that the number of years' purchase selected in different cases is somewhat arbitrary, and in every case must depend partly on the rate of interest. It is necessary that these qualifications should be borne carefully in mind, for there is something so pleasantly definite about two hundred and forty millions per annum that the steps in the calculation are liable to be forgotten.

It is well, also, that some of the teaching of the older economists should be remembered—that capital, although saved, is always being consumed, and that, as Adam Smith says, 'the annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes.' If this learning is somewhat too musty, at any rate the American statistician, Mr. Atkinson, may be heeded when he states that the richest nation has never more than the value—all told—of two or three years' production in hand in a concrete form, and that the whole world is always within a year of starvation. The recent accumulations of dead capital, when regarded in this manner, will assume somewhat less startling proportions.

A far better way, however, of restoring the due economic perspective seems to be to revert to the method of Petty and the early masters, and to assign a value to living, as well as to dead, capital. In order to make the comparison as fair as possible, I shall first of all take Mr. Giffen's figures for the various classes of income, and also for those parts of the various incomes supposed to be derived from the possession of capital in his sense. In this way a first approximation will be made to the income derived from 'living' capital, and greater accuracy may be then attained by considering in more detail certain kinds of income, and also certain comparatively permanent sources of 'wealth' (personal) which do not yield income.

The fundamental difficulty, which has probably thrust this problem into the background, is to pass from income to capital. We are all familiar with capital valuations of lands, houses, &c., based upon the revenues which they yield, but since the abolition of slavery in civilised communities we are not familiar with the capitalisation of wage-earning power. The short and simple dogmatism of Petty, already quoted, as to the mass of mankind being worth twenty years' purchase as well as land, seems, at any rate, to require elucidation. Why should the mass of mankind, it may well be asked, be worth neither more nor less than land? If land becomes worth thirty years' purchase, will mankind rise in value in equal proportion? and if land falls in value, will humanity fall also? The 'indestructible and original powers of the soil' are, by implication, as immortal as man is mortal, and, unlike him, require no care or labour for their preservation; and the points of contrasts between land and mankind might be indefinitely increased.

This preliminary didiculty, however, must in some way be surmounted before the comparison between 'dead' and 'living' capital can be effected; and a few facts may be noticed which serve to show that the valuation of human beings is not so remote from ordinary thought as at first sight appears. Constantly, for example, cases are occurring in the law courts which recall the methods of compensation adopted by our Saxon forefathers. A money-value is placed upon husbands, wives, sons, and daughters, and even upon their component parts. The loss of a leg has its value appraised equally with blighted affections and shocks to the system. Again, to look at the question from another point of view, every father of a family knows that it costs a considerable sum to rear children to a self-supporting age, and the higher the trade or profession selected so much the greater is the cost.

Estimates were recently given in a newspaper, expressly for the guidance of parents, of the total cost of qualifying for various employments.

These instances, however, do not at once suggest any practicable method of valuing the total human stock of a nation, with its infinite variety of ages, occupations, and abilities, A simple enumeration and summation is plainly impossible. The difficulty involved in the ages alone, from this point of view, seems at first sight almost insuperable.

We must exclude the very old and the very young, so far as earning-power is concerned, or even regard them as of negative value—but where shall we draw the line?

The clue to the solution seems to be given in the practice of insurance companies, based on the principle that whilst the individual dies the race remains, and not merely the race, but the classes and divisions of the race remain to a great extent uniform. Life insurance is mainly concerned with age and mortality, but a similar principle may be applied to the occupations of the people. The individual lawyer or carpenter perishes, but the profession or the trade survives, like a Platonic idea. In a stationary economic condition of a people, we might suppose that every trade and profession is an immortal, unchanging corporation. In this way we can see that Petty was justified in valuing the people as he valued the land—both are permanent sources of income. If the society under consideration is progressive, we are still more justified in this method of procedure in arriving at a minimum valuation. If wages are rising and the number of workers is increasing, we may he certain that after an interval of, say, ten years, the value of the 'living capital,' however estimated, will be greater than at present, and this living capital may be regarded as of the most permanent kind.

When this principle is once admitted, the only difficulty is to separate that part of the total income of the community, due to living labour in every shape and form, from that part due to capital in the narrow sense of the term. As the main practical object of this paper is to supplement Mr. Giffen's familiar estimates, it will be convenient, as already indicated, to take his figures to start with.

