The Positive Theory of Capital

CHAPTER III

UNDERESTIMATE OF THE FUTURE

IT is one of the most pregnant facts of experience that we attach a less importance to future pleasures and pains simply because they are future, and in the measure that they are future. Thus it is that, to goods which are destined to meet the wants of the future, we ascribe a value which is really less than the true intensity of their future marginal utility. We systematically underestimate future wants, and the goods which are to satisfy them.

Of the fact itself there can be no doubt; but, of course, in particular nations, at various stages of life, in different individuals, the phenomenon makes its appearance in very varying degree. We find it most frankly expressed in children and savages. With them the slightest enjoyment, if only it can be seized at the moment, outweighs the greatest and most lasting advantage. How many an Indian tribe, with careless greed, has sold the land of its fathers, the source of its maintenance, to the pale faces for a couple of casks of “firewater “! Unfortunately very much the same may be seen in our own highly civilised countries. The working man who drinks on Sunday the week’s wage he gets on Saturday, and starves along with wile and child the next six days, is not far removed from the Indian. But, to a smaller extent, and in more refined form, the same phenomenon is, I venture to assert, not quite unknown to any of us, however prudent, or cultured, or highly principled. Which of us has not been surprised to find that, under the pressure of momentary appetite, he was not able to refuse some favourite dish or cigar which the doctor had forbidden—knowing perfectly that he was doing an injury to his health, which, calm consideration would tell him, was much more considerable than the pleasure of that trifling indulgence? Or, which of us has not, to avoid a little momentary embarrassment or annoyance, plunged headlong into a much greater? Who is there that has never postponed some troublesome but unavoidable call, or business, or work which had to be done within a certain time, till the day was past when it could be done with little trouble, and has had to do it in more difficult circumstances, in haste and hurry, with overexertion and ill-humour, to the displeasure of those who were injured or wounded by the delay? Any one who knows himself, and keeps his eyes open to what is going on around him, will find this fact of the underestimate of future pleasures and pains exhibited under a thousand forms in the midst of our civilised society.

Of the fact, then, there is no doubt. Why it should be so is more difficult to say. The entire psychological relations, indeed, through which future feelings in general act on our judgments and our actions, are still very obscure, and it will be understood that the same obscurity covers the reasons why future feelings act with greater weakness on our judgments and actions than present feelings. Without meaning to forestall the pronouncement of the psychologists, who seem to me more competent to decide on both questions than the economists, I venture to think that this phenomenon rests, not on one ground, but on the joint action of no less than three different grounds.

The first ground seems to me to be the incompleteness of the imaginations we form to ourselves of our future wants. Whether it be that our power of representation and abstraction is not strong enough, or whether it be that we will not take the necessary trouble, the consideration we give our future and, particularly, our far-away future wants, is more or less imperfect. Naturally, then, all those wants which we have not considered remain without influence on the valuation of such goods as are destined to serve those future wants, and, consequently, the marginal utility of such goods is put too low.

While this first ground is very much a peculiar defect in estimate, the second seems to me to rest on a defect in will. I believe it frequently occurs that a man, called on to make choice between a present and a future pleasure or pain, decides for the present pleasure although he knows perfectly, and is even conscious while choosing, that his future loss will outweigh his present gain, and that, taking his welfare as a whole, the choice is unprofitable. How well many a “good fellow “knows the painful embarrassments and privations he is bringing on himself, by running through his salary on the day he gets it, and yet has not the strength to resist the temptation of the moment! Or, how often does a man, “from weakness,” let himself be hurried into taking some step, or making some promise, which he knows at the moment he will rue before twenty-four hours are over! The cause of such defects in conduct, I say, appears to me, in distinction from the former case, to rest, not on want of knowledge, but on defect of will. I should not be surprised, however, if the psychologists were to explain this case also as only a variation of the former: it may be that the weaker feeling of the moment prevails over the stronger feeling of the future only because the latter, while present in consciousness in a general way, is not lively enough and strong enough to take possession of the mind. For our purpose, however, it is a matter of no consequence.

Finally, as third ground, I am inclined to name the consideration of the shortness and uncertainty of life. In the case of future goods, their objective acquisition may be practically certain,1 and yet it is possible that we may not live to acquire them. This makes their utility a matter of uncertainty for us, and causes us—in perfect analogy with the case of objectively uncertain goods—to make a deduction from their value corresponding to the degree of uncertainty.2 A utility of 100, as to which there is 50% of probability that we shall not live to see it, we certainly do not value so highly as a present utility of 100; probably we value it as we do a present utility of 50; and I am convinced that any of us who was promised, to-day, a cheque for £10,000 on his hundredth birthday, would be glad to exchange this large, but somewhat uncertain gift, for a very small sum in present money! To determine correctly the practical influence of this factor, however, we must make a somewhat more accurate calculation, both of the extent to which it prevails, and the way in which it works.

