18: The Growth of Capital by Qualitative Increments

In general, the profit generated by a productive enterprise compensates labor and capital, returning wages and interest respectively. One portion of capital is dispersed to the investors as a return, while the other part is reinvested in the enterprise to provide more facilities, better equipment, and the like. The growth of a firm is the growth to the capital resources that are owned by the firm. Ideally, all capital earned by the firm is productively employed, but things are not always thus.

Growth in capital is often accompanied by growth in labor, though this is not necessarily so. In some instances, capital is used to replace labor (a machine that does work previously done by hand). Growth in labor is difficult to track, as it involves both the number of men and their productive capability. It is well known that an experienced and well-trained worker is more productive than a new hire, but this is difficult to quantify and even to observe, and as so often happens it is therefore ignored. Instead, growth of labor is considered to be a head-count of those who contribute labor to a firm or to an industry. On the societal level, it is the number of employed people.

The author then considers the progression by which goods are transformed from a raw to a consumable state: sheep produce wool, wool becomes thread, thread becomes cloth, and cloth becomes clothing. At each of these stages, capital and labor are required to transform an input into an output. And when the finished good is purchased, the entire production chain receives compensation: some part of the money a consumer pays for a coat pays the tailor, the weaver, the spinner, and the shepherd. But it compensates others as well: the shepherd shears his sheep, and so some part of the consumer's payment compensates the maker of shears, the smelter of metals, and the miners of ore. And the compensation to each of these parties is divided among labor and capital contributors.

So long as consumption of the final product continues, there is an ongoing need for the entirety of the supply chain. It is obvious that purchasing woolen clothing requires a constant supply of wool, but it also requires a constant supply of shears. While the shears are not consumed as part of the product, their constant use and sharpening wears them away until they must be replaced. And so, the purchaser of a woolen coat is paying his share of the shears used to harvest the wool that is used to produce his coat.

There is also a distinction to be drawn between growth in wages and growth in wealth. The involvement of more capital coincides with an increase in production: more and better goods are available for lower prices - hence the same amount of money can be exchanged for more and better goods as capital is increased in productive activities even as the laboring force remains unchanged.