-71- 
VI. CLASSICAL ECONOMIC THEORY 
THE YIELD OF CAPITAL 
None of the classical economists of the second generation 
accepted Ricardo's theory of profit, for none of them accepted 
Ricardo's theory of wages. They found Malthus's theory of pro- 
fit little more to their taste, since it was essentially a sur- 
render to uncertainty. Therefore the economists of the second 
generation each sought a new theory of profit, and so each looked 
back to his conception of capital for clues to where profit came 
from. 
John Ramsey McCulloch occupies a position with respect to 
the theory of capital midway between Ricardo and McCulloch's peers 
of the second generation. McCulloch found the question of which 
type of capital, fixed or circulating, was more important to be 
theoretically uninteresting: "the possession and employment of both these descriptions of capital are equally essential."l And 
he established this point by considering the very industry earlier 
political economists had used to establish the priority of circu- 
lating capital--the industry of agriculture. An agriculturalist 
might have an ample supply [of fixed capita~ ..• but if he were 
destitute of circulating capital . . . he would have to resort im- 
mediately" to hunting for food; he could not wait for the harvest. 
Similarly, supposing "the agriculturalist to be abundantly suppli~d 
with provisions, what could he do without the assistance of fixed 
. 2 capital or tools?" 

-72- 
MCCulloch is able to set fixed capital on a theoretical 
par with circulating capital because he finds more uses for cap- 
ital than those established by Smith. MCCulloch agrees that cir- 
culating capital enables the division of labor, and that the di- 
vision of labor does indeed increase productivity in the three 
ways enumerated by Smith. 3 But MCCulloch also advances a whole 
new series of advantages that are the exclusive result of fixed 
capital: fixed capital enables the production of novel commodi- 
ties, the absolute saving of labor in the process of production, 
and improved quality in the product.4 
Although McCulloch holds that a substantial portion of 
capital is fixed, he nevertheless believes that all capital is 
mobile. Therefore 
	the introduction of. 	. machines into one 
employment, necessarily occasions an equal or greater demand for the dis5ngaged labourers in some other employment. 
That capital will ever substitute for labor in a degree sufficient 
to cause technological unemployment is, for McCulloch, not pos- 
sible. 
Despite his express theoretical pronouncement, McCulloch's 
mind naturally slips into patterns of thought in which circulating 
capital predominates over fixed. When McCulloch reaches for an 
example, he supposes 
••• that a landlord employs 1,000 quarters of wheat as a capital, 500 of which are laid out in seed, keep of horses, &c. and 500 in paying wages; if the produce is 1,200 quar- 
6 ters • 


-73- 
McCulloch's example of a "capital" is a very large pile of wheat. This wheat is used in paying wages and in "seed, keep of horses, &c."; the horses and such are not the capital; their upkeep is. The circulating is visible; the fixed is not in evidence. 
Just as McCulloch's conception of capital is halfway between Ricardo's and Scrope's, his conception of profit is also 
an attempt to find a middle way. But McCulloch is unable to give reasons for the proportions into which the total product is divided in the short run. His lack of strong theoretical assumptions about the nature of capital leaves McCulloch without an adequate short-run theory of profits; profits are what is left after the payment of rent and the payment of wages, which are presumably determined by the size of the wage fund. 
McCulloch is certain that profits must fall in the long run. Ricardo's theory will eventually hold; profits will fall as a result of "the ultimate and certain effect which the necessity of resorting to poorer lands ... must always have." But the operations of this principle "frequently are counteracted 
• by extrinsic causes.,,7 McCulloch thus robs the short run version of Ricardo's theory of all its substance. And otherwise McCulloch limits himself to the presentation of a disorganized taxonomy of the effects that influence the rate of profit. Profi ts are increased "(1) by a fall of wages, (2) a fall of taxes, or (3) an increased productiveness of industry."B He offers no further explanations. 
By contrast, George Poulett Scrope has a very clear idea of how profit derives from the nature of capital. He places the source of profit squarely in the act of abstinence necessary to 


