The Positive Theory of Capital

CHAPTER II

DIFFERENCES IN WANT AND PROVISION FOR WANT

THE first great cause of difference in value between present and future goods consists in the different circumstances of want and provision (Bedarf und Deckung) in present and future. Present goods, as we know, receive their value from the circumstances of want and provision in the present: future goods from the same circumstances in those future periods of time when they will come into our disposal. If a person is badly in want of certain goods, or of goods in general, while he has reason to hope that, at a future period, he will be better off, he will always value a given quantity of immediately available goods at a higher figure than the same quantity of future goods. In economic life this occurs very frequently, and may be considered as typical in the two following cases. First, in all cases of immediate distress and necessity. A peasant who has had a bad harvest, or sustained loss by fire, an artisan who has had heavy expenses through illness or death in his family, a labourer who is starving; all these agree in valuing the present shilling, which lifts them out of direst need, ever so much more than the future shilling,—the proof being the usurious conditions to which such people often submit in order to raise money at the moment.1 Second, in the case of persons who have reason to look forward to economical circumstances of increasing comfort. Thus all kinds of beginners who have no means, such as young artists, lawyers, officials, budding doctors, men going into business, are only too ready, in return for a sum of present goods which assists them to start in the vocation they have chosen, and acts as foundation of their economical existence, to promise a considerably larger sum on the condition that they do not require to pay it until they are in receipt of a decent income.2

Of course the contrary also occurs not unfrequently in economical life. There are persons who are comparatively well off at the moment, and who are likely to be worse off in the future. To this category belongs, among others, that very considerable number of people whose income is obtained, mostly or altogether, by personal exertions, and will, presumably, fall away at a later period of life when they become unfit for work. A merchant’s clerk, for instance, who is in his fiftieth year, and has an income of £100, cannot expect to have any-thing better ten years later than, perhaps, a small retiring allowance of £30, or an annuity which he may secure by purchase at an assurance office. It is evident that to such people the marginal utility that depends on a shilling spent now is smaller than that depending on a shilling available in the more badly secured future. It would seem that, in such cases, a present shilling should be less valued than a future one. And so it would be if present goods were necessarily spent in the present, but that is not the case. Most goods, and among them, particularly, money, which represents all kinds of goods indifferently, are durable, and can, therefore, be reserved for the service of the future. The case, then, between present and future goods stands thus. The only possible uses of future goods are, naturally, future, while present goods have the same possibility of future use, and have besides—according to choice—either the present uses, or those future ones which may turn up in the time that intervenes between the present moment and the future point of time with which the comparison is being made.

Here then are two possibilities. Either it is the case that all those uses of the present and near future, which are generally taken into consideration as regards the good in question, are less important than the future uses; and in this case the present good will be reserved for these future uses, will derive its value from them,3 and will be just equal in value to a future good similarly available. Or it is the case that one of the earlier uses is more important; and then the present good gets its value from this use, and has, therefore, the advantage over the future good, which can only obtain its value from a less important future employment. But, usually, one never knows that some unforeseen occurrence in the near future may not give rise to some more urgent want. At any rate such a thing is possible, and it gives a chance of profitable employment to a good already on hand, such as, naturally, a good that will only come into our possession in the future has not got:—a chance which, as we have seen, is calculated in the amount of the value, and assessed, according to practical although incorrect methods, as an increment graduated according to its probability. To put it in figures. With £100 which will come into my hands at the end of five years, I can only aim at a marginal utility determined by the situation of things in the year 1896; we shall put this utility down at 1000 ideal units. With £100 at my disposal now, I can, at the least, realise the same marginal utility of 1000 units, but if an urgent want, arising in the meantime, gives me an opportunity of obtaining a marginal utility of 1200,1 may, possibly, realise it. Say, now, that the probability* of such an opportunity occurring equals one-tenth, I shall estimate the value of the present £100 at 1000 units certain, and, beyond that, at one-tenth of the possible surplus of 200: that is, in all, at 1020 units.4 Present goods are, therefore, in the worst case, equal in value to future goods, and, as a rule, they have the advantage over them in being employed as a reserve. The only exception occurs in those comparatively rare cases where it is difficult or impracticable to keep the present goods till the time of worse provision comes. This happens, for instance, in the case of goods subject to rapid deterioration or decay, such as ice, fruit, and the like. Any fruit merchant in harvest time will put a considerably higher value on a bushel of grapes to be delivered in April than on a bushel of grapes in his store at the time. Or say that a rich man is anticipating a long period of arrest, during which his living will be conformed to the hard fare of prison regime, how willingly would he give the price of À hundred present luxurious meals if he could ensure ten such meals during his captivity!

