It is a great error to believe that capital is in itself a distinct entity.
After introducing the notion of capital by the isolated man, Frédéric Bastiat develops his thoughts and introduces society. Yet, a primary characteristic of society is exchange, and capital can be exchanged as much as any other good. One of the reasons for this is that capital is defined as such through its use only – a sack of wheat can be seen as a consumer’s product or as capital. This characteristic of capital is key because it means notably that its price follows the law of supply and demand in the same way as does a consumer’s good. This allows to understand how some people can become rich thanks to capital gains but, as we shall see later, it also explains why interest is legitimate.
Another key consequence to the fact that capital can be exchanged like any other consumer’s good is how capital relates to money. Capital is often confused with its monetary representation. It is a simplification but money can indeed “buy” capital as much as any other consumer’s good. This is one of the inconsistencies of the anti-capitalists – if they refuse that capital can be exchanged (implying the existence of property rights), they need to refuse that consumers’ goods can be exchanged as well, which would mean the end of society as an economic entity.
Besides, today’s quote hints at the fact that capital formation is a product of savings, which Bastiat will describe later as “Capital has its roots in three attributes of man: foresight, intelligence, and thrift”.
Other quotes from Capital:
Introduction – Part 1 – Part 2 – Part 3 – Conclusion