-74- 
create capital. Profit is the result of the worker "productively using for a season what the other has painfully produced or saved by a sacrifice of present ease or enjoyment.,,9 Workers allow 
the capitalist to take his profit because, "while capital would produce no increase" withotit the workers, "it is equally true that their skill and labour would produce nothing, nay, that they could not even maintain their existence, without the capital that they 
10 employ." 
In the mind of Scrope, capital has no definite typical char- 
acter. It is "the various tools, machinery, materials, necessaries of subsistence, or other things provided for sale, or for the consumption and use of labourers while employed in the production of saleable commodities."ll The one unifying characteristic is that Scrope's capital is painfully created. Thus profit is necessary for its existence~ in the absence of profit "no one would produce any of the things as are necessary for production.,,12 
Like McCulloch, Scrope has no strong theoretical conception of capital. Therefore, like McCulloch's, Scrope's explanation of the regulation of profits is vague. In large part, it is a theoretical hole in Scrope's conception of the economy--although Scrope does believe in some vague and mostly unexpressed version of Senior's abstinence theory ofoprofit.13 
But the first Principles text of the second generation to put forth a coherent view of capital and profit was not Senior's, but Longfield's. In his Lectures on Political Economy, Mountifort Longfield states that the characteristic form of capital is fixed. When Longfield wishes to give an example of the use of capital, 


-75- 
he considers not a large stock of wheat that will feed the worker 
until the harvest, but a spade. Profit comes not from the fact 
that the capitalist can threaten the worker with starvation, but 
from the fact that "before the labourer should argue that the con- 
tract" which assigns part of the net value of the product to the 
capitalist "was unequal and unjust 
let him . . • say how 
great a portion he could cultivate 
unassisted by any instru- 
ment." For "the spade could do nothing without the man, and the 
man could do very little without the spade.,,14 
Longfield takes great care to establish that fixed capital 
is productive. Only after this has been established does Long- 
field bring in the fact that production requires time. T"his enters 
Longfield's analysis as a 
	new element of complexity. 	•. The labourer 
who extracts the ore from the mine, cannot conveniently wait for his wages until it 
has gone through every process, and is sold to the consumer.lS 
Those who work at the beginning of the process of production have 
their wages discounted. This is a necessity, for "the first capi- 
tal accumulated in the Empire may have its effect in producing 
,,16 Yet nothing in Longfield's argument so far 
that gown 
indicates the rate at which past labor is to be compounded, the 
size of the "discount the labourer pays for prompt payment, ,,1'7 
the prevailing rate of profit--for the competition of capital 
makes all three of these figures equal. 
Longfield gives a short summary of the "traditional" way 
in which political economists explained the determination of the 


-76- 
rate of profit: 
. • . let us suppose that all advances are made at the same interval, say a year, from the time of sale; and having by this abstraction removed all considerations of 
the length of time, we shall say that the rate of profit depends upon the proportion between the advance made by the capitalist, and the return he receives. Let us also suppose that this advance is always made 
in the form of wages paid to the labourer, and it will follow, that the rate of profit depends on the proportion in which the value of any commodity is divided between the labourer and the capitalist.18 
Longfield considers this true--in all cases "in which it does 
apply." And the quarrel Torrens originally had with the propo- 
sition "arises entirely from his not understanding it in this 
sense."19 But other cases are not identical to this; their re- 
duction to this paradigmatic case must be carried out "with a 
little care.,,20 And Torrens and McCulloch have failed to properly 
take this care.21 Furthermore, Ricardo had made this truth "the 
foundation of a most ingenious theory of profits"--but a theory 
	. 	. 	22 
whlch lS completely wrong. 
Longfield's explanation of the determination of the rate 
of profit is very different. Capital does advance "to the work- 
man the value of his labour, before the produce. 	. is sold." 
But more important, capital "assists the labourer materially, by 
supplying him with ... machinery." And thus "the profits of 
capital employed in every industrial undertaking must find their 
level, and the height of that level must be determined by the pro- 
fits of that capital which is naturally the least efficiently em- 
ployed.,,23 


