Frank Albert Fetter, Recent Discussion of the Capital Concept (November 1900)

Fetter’s journal article argues that the definition of capital requires reconstruction because accepted terminology obscures the economic relations it should explain. Definitions are instruments of thought, and their ambiguities affect practical judgment as well as abstract theory. His central proposal is to understand capital as material wealth considered in terms of market value, without excluding natural agents or goods that directly satisfy wants. The article’s six sections move from a critical examination of Böhm-Bawerk, John B. Clark, and Irving Fisher to attacks on the distinctions between private and social capital and between land and produced capital, concluding with Fetter’s own definition.

Böhm-Bawerk supplies the starting point because his influential account consolidates established usage. He distinguishes private capital, consisting of products used to acquire income, from social capital, consisting of products employed in further production. Private capital consequently includes hired consumption goods, such as rented houses and pianos, while both categories exclude land. Fetter finds that this apparently settled classification conceals incompatible principles. Particularly revealing is Böhm-Bawerk’s movement from capital as concrete goods to monetary comparisons when discussing interest: the operative concept differs from the formal definition.

Clark makes the value conception explicit by distinguishing a lasting productive fund from its changing constituent goods. Fetter welcomes the recognition that unlike objects can be compared through value, but rejects the additional claims attached to it. Clark excludes consumption goods, attributes capital’s genesis to abstinence despite including natural agents, and makes permanence essential to a fund that can actually diminish or disappear. His claim that capital synchronizes labor with its fruits mistakes the availability of finished consumption goods for a defining function of capital generally. Durable machinery and natural agents do not themselves become the goods paid out as wages.

The striking antithesis of the goods that make up capital with the capital itself appears thus to be over-abstraction and unreality.

The objection is not to valuation but to treating the valued fund as an entity detached from its constituents. Replacement and net accumulation must be distinguished, yet replacing a worn-out machine still creates capital even if the aggregate remains unchanged.

Fisher offers a different reconstruction: capital is all wealth at a point in time, contrasted with income as a flow. Fetter considers the inclusion of natural agents and consumption goods especially fruitful, and acknowledges the usefulness of distinguishing stocks, turnover, and income. But physical inventories cannot aggregate heterogeneous wealth into an economically meaningful quantity. Nor does income consist simply of the same material objects flowing toward consumption: durable agents yield services without themselves becoming consumable goods. Fisher’s stock–flow distinction therefore supplies useful analytical tools, but not the best organizing principle for the capital concept.

The constructive argument emerges through Fetter’s return to private and social capital. Two owner-occupied houses supposedly become capital when their owners rent them to each other, then cease to be capital when the owners return. Nothing about their serviceability has changed; only the contractual arrangement has. Fetter first interprets renting as purchasing a temporally limited group of uses, then makes the more fundamental distinction between contract interest and economic interest. Contract interest allocates a benefit through agreement; economic interest concerns the advantage yielded by possessing and using a valuable thing, regardless of ownership.

I shall maintain that income must be looked upon as a series or group of satisfactions, not as a series or group of material things.

This psychological conception of income gives services from goods the same standing as personal services. A dwelling contributes directly to satisfaction; a mill contributes indirectly. Production and consumption remain conceptually distinguishable even when they occur simultaneously. Economic satisfaction, however, requires dependence on scarce objective agents or effort: Fetter does not turn every pleasurable state into an economic product.

Wherever there is a postponed use, that use is subject to a discount. Its present worth is less than its worth will be at maturity.

Interest thus cannot be confined to a conventional class of productive goods or to consumption goods let for hire. Apples stored by a householder involve prospective benefits just as apples stored by a merchant do. The distinction between consumption and production goods may remain convenient descriptively, but it does not identify fundamentally different economic contributions.

The fifth section similarly dismantles the exclusion of land through capital’s supposed origin in labor. Mobility, agricultural use, ownership conventions, and ordinary terminology fail to establish a consistent boundary. Labor and nature jointly contribute to valuable goods; natural products may require no labor, while improvements inseparable from land embody it. Fetter regards the persistent classification of capital as accumulated labor as a residue of the labor-value theory, even among its declared opponents. Economic function and value cannot be classified reliably by reconstructing historical origins.

Capital is economic wealth whose quantity is expressed in a general value unit.

This concluding definition joins concrete things to their comparable market valuations. Wealth and capital comprise the same things viewed differently; property denotes legal rights of control, which need not coincide with the underlying wealth. A mortgage divides claims rather than multiplying capital. Fetter also cautions that changing monetary capital does not necessarily indicate changing welfare. The article’s significance lies in making explicit a value conception already used in business and economic reasoning, and showing how its consistent adoption requires reconsideration of land value, rent, and interest. It ends by announcing, rather than supplying, the broader economic system this reconstruction would support.