We may, then, draw up the balance-sheet which shows the influence of the different circumstances of Want and its Provision in present and future as follows. A great many persons who are not so well provided for in the present as they expect to be in the future, set a considerably higher value on present goods than on future. A great many persons who are better provided for in the present than they expect to be in the future, but who have the chance of preserving present goods for the service of the future, and, moreover, of using them as a reserve fund for anything that may turn up in the meantime, value present goods either at the same figure as future, or a little higher. It is only in a fractional minority of cases, where communication between present and future is hindered or threatened by peculiar circumstances, that present goods have, for their owners, a lower subjective use value than future. This being the state of things, even if there was nothing else co-operating with this difference of want and provision in present and future, the resultant of the subjective valuations, which determines the objective exchange value, would obviously be such that present goods must maintain a proportionate advantage, a proportionate, agio over future. But, besides this, there are other co-operating circumstances which work, even more distinctly, in the same direction.

5 The proverb bis dot qui cito dai has therefore a quite sound economical basis.

6 For this reason the well-known postponement of university fees in the case of poor students in Germany (Stundung) is found to be a relief not much ‘ inferior to the total exemption of the same class in Austria (Befreiung). Or we may think of the conditions of the contract which the impresario makes with the singers he educates and brings out.

7 According to the law laid down above on p. 162, for the case of alternative employments with different marginal utilities.

8 I need scarcely say that, in practical life, we seldom or never make out our valuations with such minute exactitude as in the above illustration. But it does give a faithful picture of the kind of considerations of which we avail ourselves in such cases.

