public benefit, as on roads, canals, or the like, it were better for the public that the capital should remain inactive, or concealed; since, if the public lost the use of it, at least it would not have the interest.

to pay

Thus, it may be expedient to borrow, when capital must be spent by a government, having nothing but the usufruct at its command; but we are not to imagine, that, by the act of borrowing, the public prosperity can be advanced. The borrower, whether a sovereign or an individual, incurs an annual charge upon his revenue, besides impoverishing himself to the full amount of the principal, if it be consumed; and nations never borrow but with a view to consume outright.

77. The Views of Karl Dietzel. The opinions of Adam Smith and of such disciples as Say had a profound influence upon the later development of financial theory. About the middle of the nineteenth century, however, a German economist, Karl Dietzel, raised a vigorous protest against the view of public debts then prevalent; and developed a theory which has had considerable influence upon later German writers. Dietzel said, in part:

From Adam Smith's time down to the present a one-sided view of public loans has prevailed in financial theory, and is encountered in the work of most writers. It is based upon Smith's erroneous conception of capital and income. In brief the substance of this doctrine is as follows:

Taxes are paid out of income; loans, out of capital. If, therefore, the funds needed for extraordinary expenditures are raised by taxation, the people, as a result of their natural dislike of weakening their economic position, will restrict their consumption and endeavor to pay the taxes out of their net income. In this way the capital of the community is not diminished and industry is not disturbed; while the whole effect of the extraordinary expenditure is to cause a simple retrenchment in consumption.

If, however, the extraordinary outlays are met by loans, the funds will come from the capital of the community. By this

1 System der Staatsanleihen, 159 et seq. (1855).

process the supply of capital will be reduced, and future production of wealth will be decreased. In this way society is permanently injured; for the capital thus expended is lost. beyond recovery since it is destroyed in unproductive consumption which the state undertakes through its agency.

If this view were correct, the practice of public borrowing would thereby be unconditionally condemned. Fortunately the case is altogether otherwise. In Smith's view we encounter various fundamental errors of prevailing financial theory: a false conception of capital; a one-sided notion of productivity; and the arbitrary assumption of the existence of such a thing as a distinct net income.

Concerning the first two of these errors, we have already said enough; and so merely refer to the results of the previous discussion. The third we have now to examine. "Taxes," it is said, "are paid out of net income," that is, out of that portion of the product of current industry which is not required for the maintenance of existing economic conditions, and which, therefore, can be used by the recipieht for any purpose he pleases and will ordinarily be consumed. This doctrine rests on the erroneous conception that economic society is a mechanical contrivance which always remains the same, and in which the same factors yield every year the same result and ought to do so. Industry is conceived of as having two purposes, first, the production of goods needed to maintain the existing industrial fabric; and, second, the production of a surplus which, as net income, can be used for any purpose desired.

This view can be founded neither upon human nature as we know it nor upon the experience of practical life. The motive and purpose of all economic effort is everywhere the one effort to satisfy human needs. These needs, however, continually advance, of necessity; and for this reason, advance, progress,

1 Dietzel had argued that Smith's conception of capital was altogether too narrow. Smith defined capital as that part of a person's "stock" which he expects to afford him a revenue. Wealth of Nations, Bk. II, ch. 1. Dietzel would make the concept so broad as to include substantially all the material and immaterial possessions of a community. He even called the state a part of the capital of society. System der Staatsanleihen, 33-75. Dietzel's second criticism, viz. that Smith had an erroneous notion about productivity, has been presented sufficiently in a passage which we have already quoted. See § 7.-ED.

must be regarded as the fundamental principle of economic society.

What led men to advance beyond the first rude conditions of primitive industry, what compelled them gradually to combine their labor power and to create capital, what carried them on from that rude beginning through so many intermediate stages to the present civilization and mastery over nature, is their inherent impulse to improve their condition and to satisfy their needs ever more completely. All goods newly produced at any time have this purpose: they may be immediately consumed, or may be used in such a way that they do not yield up the satisfactions they afford until a later time.