-77- 
In other words, the rate of profit is determined by the 
ratio between the productivity and the cost of the least effi- 
cient implement, by the marginal productivity of fixed capital: 
•• ~ if a spade makes a man's labour twenty times as efficacious as it would be if unassisted by any instrument, 1/20 only of his work is performed by himself, and the remaining 19/20 must be attributed to the capital. And this is the measure of the intensity of demand for such an instrument. A labourer working for himself would find it for his interest to give 19/20 of the produce of 
his labour to the person who would lend him one, if the alternative was that he should turn up the earth with his naked hands; or 
if he worked for another, his employer might pay a similar sum for the purpose of supplying him with an instrument. But this profit is not paid, because ,on account of the abundance of capital in the country, which must be employed in cases where, in proportion to the quantity, it is not so capable 
of mUltiplying the efficiency of the labourer; and the profits of this portion must regulate the profits of the rest.~4 
Time preference, the fabled pain of abstinence, has at 
most only a secondary effect on the yield of capital. 
"In many 
instances it [the sacrifice involved in abstinence] is very slight, 
since we find that many persons save without any prospect of pro- 
fit, but merely from the love of accumulation, or the preference 
of the future to the present.,,2S A high rate of profit increases 
accumulation, although it is not the dominant cause of the growth 
of a nation's capital. The desire for accumulation "will not gen- 
erally be strongest where the rate of profits is highest, although, 
caeteris paribus, it would necessarily be so." But Longfield con- 
siders the determination of the long run growth of capital outside 
the proper bounds of his introductory Lectures.26


-78- 
To speak of Longfield's theory in another analytical lan- 
guage, it is essentially a doctrine of long-run disequilibrium. 
At any time there is a fixed supply of capital, given by the 
capital stock then in existence, and an established demand for 
capital, derived from the productivity of fixed machinery. The 
rate of profit is given by the day-to-day temporary equilibrium 
of this market. The short-run equilibrium of the capital market 
shifts over time, for accumulation takes place. But accumulation 
takes place largely independently of the rate of profit, therefore 
capital per head increases--but not necessarily toward any long- 
run equilibrium level. 
In Longfield's theory, the distribution of income between 
workers and capitalists is not the result of any sort of inter- 
temporal equilibrium. Accumulation is determined by the insti- 
tutional structure of society. Time preference--the supply sche- 
dule of capital in the very long run--does not bind in Longfield's 
theory in this or any foreseeable age. 
Longfield's theory of capital and profits was, however, 
not adopted by those at the center of the scientific intellectual 
community of the classical economists. They continued along the 
trajectory begun by McCulloch and Scrope. And to see the theory 
that did become the loose orthodoxy of the second generation in 
the sphere of capital, it is necessary to turn to the Outline of 
		' 	f I" 	f 	,27 

te SClence 0 Po ltlcal Economy 0 Nassau Senlor. 
Senior does not see "capital" as an independent factor of 
production: 
It is evident that Capital . . . ras usually] defined is not a simple productive instrument: 