• 1See Monger’s Grundsätze der Volkswirthschaftslehre, p. 93.
• 2See my Capital and Interest, 1890, p. 111.
• 3P. 219 (German edition, p. 266). See also my Hechte und Verhältnisse, p. 51. Innsbruck, 1881.
• 4Cossa [La Nozione del Capitale), Saggi di Ee. Pol., p. 157, has the definition: “Capitale è un prodotto impiegato nella produzione.” Ricca-Salerno (Sulla Teoria del Capitale, 1877, p. 51) says: “Il capitale è ricchezza prodotta applicata alla produzione.” Rodbertus, whose opinion I am inclined to put particularly high, because, although not altogether happy in his solution of the problems of capital, he had an insight into its essence such as scarcely any one before him had, explains (Das Kapital, p. 234, also Zur Beleuchtung der soz. Frage, p. 98) that “Capital (materials and tools) is product which serves for still further production.” A. Wagner, also, who has done good service in the theory of capital (Grundlegung, second edition, p. 38), calls capital a “Stock of economical goods, which serve as instruments to the making or acquiring of new economical goods.” In the most recent Italian monograph on capital, Supino (Il Capitale nell’ Organismo Economico e nell’ Economia Politica, 1886, pp. 9 and 17) defines capital again as “Il prodotto del lavoro passato che serve a produzione successiva,” or as “ricchezza impiegata produttivamente allo scopo di ricavarne un profitto.” Of other prominent modem writers may be mentioned Pierson (Leerboek der Staathuishoudkunde, Haarlem, 1884, p. 157); Schönberg (Handbuch, second edition, p. 209), “Capital is a material means of production, obtained by human labour, which, employed as such, is destined to give a return to its owner”; E. Sax (Grundlegung der theoretischen Staatswirth-schaft, pp. 115, 315, 323, etc.) Of recent French writers on the subject Gide (Principes d’Économie Politique, Paris, 1884) recognises the two varieties in the conception of capital with a clearness rare even in French literature, and distinguishes them as “capitaux simplement lucratifs” and “capitaux productifs.” “Les premiers,” he says, “sont ceux que rapportent un revenu á une personne; les seconds sont ceux qui prodnisent one richesse nouvelle dans le pays” (p. 148). His only failure is that he would recognise productive capitals alone as “true” capitals.In English literature our conception of capital (without, of course, any clear distinction being kept between its two varieties) is almost exclusively the prevailing one; this is so well known that I may spare quotations. Generally speaking, it is very significant of the state of “public opinion” in the matter that not long ago Kleinwächter (Schönberg’s Handbuch, second edition, p. 210) could explain “Common usage in political economy to-day considers it an essential characteristic of capital that it is a material means of production.” The only difference of opinion is as to whether land should be reckoned as capital or not. Finally, I think I may ventare to express the opinion that even the fore-most representative of a rival definition, Knies, is in opposition to us more in form than in matter. It is he at any rate who has, in a masterly manner, developed the idea—the really important one in our statement of the conception—that, in defining capital, we must define that which is the object of those problems that “have appeared on the scene under the name of capital” (Das Odd, p. 19).
• 5If we try to represent the classification of our wants by a typical scheme we must, on the principles just laid down, give it something like the following shape:—
• 6When we are told that capital assists in the production of wealth, and then again that it assists in the obtaining of wealth for its owner, we are apt to jump to the conclusion that the two phenomena are intimately and essentially connected, and that the one is the immediate result of the other—that capital can bring wealth to its owner because capital assists in the production of wealth. As a fact, Political Economy has taken up this idea only too readily and too completely. Captivated by the deceptive symmetry that exists between the three great factors of production—Nature, Labour, Capital—and the three great branches of income—Rent, Wage, and Interest—the science, from Say’s day till the present, has taught that these three branches of income are nothing else than the payment for the three factors of production, and that Interest in particular is nothing else than the compensation which capital receives for its productive services when the product is divided out among society. Propounded by various interest theories in various forms this idea has found its most concise and, at the same time, its most naive expression, in the well-known “Productivity theories”—those theories which explain interest directly as the natural fruit of a productive power peculiar to and resident in capital.
• 7The theory of the use of goods I have already gone into at length in Capital and Interest. I there showed that material goods are nothing else than such distinct forms of matter as admit of the natural powers residing in them being directed to human advantage. I showed how the “use” they afford is realised through concrete activities of these natural powers, and, therefore, by real forth putting of power. I showed how a use (Gebrauch or Nutzung) cannot be made of them otherwise than by taking the peculiar forms of the energy of the good at the proper moment, supplying the conditions necessary to render them available where they previously existed in an unavailable form, and then bringing these forms of energy into proper connection with that object in which the useful effect is to take place. On these considerations I based the conception of the “Material Services” (Nutzleistungen) which I believe to be the only one that corresponds with facts, and rejected certain shadowy ideas which connected the old theory of interest with the word “Uses” of goods. What remains for us here is, on the same lines, to lay down certain fundamental ideas as to the origin of material goods.
• 8Again, the solution suggested is the most conservative one. Without laying any particular weight on the fact that the historical origin of the word Capital indicates a relation to an acquisition or a gain, and that our reading remains true to this, it preserves the double relation—the relation to acquisition of interest on the one side, and to production on the other—which was imported into the conception of capital by Adam Smith, and since his time has been adopted in scientific usage. It is no inconsiderable advantage, then, that we do not require to create a majority in its favour by a revolution in terminology; the majority is already with us, and the conception may easily be carried unanimously if we add some new unbiassed members. Here, too, it is worthy of particular attention that those writers who have occupied themselves professedly and most profoundly with the investigation of the conception of capital and its problems, have ended, almost without exception, by adopting exactly the same conception, or at least one which comes very close to it.