As regards this I think we shall be able to establish what follows. The factor in question is directly active only in a minority of cases: in most cases its action is indirect. It works in the most direct and powerful way in those not very numerous cases where men have the thought of death forced on them by peculiar circumstances; for example, among very old men, people suffering from fatal diseases, those placed in dangerous situations or engaged in very perilous callings, such as people in times of plague or soldiers before an engagement, and so on. The disregard of a future so uncertain not seldom finds drastic expression in the mad extravagance which seizes people in such circumstances; a fact in the history of civilisation which has often been noted—by Adam Smith among others. On the other hand, the thought of the uncertainty of life seems to me to exert no direct influence at all in that vast majority of cases where we are dealing with men in normal circumstances, and dealing, at the same time, with the valuation of goods belonging to a time not very far in the future; say, goods that would come into their possession in a couple of days, or months, or even years. I am convinced that a healthy middle-aged man, to whom a payment of £100 next year was due for certain, would not value it a single penny less on the ground that he might not live to see next year. It is only where very long periods of time are concerned that this factor, among normally situated men, obtains fully and directly. Payments which fall due in a hundred, fifty, or even twenty years, lose in value from the consideration of the uncertainty of life as regards all payees: payments which fall due in ten years lose in value as regards a great many.

And here finally we have the point from which this third motive may rise to universal indirect efficiency—although, at the same time, a very much weakened efficiency. If certain differ-ences of valuation have once become established as regards long intervals of time, they must, through the agency of exchange transactions, to some degree affect shorter intervals. For the mechanism which determines objective value abhors any sudden leap in value. It is not possible, for example, that a payment of £100 which will be made on 1st January 1900 certain, should be worth only £80 till 31st December 1889, and should jump up to the full value of £100 at twelve o’clock that night, because the due date is now only ten years off. Equalising tendencies, and transactions which I can best compare with stock exchange arbitrage, spread the differences of value, which obtain as regards long periods, uniformly over the entire intermediate period—Putting all these peculiar circumstances together, I should be inclined to consider the practical efficiency of this factor not altogether trifling. Still I should not place it very high, especially as it is weakened, to a not inconsiderable extent, by the consideration of closely related heirs. In any case, the two motives first mentioned have con-siderably more to do with the undervaluation of the future utility than the third.3 All three causes of our underestimate of future utility—errors of valuation through faulty representation of coming needs, defects of will, and consideration of the uncertainty of life—manifest themselves in extremely different degrees in different individuals, and even in the same individual at different times, according to differences of temperament and mood. For the same interval of time they may cause one to make an undervaluation of 100%, another of 5.0%, a third of 1% or 2%: while they may send fanatics in the matter of foresight and precaution to the opposite extreme of overvaluing future utility. I should like to call special attention, further, to the fact, that the undervaluation which results from these causes is not at all graduated harmoniously, in the subjective valuation of the individuals, according to the length of the time that intervenes. I mean, it is not graduated in this way, for example, that the man who discounts a utility which he expects to get in one year by 5%, must discount a utility due in two years by 10%, or one due in three months by 1¼%. On the contrary, the original subjective undervaluations are, in the highest degree, unequal and irregular. In particular, so far as the undervaluation is caused by defects of will, there may be a strong difference between an enjoyment which offers itself at the very moment, and one which does not; while, on the other hand, there may be a very small difference, or no difference at all, between an enjoyment which is pretty far away, and one which is farther away. Uniformity is practically introduced into the various undervaluations, as we shall see later, only through the mediation of exchange business. At any rate—and this is sufficient for us here—all three causes have one common result; that, under their influence, we estimate the utility of future goods at a lower figure than expresses their true value: we look at the marginal utility of future goods diminished, as it were, in perspective.4