In an essay[3] on the progress of the working classes, Mr. Giffen states:—'The capitalist as such gets a low interest for his money, and the aggregate return to capital is not a third part of the aggregate income of the country (which may be put at not less than £1,200 millions) and is, as I should estimate,not much more than a fourth part.' It follows at once from this that the value of the 'living capital' is, at any rate, nearly three times the value of the dead. If it be objected that this simple method of valuation is illusory, I reply that it is actually less illusory than Mr. Giffen's own calculations, for the living capital of the race is less perishable than much of the so-called material capital.

But the full strength of the case can only be seen when the details of Mr. Giffen's method are examined. Take, for example, the table quoted in his recent work on the Growth of Capital (page 11). The object of this table is to give the amounts of the principal classes of income, and to capitalise those parts of these incomes which are supposed to he derived from capital proper. Now it will be found that of the total income of the trades and professions for 1885, namely, £l80,000,000, only one-fifth part is supposed to be derived from capital, and this is capitalised at only fifteen years' purchase. But the curious thing is that in the other items of income no such corresponding division is made. The largest item in the national inventory is the value of the houses. This is obtained by simply capitalising the return of rental under Schedule A in the income-tax returns at fifteen years' purchase, by which a gross value of nearly £2,000 millions is obtained. But it is perfectly plain that houses would not yield a return of between 6 and 7 per cent. unless a certain portion were actually earned by the constant expenditure of labour. Similarly so regards the income from lands, farming capital, railways, waterworks, and all kinds of companies, a division ought to be made in the same way as in the income derived from trades and professions. The value of the dead capital would in this way suffer a corresponding diminution.

Some idea of the importance of this point may be obtained from considering the aggregate figures of incomes (paying income tax) and the corresponding capital—the former, taking Mr. Giffen's figures, being (roughly) £429 millions, and the latter £7,620 millions. This gives the average of years' purchase as 18, or, in other words, the yield to the capital is about 5½ per cent.

Now it is plain that if the pure rate of interest, as indicated by railway debentures and corporation stocks, is only about 3 per cent., this extra return to capital must be considered as mainly due to the labour involved in maintaining and employing the capital. The element of risk when the question is considered from the national point of view is obviously of comparatively small importance.

Passing now from the capital owned by those paying income tax to the other principal items in the national inventory, the first in importance is the 'movable property not yielding income, e.g., furniture in houses, works of art, &c.' This valuation is made by simply taking half the value of the houses, and reaches the round figure of £1,000 millions or thereby. For the purpose in hand it is only necessary to observe that even to make a proper use of this movable property involves a large amount of labour, which is unrepresented in the wage-earning or profit-earning classes. The musical and artistic skill, for example, 'fixed and embodied' in young ladies should be included in an estimate of living capital, just as much as their pianos and paint-boxes are included in the dead capital. It is plain that the value of the greater part of movable property would vanish but for the acquired abilities of the inhabitants. A simple example will make this point clear. The more widely spread the love of art of the highest kind so much greater will be the value of old pictures. In the ancient world, when slaves were trained in all kinds of accomplishments, a very high value was placed upon natural abilities and education, and the mere fact of personal freedom cannot be held to destroy the meaning of an economic estimate. But this argument must, if valid at all, be carried further.

In order to make an adequate estimate of the value of living, on the same basis as in the case of dead, capital, the men, women, and children must be considered not merely as creating or giving value to so much material wealth, but as in themselves constituting, like the movables of the inanimate inventory, more or less permanent sources of enjoyment. Domesticated humanity may properly be considered to have a money-value, first, because it costs a very real expense to produce and maintain, and, secondly, because it furnishes pleasures which common experience shows rank very high in the scale of limited and desirable things. This second ground of valuation is of importance qualitatively, as showing the real basis of the comparison, but it is plainly unworkable quantitatively, and it therefore seems necessary to fall back upon cost of production for a measure as in the case of public property which also is not directly exchangeable.

Take drst of all a simple hypothetical case to illustrate the principle. Five shillings a week for fifteen years is about £200, and this does not seem an extravagant estimate for bringing up the child of a superior artisan or tradesman. The value of the house in which the child is reared would probably be something less than this sum; in other words, an 'economic man' could more easily purchase a house in fifteen years than rear a child during that period.