h

-79- 
it is in most cases the result of all three productive instruments combined. Some natural agent must have afforded the material, some delay of enjoyment must in general have reserved it from unproductive use, and some labour must in general have28 been employed to prepare and preserve it. 
Instead, Senior's third factor of production is "Abstinence." 
The emphasis is on the pain involved in the act of saving: "to 
abstain from the enjoyment which is in our power, or to seek dis- 
tant rather than immediate results, are among the most painful exertions of the human will.,,29 Yet people do engage in Abstinence, 
for it is useful; its advantages "are two: first, the Use of Im- 
plements; and Second the Division of Labour."30 
The pain of Abstinence bounds profits from below. 
They are subject to a minimum, because each of them wages and profits is the result of a sacrifice. It may be difficult to say what is the minimum with respect to profit, but it is clear that every capitalist, as a motive to abstain from the imme- 
	diate and unproductive enjoyment of his 	31 
capital, must require some remuneration •.. 
Abstinence is desirable because it increases productivity. But 
the reward for Abstinence, profit, is a result of the psychologi- 
cal pain involved in the exercise of Abstinence. 
This position of Senior's is wide 'open to ridicule: vi- 
sions spring to mind of rich heirs writhing in torment at the 
thought of being unable to consume their vast wealth in a single 
day. In fact, to make Senior seem less than idiotic, some notion 
of marginal analysis is needed. Furthermore,the Abstinence theo- 
ry's assumption that the present was preferred to the future was 


-80- 
Senior's personal addition to economic theory. Smith and others had argued that, in general, consumption in the future was more desired than consumption in the present. 
Senior's theory of profit did have one striking characteristic: it did not depend on a prior theory of capital. "Capital" could be anything it pleased, so long as its creation involved Abstinence Senior's theory of profit was still plausible. This was necessary, for Senior, like McCulloch and Scrope, did not 
have strong theoretical opinions about the nature of capital from which he could derive a theory of profit. Since Senior's theory did not require a particular conception of c;api't'a:.i,., while competing theories--like Longfield's--did demand an explicit view of 
the nature of capital, Senior's theory was far more attractive than its competitors. 
Senior's theory had one additional strong formal advantage over Longfield's. Senior's explained the existing stock of capital as the result of the long run equilibrium of a competitive market, The rate of interest was such that it balanced the pain of Abstinence to call forth just that amount of capital which was demanded; and the increased productivity of methods of production that required Abstinence occasioned the possibility of profit. 
The theory of Ahstinence fitted, in its form and content, the rules for theory choice present within classical political economy better than Longfield's theory, which assumed that the amount of capital was not an equilibrium result, or Ricardo's theory, which required the prior assumption that wages be fixed at subsistence, or Scrope's lack of a theory. 


-81- 
Still, the Abstinence theory did not command sufficient 
support from the second generation to be termed the orthodox 
theory of capital and profit. But then John Stuart Mill adopted 
the Abstinence theory. 
Alongside Senior's theory of profit, Mill held a theory of 
capital very close to Ricardo's. J.S. Mill's conception of "capi- 
tal" is very close to "advances." 
Mill begins his exposition by "leaving rent out of the ques- 
tion," for "no practical error. 	is produced by disregarding 
it." If "we inquire in'what it is that the advances of the capi- 
talist, for purposes of production, consist, we shall find that 
they consist of the wages of labour." For the value of goods sold 
can be broken down into profits, wages, and costs of materials. 
But these costs of materials are themselves values of goods sold, 
and so their value can be similarly broken down. And so ultimately 
"whatever . 
	'f' 	, 	f 	,,32 
lS not pro It, lS repayment 0 wages. 
J. S. ·Mill's account of the services provided by capital is 
colored by his view of it as "variable" and circulating. His 
agrarian conception of capital pervades his "four fundamental 
propositions of capital." They are, first, "That industry is lim- 
ited by capital," that 
the people of a country are maintained and have their wants supplied, not by the produce of present labour, but of past. They consume what has been produced, not what is about 
to be produced.33 
Implicit within this proposition is a view of capital as comple- 
mentary to labor; no more workers can be employed than there is 


shapeType75fBehindDocument1pWrapPolygonVertices8;6;(11614,10529);(0,10529);(0,0);(21499,0);(21499,21452);(11614,21452)posrelh0posrelv0pib
-82- 
shapeType75fBehindDocument1pWrapPolygonVertices8;6;(0,8104);(19332,8104);(19332,0);(21500,0);(21500,21499);(0,21499)posrelh0posrelv0pib
capital to Support them. And yet capital is also primarily variable: the vast majority of capital is the wage fund. 