Now it is easy to show that this phenomenon must sub-stantially contribute to strengthen the efficiency of the first factor in the undervaluation of future goods, the difference in the provision of goods for present and future. All persons who are worse off in the present than they expect to be in the future,—persons to whom, therefore, the true marginal utility of a future good is already less than the marginal utility of a similar present good,—are led by this second factor to put the future marginal utility still lower than it really is, and this increases the difference in value to the further prejudice of future goods. If, for example, the marginal utility of a definite present good is 100, and the true marginal utility of a similar good in a better-provided future is 80, the future good will be rated, perhaps, at 70 only, thariks to this second factor, and thus the difference of valuation rises from 20 to 30. In the same way those persons who may be supposed to be in approximately similar circumstances in present and future, and would, other things being equal, value present and future goods at approximately the same figure, will fall under the category of those who value present goods more highly than future. This second factor, then, increases both the number and the intensity of the differences in valuation to the prejudice of future goods, and, naturally, in the market where present goods are exchanged against future, this must make the resultant exchange value more unfavourable to the latter. The agio on present goods moves upwards.5

6 See above, p. 245.

7 If there is objective uncertainty as well as subjective there will, naturally, be two deductions. Of these the one made on account of objective uncertainty, as a particular phenomenon of certain kinds of goods, has nothing to do with interest; we have only to deal with the deduction on account of subjective uncertainty.

8 An effect analogous to that of the uncertainty of life might be exerted by the uncertainty of the duration of our capacity of enjoyment; but in any case the limits of the efficiency of this motive are much more closely drawn.*

9 Jerons, like his follower Sax, as we saw in the note to p. 239, fell into a misunderstanding as to the entire nature of the phenomenon mentioned in the text, in confusing the representations and valuations which we make as regards future feelings with actually present feelings. We need not wonder, then, at not finding in these writers any sound thorough-going explanation of the phenomena, or even an attempt at such. They accept the supposed “weakened anticipated feelings “of future needs simply as fact, as a “well-known psychological fact,” and they pass over much of its detail—which really very much requires explanation—without comment as “self-evident” (see, e.g., Sax as before, p. 178).

10 Indirectly this effect will be strengthened by the fact that, through the undervaluation of the future utility, men will refrain from providing for the future so amply as they would otherwise have done. In other words, this underestimate acts to the prejudice of saving and accumulation of wealth, and still further reduces the number of persons who have to throw an accumulated surplus of present goods on the market.

• 1See Monger’s Grundsätze der Volkswirthschaftslehre, p. 93.
• 2Generally speaking, there are two occasions on which a man is called on to form a judgment as to value. One is on parting with a good in his possession, e.g. in giving it away, or exchanging, or consuming it; the other, on acquiring a good. In the two cases the form which the valuation assumes in thought is, externally, a little different. A good which a man has he values according to the injury which he would suffer by its loss; he values it, therefore, according to the last satisfaction which is assured him by having it. A good which a man has not he values, on the contrary, according to the increment of utility which its acquisition brings; i.e. according to the most urgent among those satisfactions which, in the conditions of his fortunes up till the present time, he has not been able to obtain. Naturally we get the same result by either method, for the final satis-faction which is assured by a good is always identical with the first which would be lost without the good. In the text I have put the formula in such a way that it will sufficiently embrace either method.
• 3See my Capital and Interest, 1890, p. 111.
• 4P. 219 (German edition, p. 266). See also my Hechte und Verhältnisse, p. 51. Innsbruck, 1881.
• 5See Mill’s Principles, i. 1. 2.
• 6If 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:—
• 7THE cases we have hitherto considered have been comparatively easy of interpretation; but practical economic life brings out a great many complications which the practical man treats with easy assurance, but the theorist finds considerable difficulty in explaining. To understand these everything depends on the correctness of our casuistical decision as to that amount of utility which, in* the given circumstances, is the marginal utility. For this purpose the following general direction may serve as master-key to all the more difficult problems of value. We must look at the economic position of the person who is estimating the value of a good from two points of view. First, we must in thought add the good to his stock, and consider what further and lesser concrete wants can now be satisfied. Second, we must in thought deduct the good from his stock, and consider again what concrete wants will still be satisfied. In the latter case, of course, it becomes manifest that a certain layer of wants, viz. the lowest layer, has lost its former pro-vision; this lowest layer indicates the marginal utility that determines the valuation.
• 8When 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.
• 9The 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.
• 10If we look more closely at the way in which man assists natural processes, we find that his sole but ample contribution consists in the moving of things. “Putting objects in motion” is the idea which gives the key to all human production and its results;—to all man’s mastery over nature and its powers. And this is so simply because the powers reside in the objects. Now when man by his physical powers—the power of moving things—is able to dictate where the object shall be, he obtains a control over the place at which a natural power may become effective; and this means broadly a control over the way and over the time in which it may become effective.