The Rise of New Capitals

In his 1776 book Wealth of Nations, Adam Smith provided the classical definition of capital:

When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries.

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital.

Under this classical definition, capital refers to surplus wealth employed to provide non-labor income to its owner. It is from this definition, which was repeated for centuries, that we get such political-economic dichotomies as capital versus labor, capital's share versus labor's share, and earned income (wages, salaries, farm income, self-employment income) versus unearned income (rents, dividends, interest, capital gains).

It was, among other things, the seeming vulnerability of a tiny class of people grabbing massive amounts of the national income from merely owning capital that convinced Marx and others that socialist revolution was inevitable. It was the seeming unfairness of this set of arrangements that launched socialist, social democratic, and labor parties across Europe in the late 19th and early 20th century. It was also the seeming unfairness of this situation that caused J.B. Clark to viciously criticize capitalism during his early career, criticisms he abandoned after he came up with his marginal productivity theory of distribution that supposedly solved the apparent problem of capital income (it didn't actually).

In the last few decades, this centuries-old idea of "capital" has been stretched to the point of unrecognizability by the rapid proliferation of things being newly branded with the word capital. We have, of course, the heavy hitters among newly designated capitals: human, social, and cultural.

There is also now organizational and institutional capital.

Intellectual capital, apparently a phrase with a slightly longer pedigree, has been boosted by the new linguistic craze.

There is even, now, gender capital.

I am not going to argue that these things aren't really capital because capital can mean whatever you want it to mean. But it's clear these things are not capital in the sense that Smith, Marx, and basically everyone prior to 1950 used the word (and the way Piketty used it). Whereas old capital referred, basically, to wealth that provided its owners passive (non-labor) income, these new capitals, taken as a whole, don't coherently describe anything more than things that provide economic advantages.

That's not to say the new capitals aren't meaningful things. Social capital—the resources accessible to people via their social networks—is a very real and important concept. Cultural capital—possessing the beliefs, attitudes, behaviors, and aesthetics that the upper class likes—is also a very real and important concept. All of these capitals refer to economically relevant things, even if they have no real relationship to old capital.

However, one of the problems with the late 20th century academic fad of calling everything capital is that it can and does generate some serious confusion via category errors.

The most common source of this confusion surrounds the idea of "human capital," which refers to one's skills and education. When people are talking about the immense inequality in the distribution of capital (77% of US wealth/capital is owned by 10% of families), it is not uncommon for those schooled in the ways of post-1960s academia to chime in: actually, most capital is human capital and so it's not nearly so bad.

But when used this way, the phrase "human capital" literally swallows the entire capital versus labor distinction.

When slaves existed, you really did have "human capital" in the old sense of assets that provided passive income to their owners. But that's not what "human capital" in the Gary Becker sense refers to. In the Gary Becker sense, "human capital" is essentially just the present value of one's future labor income. And since labor's share of the national income is greater than 50%, capitalizing labor income into the present and calling it "human capital" renders the conclusion that most capital is "human capital."

In the context of the old debates about the vastly unequal distribution of capital, this human capital "insight" is vacuous. It's just a rebranding of labor income as human capital income. There is no longer labor's share (around 70%) and capital's share (around 30%); rather, there is only capital's share (100%), subdivided between different kinds of capital income. Again, you can call things whatever you want, of course. But the classical problem people have raised about capital is that it provides income without working. Human capital does not do that.

Rebranding labor income as human capital dividends does not negate the seeming unfairness of someone with $1 million of capital just hanging on the beach doing nothing, while receiving twice the annual income of someone actually going out and laboring full time for $12/hour. The extremely unequal distribution of the lounge-at-the-beach-and-still-get-paid capital still presents the same normative challenges as it did hundreds of years ago, notwithstanding the increasingly liberal application of the word "capital" to anything and everything.