The assumption that a part of the product is devoted to the satisfaction of necessary wants, that is, to the maintenance of existing industry, - and is, therefore, not available for any other purpose, while the other part may be devoted to any purpose whatever, is wholly arbitrary. The same is true of the concept of free income, which is founded upon this arbitrary assumption, free income the disposition of which is less important than the disposition of the capital previously accumulated, so that its destruction by taxation is a matter of comparatively little moment; while it is thought that to take previously accumulated capital in the form of a loan exerts a destructive influence upon industry.

The truth is that all newly produced goods are at the outset disposable capital. All are created for the same purpose, the immediate or more remote satisfaction of needs; they are already destined to be capital, and must, therefore, be considered as capital. To take away any part of them is as truly a destruction of capital, as the destruction of capital previously accumulated would be.

The ongoing of industry is continuous and without a break. It is the result of ceaselessly active forces; of human activity in working over raw materials and of ever-operating natural forces. The assumption of distinct periods of production is, for this reason, a thoroughly arbitrary one, admissible only for convenience of representation and logical arrangement. It is, therefore, to be confined to these uses alone, since there is nothing in reality that corresponds to it. The moment that we try to build an

argument upon such a foundation, the assumption then leads to an arbitrary severing of the natural course of things; and error is the necessary result.

This is true of the theory of net income which, of course, rests upon the assumption of distinct periods of production, since it would be unthinkable otherwise. Net income consists of the value of all the goods produced in any period after all the costs of production have been deducted, among which is included an appropriate allowance for the support of the producers. The surplus value continually produced by industry, and called net income, is destined just as little for any sort of unproductive employment that may be desired as are the goods accumulated prior to any productive period, which are usually called capital. The first is destined for the same end as the second, namely, under the continuous influence of human labor, to be converted into goods capable of satisfying more and more completely human wants, and then to be consumed for this object. Newly produced goods form a homogeneous mass with the goods previously produced, the whole being destined to serve as the basis of the subsequent industry of the people. They have merely this advantage that, in respect to them, people are free to choose in what form they will have them applied to the production of wealth. The decision of this point will depend upon a consideration of the way in which these goods will yield the greatest advantage. If they will have a greater value when employed in a private business enterprise, then it will be disadvantageous to take them for public purposes; but it is wholly immaterial whether they were previously net income or capital.

This whole theory of Smith's is at the bottom based upon his erroneous view of governmental activity. If one looks upon the state as unproductive and considers its operations as a destruction of values, then, to be sure, this cost of maintaining the state can come only from the surplus wealth created each year, that is, will be taken from income,- because otherwise the capital and consequently the productive power of the community must continually diminish and finally come to an end. So far, then, we can say that taxes are paid out of income. But, as we have demonstrated, taxes are really a

-

part of the disposable capital created each year for the purpose of being converted by society into those goods which can be obtained only in this way. The production of taxes is just as good an end of economic activity as the production of any other goods. It is, therefore, clearly inadmissible to count the goods which protect the body against cold as among the costs of maintaining industry, on the ground that they are a necessary part of a man's subsistence, and, on the other hand, set over against them as "net income" the goods which protect personal freedom and industrial activity.

Equally incorrect, then, is the other half of the doctrine of Smith, — that loans are raised from the capital of the community, and therefore impair production and injure the economic position of the people. In this proposition the inadequacy and faults of the current definition of capital come to light most forcibly. Unless we are very much mistaken, this view was suggested by the facts, that subscriptions to loans are commonly made in large sums while taxes are paid in smaller amounts, and that in ordinary life we are accustomed to call the former capital since they can at once be loaned at interest while we do not consider the latter as capital because they are usually too small to find ready investment. Where now are we to look for the capital which is withdrawn from industry when loans are made. Clearly it must be capital already devoted to production since only in this case can it affect industry in any injurious manner. But it is evident that fixed capital cannot be turned over to the state, and this forms the largest and most important part of the whole supply of capital. And circulating capital is in the main so far advanced toward its conversion into some specialized form of goods that it is adapted only to the special needs of private individuals and not to those of the state. Therefore the state can take only that part of capital which is in the form of raw materials, or materials slightly transformed, which is still free capital and not yet ready for the use of private industry. Concerning the most useful disposition of this, it is possible and necessary to make a decision.

Of course this new disposable capital, in conformity with the purpose of all economic activity, is usually destined to replace the capital that is continually consumed and to make additions