Frank Albert Fetter, The Nature of Capital and Income

Frank Albert Fetter’s review, originally published in the Journal of Political Economy in 1907 and republished in 1977, assesses Irving Fisher’s 1906 book of the same title. It combines strong endorsement of Fisher’s mathematical exposition with a historical critique of his definitions. Fetter credits Fisher with demonstrating the inconsistencies of conventional factor classifications, establishing the coherence of capitalization theory, and applying that theory to business accounts. His central objection is that Fisher’s mature analysis has outgrown the stock-and-flow analogy with which it began, without sufficiently acknowledging the change.

Fetter first surveys Fisher’s progression from wealth, property, and utility through capital accounts, income accounting, and the relations between capital and income. He then organizes his own argument into four discussions: capital, income, their relations, and Fisher’s place in contemporary economic thought. Rather than reproduce a book whose principal conclusions he accepts, Fetter concentrates on conceptual tensions and reconstructs their development through Fisher’s earlier articles.

The first tension concerns whether capital and income differ merely as a stock and a flow of the same commodities, or whether they consist of different things. Fisher’s early illustrations—food passing through a pantry, carpets entering and leaving a store, water in reservoirs and streams—suggested that temporal measurement alone supplied the distinction. His book instead distinguishes accumulated wealth from the services wealth renders. For Fetter, this is a substantive correction, not simply an elaboration of the original formula:

The misleading phrase “fund and flow” must be looked upon as a historical accident and one unsuited to the better capital concept which Professor Fisher has now adopted.

The criticism is directed at the analogy’s explanatory authority. A stock of durable goods is not an accumulated supply of the services those goods will provide. Equally important, heterogeneous physical objects cannot be added into a meaningful economic total without valuation. Fisher had initially treated summation in value as secondary; his mature exposition makes it indispensable. Fetter therefore identifies two connected advances: services replace commodity turnover as the substance of income, and present value replaces a physical inventory as the operative meaning of capital.

The discussion of income traces three stages in Fisher’s thought: flows of concrete commodities, services supplied by wealth, and finally subjective satisfactions. Fetter welcomes the movement toward psychological analysis but questions whether an individual’s entire conscious life should count as income. The relevant concept should concern pleasurable experiences that objective goods help produce. He also objects to treating money receipts and directly enjoyed services as if their common description as services automatically made them homogeneous. These distinctions matter because Fisher sometimes moves between monetary accounting and psychic enjoyment without maintaining a stable analytical level. A claim that selling a book adds nothing to social income, whereas reading it does, privileges final consumption while obscuring the contribution of productive activity.

The consequences become clearest in Fisher’s treatment of capital appreciation. Fisher distinguishes realized income from earned income and excludes increases in capital value from the former until services or payments are received. Fetter challenges the deferred-annuity example intended to prove that counting appreciation as income would entail double counting. The expected payments have already been discounted into present capital value; this does not establish that the subsequent increment is economically irrelevant:

The increment of money income in any elapsed year is therefore the primary fact, and increase of capital occurs only on condition that the accrued money income is not withdrawn but is added by reinvestment, or is saved.

Fetter thus distinguishes accrual from the conventional dates at which income becomes separately payable. He also exposes the instability of Fisher’s taxation example, in which three heirs choose immediate, deferred, or rapidly exhausted annuities. Taxing only what each spends may defend a consumption tax, but it does not establish the proper meaning of an income tax. An income tax aims at net earnings available either for saving or expenditure; a property tax aims at capitalized property rights. When Fisher counts expenditure from original capital as realized income, those different bases become confused:

According to this usage income is never money coming in but always money going out. Income is not an addition but always a subtraction.

Fetter’s third discussion examines Fisher’s four proposed income-capital relations: physical productivity, value productivity, physical return, and value return. Physical productivity cannot generally isolate the contribution of one productive agent from the jointly produced output of labor, land, and equipment. Moreover, relations between unlike dimensions are rates rather than mathematical ratios. The decisive relation is consequently value return: income-value compared with capital-value. Here Fetter locates the conceptual reversal underlying capitalization theory. Physical wealth helps produce services, but expected incomes determine capital’s present worth:

Capital is treated as the present worth of expected incomes, and the essence of the capital problem is found in the value relations between incomes and capital sums.

The concluding historical discussion places Fisher within the psychological economics associated with Patten and Clark’s challenge to conventional distinctions between land and capital, rent and interest. Fetter argues that Fisher’s actual development owes more to these currents than his account of a mathematical inspiration from Newcomb acknowledges. The review’s significance lies in its insistence that capital theory belongs within a unified theory of distribution: capital is the time aspect of value, not an isolated classification of physical wealth. Despite definitions that still burden the exposition, Fisher’s book gives disputed ideas convincing mathematical and practical form. Fetter’s qualified praise preserves both judgments: the book is a major contribution, and its strongest results require conceptual foundations clearer than its inherited terminology supplies.