The example is plain enough, but to advance from the particular to the general is by no means so simple. Several distinct difficulties are involved—difficulties of age, sex, and social position, for example. Seeing that only very general results are aimed at, something like Mr. Giffen's simple method of halving a known item seems very attractive; if the dead movables are half the value of the houses, why should the living not be roughly estimated in the same manner? As the object of the present inquiry is mainly comparative, in default of any better plan the value of the house may provisionally be taken as the basis of the valuation of the people in it, just as it is taken as the basis of their expenditure for purposes of taxation.

It only remains, then, to determine this quantitative relation of the two valuations—the cost of producing the people compared with the cost of producing the house. The principle applied must be simple and general; it is impossible to make a summation of problematical figures for different classes. The best clue to the selection seems furnished by the example already taken. We may compare roughly the rental of the house with the expenditure on the persons it contains. Now according to Mr. Giffen's tables the total rental of houses is about £128 millions, whilst the total income of the nation is about £1,300 millions, from which it follows that ten per cent. is spent upon house-rent. If we take the usual figure of five persons to every house, and further assume that ten per cent. of income is spent upon the complete maintenance of each person and ten per cent. on rent, we shall still have four-tenths of the income left over. Accordingly it does not appear beyond the mark, taking the family as a permanent institution in the sense already explained, to consider every 'person' as of equal value with the house in which he lives, and every family of five times the value of the house. As this part of the estimate of the living capital presents most difficulty, and is most liable to be misunderstood, some further explanation or justification may be derived from the following considerations. In the first place, in the Census Returns nearly 60 per cent. of the population are placed in the 'unoccupied' class, On analysis, however, it appears that this class comprises children and young persons who are preparing for occupations of various kinds, and women who, as wives and daughters, are occupied with household duties. Now a child has as just a claim from the present point of view to valuation as a colt, and the employment of domestic servants and governesses shows that the unpaid work of women of the class described ought to be considered of at least equal value. But secondly, even the 'occupied' classes must be considered not merely as earning income but as furnishing in their private capacity utilities to the community or to their families on which a value may properly be placed. There is no difficulty in seeing that in an estimate of 'living capital' some allowance must he made for the people themselves (apart from their wealth-producing power)—the difficulty is to determine the most reasonable measure. Cost of production or of maintenance (if we consider the various classes as immortal species) has the advantage of simplicity, and may also be supported by various analogies, e.g., public works, lighthouses, roads, breakwaters would naturally be valued by their original cost and the additional annual outlay.

It is not necessary to enter into particulars regarding all the items in Mr. Giffen's table of material wealth. The general result is perfectly plain; the closer and more critical the examination, so much the greater appears to be the relative importance (taking, as far as possible, the same basis and method of calculation) of the 'living' to the 'dead' capital. It has already appeared in the course of this inquiry that the method of calculation adopted by Mr. Giffen is, in some respects, inconsistent. There seems to be no sufficient reason discoverable for the precise figures adopted for turning income into capital, nor for deciding what part of income ought to be considered as derived from capital proper, and what part from the management of the capital. Farmers' capital, for example, is calculated on the basis that it yields over 12 per cent. per annum

O fortunatos nimium, sua si bona norint, Agricolas!

In conclusion, after this reiteration of the necessity of caution, an attempt may be made to give the appearance of numerical precision to the estimates of the national capital, living and dead. For the latter, Mr. Giffen makes a grand total of some £10,000 millions. Of this amount, however, the movable property in houses, &c., and the government and local property in the shape of buildings, docks, &c., to the amount of nearly £1,500 millions do not yield income, whilst another £500 millions of capital is invested abroad. Thus the dead capital in the country yielding income is about £8,000 millions, and the income yielded (deducting that from foreign investments) is about £500 millions.

Now it will be observed that the pure interest on £8,000 millions at 3 per cent. is £240 millions only, or not quite half the amount (i.e. £50O millions) put down as derived from dead capital. It follows, adopting the principle examined above, that the other 3 per cent., or thereabouts (or the other half of this income), must be put down to the the 'living capital' associated with the dead capital; in other words, if the capital (in the ordinary sense) of the country actually yields 6 per cent., whilst the rate of interest, pure and simple, is only 3 per cent., half this total yield is due to the labour of the capitalist. Now the capitalist (i.e. the species, not the individual) qua labourer, remains as much a permanent factor of the industrial resources of the country as the land itself, and therefore we may fairly assume that the aggregate value of the living capitalist (considered as an enduring species) is, on Mr. Giffen's showing (adequately interpreted), about equal to the aggregate value of his capital, i.e. about £8,000 millions.

