Capital and investment

Capital is more than just property that has been invested to secure a financial gain. It has a second key defining characteristic. This characteristic was captured and highlighted by the US Supreme Court in the case of Securities and Exchange Commission v W J Howey Co. in 1946. The question before the court was whether a particular instrument constituted an ‘investment contract’ for the purposes of federal securities law. The court held that the test was whether it ‘involve[d] an investment of money in a common enterprise with profits to come solely from the efforts of others’. In reaching this conclusion, the court was confirming the approach of earlier courts that had similarly defined investment as ‘the entrusting of money or other capital to another, with the expectation of deriving a profit or income therefrom, to be created through the efforts of others’. The Howey test, as it has come to be called, has since been refined a little – the courts have, for example, adopted a more relaxed standard for the derivation of profits by omitting the word ‘solely’ from the test – but it remains good law. It was reaffirmed by the Supreme Court in United Housing Foundation v Forman in 1975 and remains central to determining whether a particular financial arrangement constitutes an investment contract and qualifies as a ‘security’ for the purposes of the Securities Act 1933. The Howey test is consonant with the US courts’ view that ‘it is the passive investor for whose benefit the securities laws were enacted’. The Howey test for investment is descriptive and factual in nature, though it clearly raises ethical and normative questions.

In its focus on pecuniary returns that come ‘from the efforts of others’, there are echoes in Howey of Veblen's linking of ‘investment’ with ‘absentee ownership’ and the extraction of what he called ‘unearned incomes’. Veblen observed that more and more property in capitalist societies took the form of claims on revenues produced in large part by the labour and ingenuity of others, hence his assertion that ‘the gains of investment are drawn from the aggregate material productivity of the community's industry’.