Does Capital Come From Savings?

Oscar B. Johannsen

[Reprinted from The Gargoyle, October 1961]

A question which has long puzzled the writer is whether capital comes from savings. Most economists state that wealth must first be saved in order to have capital. But is this true?

Well, what do we mean by savings? This writer's definition is that savings are articles of wealth which are set aside for future use. Early in man's evolution he became aware that he had to provide for the future. He might not catch any game for a period of time and, therefore, he began to save some of the wealth he produced to use when the need arose. Savings, thus, consist of such prosaic items as the jars of home preserves that the housewife has in her cellar. Savings may also consist of money which you have set aside for future use. Savings maybe of tools which you made yourself or purchased for future use. The extra hammer you buy to use when your present hammer wears out constitutes savings.

Now, it should be obvious that capital can be produced which does not come from savings. A native who is walking through a forest espies an apple on a tree. He bends down to pick up a branch and knocks the apple down. Then he throws the branch away. That branch while he was using it was capital, but it certainly did not come out of any wealth he had previously saved. He made the capital on the spot, used it, and then discarded it. As a matter of fact, the very act of discarding the branch is contrary to the whole concept of saving, for saving means you keep something for the future. You do not discard it.

Another example. A man has been in the habit of fishing each morning. He gets five fish which is enough to live on, and lolls around the rest of the day contemplating the beauties of nature. One day he works in the afternoon fashioning a more efficient fishing rod. This is a new tool, but wherein is the saving involved? He just worked longer one day. He produced more.

In the case of the hammer which is kept for future use, it might be said that when it is put to use that capital came from savings.

The above examples would seem to indicate that capital can come out of savings but not necessarily so. If anything it appears that capital comes out of increased production, and maybe not even increased production. If a man were willing to do without while he made the capital, it might be said that the capital did not come from increased production, but merely part of the ordinary production cycle.

And when savings are turned into capital, are they still savings? When the jar of peaches are eaten, they obviously are no longer savings? But is the hammer which is not being used savings? It would hardly seem so as it is not set aside for future use. Only in a strained way could it be so construed. Wealth is only capital when it is actually being used. When it is idle, it is ordinary wealth. Thus the hammer lying on the bench might be considered savings during those times it is not being used, but this does seem to be looking at the matter in a very strained manner.

The problem is somewhat analogous to that of army reserves. As long as some men are kept behind the lines as reserves they are that, but once they are brought up to the front line and incorporated into the battlefront they are no longer reserves.

Possibly savings should be divided into two categories. Savings immediately available and "working savings". The jar of peaches, the hammer are savings which are at hand for immediate use. However, people have been loathe to keep wealth lying around idle, so when they had extra wealth they would lend it out to other people. We usually call these investments. What we do is to put at the disposal of other people wealth which we have produced. If we did not do this, those people would have to produce first this wealth. We have, thus, "saved" them effort and time. However, this is not savings. You can't save energy or time. You either use it or you don't.

Now, of course, the fact that we put this wealth at their disposal is a tremendous advantage to them. In effect they stand on our shoulders and produce more. It is said that each succeeding generation benefits from the savings of the preceding. However, whether we are actually benefiting from the wealth or whether we are really benefiting from their increased knowledge is the question. All wealth constantly deteriorates so each generation is actually producing the capital which is said it inherited for it must keep it in a constant state of repair. Actually, it isn't too important if the wealth is there. What is important is that the knowledge exists to make the capital. After each war, it is amazing how quickly new factories and equipment are produced as long as there are enough engineers, scientists, and people with "know how". It can hardly be said that this capital came from savings as most of the wealth might have been destroyed in the war.

This writer is not prepared to say that capital does not come from savings but has not seen any definitive arguments one, way or the other. He hopes that some of his readers will write The Gargoyle to give their views for the matter is an important one. The writer does not recall that Henry George ever said capital came from savings. It seems that too many people glibly assume that capital comes from savings, but when it comes to proving it the proof is not forthcoming.