In giving, however, an estimate of the national 'living' capital, it will be best to take the items in the order of their importance. The figures, as Mr. Giffen says of his comparatively small 'dead' capital, are so large that a million or so is of no consequence, and the calculation must be made in a very rough manner.

Assume, then (following Mr. Giffen as already quoted), that the income of labour in the ordinary sense is £800 millions per annum. At thirty years' purchase this gives the value of labour qua labour as £24,000 millions. Next consider the capitalist as an employer and worker and not merely as the receiver of interest. Mr. Giffen assumes that four-fifths of the income under Schedule D (trades and professions) is really not interest but earnings of management. This, however, mounts to upwards of £140 millions, and capitalised as before extends beyond £4,000 millions. To this amount must be added the £8,000 millions derived, as already explained, from considering the management of the aggregate national dead capital. The total is thus £12,000 millions. Next we must consider the people of the country not as mere producers, labourers, or employers, but as 'things in themselves,' or rather superior domestic animals reared for their affectionate dispositions and intellectual and moral activities. Here, as already explained, it seemed best to take a rough empirical rule founded on 'cost of production.' For the present purpose it has been assumed that every 'person' is worth, or rather costs, at least as much as every 'house.' Without stopping to expand the meaning of the inverted commas we reach at once a sum total of £l0,000 millions.

Lastly, taking the income of those who return under Schedule E (official salaries and the like), and capitalising in the usual way, we conclude the inventory of the national living capital with the modest item of £l,000 millions.

The results, arranged in order, are: Living labour (ordinary), £24,000 millions; living labour (trades and professions), £12,000 millions; domesticated humanity (all kinds),[4] £10,000 millions; professional salaried officialdom, £1,000 millions—in all, a grand total of £47.000 millions.

Thus the living capital of the United Kingdom is, taking the estimate given above, about five times the value of the dead! Or, to illustrate the general by the particular, the just ransom, appraised on commercial principles, of the men, women, and children would be five times as great as the market price of all the material wealth—lands, houses, railways, mines, furniture, pictures, and the infinite variety of instruments of production and objects of consumption!

This estimate of living capital is no doubt open to question, both as regards the principle on which it is based, and the actual figures adopted. But the important point to observe is that it is as well founded and as useful as the corresponding estimate of capital in the narrower sense of the term.

It may be well to restate the general principle in the light of the conclusion. There are two main positions. First of all, the people of the country are regarded (like the dead capital) as earning so much income. There can be no question whatever that the part of the national income due to personal exertion of all kinds is far larger than that derived from the pure interest on previous accumulations, or from the rent of appropriated natural agents. The relative proportions assigned, it may be remarked, might have been set down still more in favour of 'living' capital if other considerations had been allowed for, as, for example, the 'abstinence' involved in saving. It seemed best, however, not to carry the analysis beyond the point already accepted in the corresponding estimate of 'dead' capital, which has always been kept in view.

Exception may, no doubt, also be taken to the method of capitalising this income; but in a stationary, and still more in a progressive, state of society, it seems legitimate to look upon this income as derived from permanent sources—in short, to acknowledge that life is as permanent as land. Now, in capitalising permanent kinds of income, where, from the national point of view, risk may be omitted, the rate of interest must obviously be the basis, and at present thirty years (or even thirty-three) may be fairly taken.

But secondly, just as Mr. Giffen and others give a value to that part of dead capital which does not yield income (e.g., the furniture in houses), so a value must be given to 'living' capital simply as a permanent source of enjoyment. Here the natural basis (seeing that exchanges of this kind of capital are not now made) seems to be cost of production. As regards the precise method to be adopted, opinions may differ; my own choice was influenced largely, apart from the reasons already given, by the idea of making the comparison with the dead capital as close as possible. A more accurate method, however, might with some difficulty be founded upon aggregate national estimates of various kinds of annual consumption, expenses of education, and the like.

The uses to which the general result may be applied, after making every possible allowance for correction, are so various and far-reaching, that they demand a separate investigation. It is sufficient now simply to allude to such problems as Socialism and the relations of labour and capital (in the narrow sense); national education of all kinds; and, finally, the nature of the progress of civilisation in its historical aspects, as indicated by the growth of 'living capital.'

J. S. Nicholson


  1. Political Arithmetic, p. 192, edition 1699.
  2. Op. cit. p. 226.
  3. Essays of Finance, 2nd Series, p. 403.
  4. As explained above, this item is obtained by considering the people as valuable 'things in themselves,' and not merely as wage-earners.