Second among Mill's fundamental propositions is the truism that all capital "is the result of saving." And Mill's conception of capital results in this truth being given the cast that capital is created by an individual's decision to accumulate wage goods rather than by a decision to devote resources to the production 

of producers' as opposed to consumers' goods. The third proposition--Say's Law--thus becomes a logical necessity: clearly all that is produced is consumed, for saving (by the capitalists) is the obverse of consumption (by the workers) .34 

The fourth of Mill's propositions, that "demand for commodities is not demand for labour," fOllows logically from the other three. For Mill, the capital stock is divided into two parts; one of which is the wage fund, and the other of which is the stock of tools and raw materials on which the workers can work. Since capital is complementary to labor, the size of this second portion 

of the capital stock determines how many workers can be productively employed. Therefore industry's demand for labor, set by the size 

of the accumulated capital stock, is given before anything is known about the shape of consumers' final demand. All that demand for 
a specific commodity can do is to shift employment from one industry to another; it cannot affect the aggregate amount of employment.3S 

Where Mill considers the division of capital into "fixed" and "circulating" portions, it is only to immediately conclude that the distinction has theoretical but not practical interest. Theoretical puzzles can arise out of the possibility of differing 

-83- 
capital-labor ratios across industries and of sudden changes in the capital-labor ratio within an industry.36 But Mill believes 
that such events rarely happen. 
"There are," he says, "few if 
any examples of a great increase of fixed capital, at a time and 
place where circulating capital was not rapidly increasing like- 
wise.,,37 
Mill's view that capital is primarily advances of wages 
to workers leaves him without a notion that capital is inherently 
productive. Capital allows the worker to pursue his trade: "Of 
capital 
. by far the largest portion conduces to production 
only by sustaining in existence the labor which produces.,,38 While 
that "portion of capital which consists of tools and materials, 
may be said. 	. to have a productive power," the typical element 
of capital "is only the means by which the capitalist procures to 
himself . 
. the use of that labour in which the power of produc- 
tion really resides.,,39 
Mill was pushed by his conception of capital toward a modi- 
fication of Ricardo's theory of profit. Since wages were, in the 
short run, fixed at an amount determined by the size of the wage 
fund, profits existed as a residual of production over the sum of 
rent and wages: 
"The cause of profit is, that labour produces 
more than is required for its support." ,And the capitalist ex- 
tracts this residual by means of his class monopoly of the means 
of production: 
The reason why capital yields a profit, is because ... if a capitalist supplies a party of labourers with ... rfood, clothing, materials, "and tools] on the condition of receiving all they produce, they will, in addition to reproducing their own neces- 


-84- 
saries and instruments, have a portion of their time remaining to work for the capitalist.40 
Yet Mill also strongly believes--on the same level of 
analysis--in the Abstinence theory of profit. He follows Senior 
in the doctrine that "the profits of the capitalist are properly 
the remuneration of abstinence.,,41 And the necessary recom- 
pense for the psychological pain of abstinence sets a lower limit 
to allowable rates of profit: 
The lowest rate of profit which can permanently exist, is that which is barely adequate . • . to afford an equivalnet for the abstinence, risk, and exertion implied in the employment of capital.42 
with respect to capital and profit, as with respect to 
wages, the opinion of J.S. Mill was the last effective word spo- 
ken by the classical economists. Neither of Mill's major peers, 
neither Fawcett nor Cairnes, was sufficiently interested in the 
theory of capital to attempt to seriously develop Mill's doctrines. 
Fawcett was more concerned with the actual state of the British 
working class; Cairnes was more interested in resurrecting the 
wage fund and developing his idea of non-competing groups.43 The 
final orthodox classical economic theory of capital was the agrar- 
ian conception of John Stuart Mill.