§5. Origin of capital; its definition. Capital is from the Latin adjective capitalis (from caput, head) in the phrase capitalis pars, the chief part, principal part; hence principal, of a money-loan. The capital, or principal, of the lender was this amount of money, distinct from the usury (originally meaning the sum paid for the use) or interest, the amount in addition which was due him at the expiration of the loan. Money loans of this kind were rare except among merchants in cities, and the borrower on his part looked upon the capital as the amount he had to "invest" (literally, clothe) in various kinds of goods. Taking these goods to a distant market, or changing them by manufacture into more valuable forms, he expected to regain when he sold them not only his capital but more than enough to pay the interest.

Merchants, manufacturers, bankers, were constantly thus investing capital. They came to estimate in terms of capital not only the sums borrowed and lent but the value of all their own rights in the goods. Even now the capital-mode of expression is less common in the rural economy, tho it is increasingly used by farmers of the enterprising sort, who are borrowing and making improvements, getting better equipment, etc., in many cases in America going so far as to count also the original price of the land, or its present value, as a part of their capital. We may define capital in accordance with this modern view.

Capital is a person's investment power as expressed in terms of money, being a person's property rights to income, estimated, as to amount, with reference to market conditions. These property rights may be composed in part of claims upon income arising from the labor of others; a promissory note given by a student of good credit, or by an inventor hoping to continue his experiments, is capital in so far as it is saleable, or bankable, tho the income from which it will be paid is to come from personal resources and not from any material agents.

Business- or industrial-capital is more specifically that part of a man's capital which is invested in his business, from which to draw a monetary income. The value of his house, furniture, and personal belongings is capital, tho ordinarily not thought of as such, but as means of enjoyment. In an emergency they may be converted into money to be used in his business, and being part of the property available to pay his debts, they help to give him greater credit at all times. Nominal capital is the amount of shares of stock issued by a corporation, taken at their par, or nominal, amount. It may have little relation to the true investment. Where there is no regulation of stock issues, a company with no true capital may print shares of millions of dollars of nominal capital. In financial statistics, bonds as well as stocks are often included in the nominal capital (as in the reports on capital in American railroads).

§ 6. Capitalization of direct durative agents. Capital can either be pledged, or sold outright at a price.1 Capitalization is the process of calculating the market-price of saleable incomes (whether sold now or not). It is the estimation of the present worth of marketable incomes. This gives us another way of defining capital: capital is any right to prospective income that can be capitalized.

1The value of a slave may be capital. A man, in our times, may not legally sell himself into slavery. Therefore, free men, in any full sense, are not capital, and it is misleading to speak of them as such, or to estimate their capital value as is sometimes done. But to a limited extent, carefully guarded by law, a man may borrow and pledge his future earning power, and thus capitalize it.

Some expression of the present worth of future uses is involved in the choice made by the individual between any two uses that are not of the same time-period. It is easy to see that this is so in every case where a present stock of goods is kept for use in different periods; it is so in every case of repair of agents for future use; it is so in every case where goods are produced for the future.

Many of these choices involve the choice of an object containing a number of uses of different time-periods, which are summed up - capitalized. Take a direct durative good, such as a fan, a house, a pleasure boat, an article of clothing, etc. That on which the value of the good as a whole is based is a series of uses which can not all be present. The fan represents all the cooling drafts to be got from it not only to-day, but many days to come. Additional uses may be obtained from the house by crowding more people into it, possibly thus slightly increasing the wear, but in no way can next year's shelter be obtained until next year. Each durative agent yields its uses through a period of time, a period usually not to be shortened except at a cost. The maximum economy of utilization (see Chapter 13) gives a series of uses at different times and of unequal present values. Each succeeding year's use, until the agent is expected to wear out, is adjusted to the value of this year's; that is, it is reduced to its present worth, and the sum of the present worths is the present value of the agent. Representing the total value of the series as P and the annual incomes as a' for the first year, etc., and the life of the agent as four years, we have:

P = present worth of (a' + a" + a"' + a" ") and substituting an assumed present worth of a,

P= (10 + 9 + 8 + 7) =34

§ 7. Capitalization of indirect durative agents. This process of valuing direct uses is extended to those indirect agents whose uses are more or less removed in time. Desires are so expansible that if the right kind and quality of direct goods could be had at will, enormously greater amounts would be used. But the continued income of present goods is dependent on durative agents. The psychic income of a civilized community is conditioned on a favorable and extremely refined environment: houses, libraries, theaters, the agencies of travel, as well as the sources supplying the more material needs. These agents, even in the richest community, are limited in variety, in quality, and in number. The present price of these goods is the capitalization of the expected uses they contain.

If a limited supply of agents could and did produce at any moment unlimited products, they would become free goods. The yield of the uses of most things depends, however, upon the lapse of time: an acre of land with the most perfect cultivation can not feed the world; but remove the limit of time, wait an eternity, and the acre would yield an infinite crop. Moreover, the economic return of agents in a given period is reached sooner than is the maximum physical return. If agents are forced to yield more bountifully, it is at the cost of other goods. A point of maximum net yield is found in any given period dependent on the rate of time-preference (see above, Chapter 21, section 10). Here also the lapse of time is the condition of the increase of the values derivable from limited agents.