TP32. Definitions; and why they matter

Politicians often talk about “billions” of pounds – but what is a “billion”? If you look at a recent dictionary, you will probably find the word defined as a thousand million. But if you look at a dictionary fifty years old, you will probably find it defined as a million million. Rather a difference! The same problem applies to many words. There is trouble with words which are used to define political attitudes: words like “socialist” or “liberal”, which often mean very different things to different people. A heated argument often resolves itself not into a real difference of opinion about ideas, but different understandings of the meaning of words. There are plenty of examples of the same kind of thing, some of which will be discussed in this article.

Scientists try to avoid that sort of confusion. When two scientists talk about “hydrogen” or “light years” or “bacteria”, they try to use the words with the same meaning ‘as other scientists employ. If they didn’t, scientific progress would be bogged down in endless futile arguments about words.

In these Topic Papers, we try to act like scientists. We give words definitions, and then try to stick to those definitions. As with the scientist (or lawyer or doctor, for that matter), we often take words which have a loose meaning in everyday speech and give them a special and precise meaning in our own study. “Energy” has a special meaning to the physicist, “depression” has a special meaning to the doctor; “action” has a special meaning to the lawyer.

Our main interest in these Topic Papers is in economic processes and their results. We try, as far as possible, to make our definitions helpful in understanding what actually goes on in those economic processes. As we shall see, if we are quite clear about how we are using words, this often helps greatly not only in understanding how things work at present, but also in making them work better in future.

Land. Labour, Wealth and Capital

Take a simple example. Consider what is required for producing things we need – anything from a cabbage to a car. First we need natural resources – seed, soil, water, minerals and light in the case of the cabbage. In the case of the car, we need other kinds of natural resources ­metallic ores; substances for converting those ores into metals; rubber plants or oils for making the tyres and so on. In the case of both the cabbage and the car, we call those natural resources by the simple four-letter word, “land”. This use of the word “land” derives from its traditional use in economics, and is different both from the way in which the word is used in law and various ways in which it is used in everyday speech.

The second thing we need for producing our cabbage or car is human effort. In the case of the cabbage, it may be no more than that of a gardener who sows the seed, keeps the plant watered and weed-free, and finally cuts it for the table. In the case of the car it is much more complicated. People must mine the ore and the substances needed to convert it into metal, people must design the car, people must design and build the factory where cars are made, people must make the various components and put them together – and so on. All kinds of human effort- physical, mental and various combinations of the two – are required in the production of cars and cabbages. We call all this human effort by another simple word – six letters this time – the word “labour”. This, again, is a special meaning deriving from the way it is (or was) used in economics.

Cars and cabbages are example of things which were made by human activity, and which people are glad to own. They are examples of what we will call “wealth”. When we speak of “wealth” in these Topic Papers, we mean the word in that sense. “Wealth” does not include “land”, as we have defined it. It may include farm animals, for example, because those farm animals were bred in the form they take by human agency. It does not include slaves, for they are themselves human beings – even though many societies in the past (and some, alas, to this day) have allowed the ownership of slaves.

In practice, the production of cabbages or cars is enormously facilitated by devices to increase productivity. Even the gardener or allotment-holder who is growing cabbages just for himself and his family uses spades and hoes, and perhaps a greenhouse. The car-producer requires much more complicated equipment – factories, many kinds of machinery and so on. These things which help productivity we will call “capital”. “Capital” is a special kind of wealth. “Capital”, again, has a special meaning in economics. It is vital to remember that all capital was made in the past by “labour” acting on “land”.

As we have repeatedly noted, some people use these three words “land”, “labour” and “capital” in different ways from ourselves. There is something to be said for scrapping them altogether and inventing new words to cover the three concepts. The best argument we can put for using these words in the way we propose to do in these Topic Papers is that they were defined in our present sense long ago by the people who set economics on its feet as a serious scientific study.

The use of these special definitions helps us to understand economic processes, and to recognise where confusions and misunderstandings sometimes arise. Some people, for example, use words like “property” or “assets”, in a way which covers both “land” and “wealth”. Yet it is always important to remember that “land” cannot be created by human agency, and is therefore always in limited supply, while most forms of “wealth” can be created in almost limited quantities. It is perfectly possible for people to make a million cars or cabbages; it is not possible for people to create a single acre of land. It is, of course, possible for people to drain marshes or even stretches of sea and turn them into places where crops can be grown or animals reared. But this is not creating land, it is merely turning one kind of land into a different kind of land.

Part of the confusion probably arises from the use of money. It is possible to use money to purchase “land” – to purchase “labour” – or to purchase “capital” or other kinds of “wealth”. But that does not mean that “land”, “labour” and “wealth” are fundamentally different things.

“Rent”

To continue the definitions of essential terms. Somebody who owns land (in our sense of the word “land”) is likely to require some sort of payment from others who want to use it. That payment, following the old economists, we call “rent”. Another troublesome and confusing word! In ordinary speech, the word “rent” is often used in a much broader way. When a tenant-farmer pays what people call “rent” to a landlord, he is usually paying not just for the use of the natural resources but also for use of farm buildings and other things – perhaps cultivated fruit trees or growing crops – which somebody planted there is the past. When a tenant householder pays what people call “rent”, he is paying partly for the use of the ground on which the building is sited, but also for the use of the building itself. The ground is a natural resource, but the building is something created in the past by human effort. The “rent” which farmer or householder pays is partly true “rent” for the use of “land”, but it is partly recompense for buildings and other things which the landlord or his predecessors caused to be constructed.

The distinction between the two things which are often covered by the same word “rent” is exceedingly important, both economically and morally. “Rent”, in the economic sense, is payment for access to natural resources: something which neither the present landlord nor any other human being has made, or has had any part in making. But the “rent” which the tenant-farmer or householder is paying is not only true “rent” in the economist’s sense of the word but also payment for something which the landowner or his predecessors have done in the past: they have constructed a house, or farm buildings; or they have planted crops.

“Wages”

Another confusing word is “wages”. In ordinary speech a distinction is often drawn between the “wages” of a labourer, the “salary” of an office-worker, the “fees” of a doctor, architect, accountant or lawyer in private practice. The distinction is artificial. Nearly all kinds of work entail elements of physical and elements of mental activity, and there is no good reason for refusing to use the word “wages” to cover all of them – which is what the “classical” economists did. Indeed, the “wages” may not be paid by an employer or a client at all. When Robinson Crusoe was alone on his island, the “wages” of his work was the food and fuel which he collected, the clothes which he made for himself, the hut he erected.

“Interest”

“Interest” is yet another problem word, which we are using in the traditional economic sense. We understand it to mean “remuneration for the use of capital”. Many gardeners and householders have found it useful occasionally to hire equipment which they don’t often use, but which will help them with some special job: a big ladder for getting on the roof, for example, or a rotovator for digging up the soil of a new garden. They are hiring “capital”, and the payment they make to the hire shop is “interest”. A person who is setting up in business will often need equipment and stock before he can start. This too is capital, and he pays for it with interest. In practice, the businessman may go to a bank or a moneylender to borrow money, which he then uses to purchase the equipment and stock. The money which he borrows is not itself capital, but is something which he then uses to purchase or hire capital.

Definitions and understanding

Using words with clear definitions is of great practical importance in understanding what goes wrong in economic practice, and how to put it right in future. It is seldom possible to treat problems satisfactorily unless we understand their causes. In these Topic Papers, we will show the root causes of many modern problems. These range from poverty to environmental damage; from booms and slumps to housing. In all cases, unambiguous definitions of terms are essential.