The Positive Theory of Capital

CHAPTER VI

THE PROFIT OF CAPITALIST UNDERTAKING. THE GENERAL SUBSISTENCE MARKET—(continued)

IT may be thought that in the disquisition of last chapter we have wandered entirely from our subject, the subsistence market. This, however, is not the case. We are here, indeed, at the very centre of the question, for we are speaking directly of those things which form and regulate the supply and demand on the subsistence market. Who are the people that require to get subsistence advanced them? The answer is: Every one who wishes to produce in capitalist methods.1 How much is required?—An amount proportioned to the length of the production process. And in what form is it required?—By instalments. Again, who are the people that have subsistence to give?—All owners of wealth who do not consume but “save “it. How much can they give?—As much as their stock of wealth contains. And in what form can they give it?—Similarly, in instalments—in the proportion that the unfinished goods contained in their inventory successively mature. This is the true nature of what occurs in our market for means of production and in our market for credit—over which, I admit, the division of labour and the use of money throw a veil very difficult to penetrate.

Now at what price will finished present goods be exchanged for future goods on the subsistence market? This is the question in which our whole interest peculiarly centres. To answer it we must describe, with more care than hitherto, both the extent and, in particular, the intensity of supply and demand. To begin with Supply.2

The extent of the supply of subsistence we have already gone into with sufficient exactness. It is represented by the total stock of wealth accumulated in a community, exclusive of land, and after deduction of those amounts which are consumed partly by owners who are getting poorer, partly by owners producing independently and spending either on themselves or by way of advances.

As to the intensity of supply, it may be assumed from what was said on p. 315 as regards modern economic circumstances, that, to the capitalists, the subjective use value of present goods is not greater than that of future goods. In the most unfavourable case, then, they would be willing to give almost 20s. present money for 20s. obtainable in two years, or, what is the same thing, for one week of labour which would bring them in 20s. in two years.3

Over and against this supply of present goods stands, as Demand:—

1. An enormous number of wage-earners who cannot employ their labour remuneratively by working on their own account, and are accordingly, as a body, inclined and ready to sell the future product of their labour for a considerably less amount of present goods. Recurring to the figures of our illustration on p. 313 we may assume that, for the future product of 20s. value—the product turned out complete as the result of a week’s work, and valued after two years at 20s.—one class of the labourers will, in the most unfavourable circumstances, accept a price or wage of 10s., while another class will accept as low a sum as 5 s. in present money.

2. A number of independent producers, themselves working, who by an advance of present goods are put in a position to prolong their process, and thus increase the productiveness of their personal labour, say, from 20s. to 24s. per week. Since these persons, obviously, get an advantage from this advance so long as it enables them to obtain anything over 20s. a week, they will be prepared, where necessary, to give up a portion of the surplus product of 4s. a week, as agio on the present goods to which they owe this surplus product. I purposely here mention only those undertakers who demand productive credit for the assistance of their own labour, and not those who demand it for the employment of workers auxiliary to themselves. The demand of these latter forms only a passing stage: they take some part of the supply, provided by the owners of wealth, out of the market, but only to offer it again, on a different part-market, to the auxiliary workers.

3. A small number of persons who, on account of urgent personal wants, seek credit for purposes of consumption, and are also ready to pay an agio for present goods.4

Here then we see that, in these groups constituting the demand, the circumstances are such that those who demand are willing and are able to pay for the present goods they require, where necessary, by a larger sum of future goods; that is to say, by an agio. This being the state of the case, then, that all who own the supply value present and future goods alike, and all who form the demand value present goods higher than future, the determination of the price simply depends on which side has the numerical preponderance. If more present goods are offered than are desired by the united demand there can be no interest. The resultant market price, as we know, must always be lower than the subjective valuation of those would-be sellers who do not effect a sale. Now if the demand is, numerically, too weak, and if, in consequence, all the present goods offered cannot find a sale, and if all capitalists—even those who cannot find a sale for their present goods—value 20s. present money at something like 20s. future money, the market price of twenty present shillings cannot be higher than twenty future shillings, and there is no agio on present goods. If, on the contrary, more present goods are wanted than are offered, all the suitors cannot be supplied. In methods with which we are familiar the weeding-out process of competition now ensues; those who are able to offer the highest agio for present goods succeed in effecting an exchange; while the others, be they few or many, are shut out, even although they may have been ready to offer some (smaller) agio. But since the market price must always be higher than that bid by the excluded buyers, and since this latter contains an agio, it is clear that, in the circumstances, the market price also must contain an agio—great or small—for present goods.

Now it can be shown—and with this we come to the goal of our long inquiry—that the supply of present goods must be numerically less than the demand. The supply, even in the richest nation, is limited by the amount of the people’s wealth at the moment. The demand, on the other hand, is practically infinite: it continues at least so long as the return to production goes on increasing with the extension of the production process, and that is a limit which, even in the richest nation, lies far beyond the amount of wealth possessed at the moment.

Where a people, as in the case of Roscher’s poor fisher-folk, live from hand to mouth, it goes without saying that they will be eager to acquire the first hardly saved stocks which allow them to make boats and nets, and their exchanges will be made with an agio against future goods. But among comfortably-off and wealthy people the position is different, not in kind, but in degree. If the stock of wealth be sufficient to maintain the population during an average one year’s production period, every one will wish to engage in a two years’ process with its greater productiveness, and, the stock of wealth not being sufficient to advance subsistence to everybody for two years, there will be, as before, bidding against each other; the circle of suitors will be weeded out; and the agio on present goods will appear. Nor does it make any difference if the community’s wealth is sufficient for an average of five or ten years’ production period. Since the provision for human wants would be still more abundant if, instead of five or ten years, six or eleven years were the average periods, men will always wish to embark on these more fruitful methods, will compete to obtain the subsistence that is not sufficient for all, arid will thereby inevitably call forth an agio for present goods.

Interest and Agio must appear. Assume for a moment that they do not. Present goods and future goods are exchanged on the great subsistence market at par, and the labourers, for the week’s work, get the whole value of their future product paid down to them in present goods. Say that the average production period, assuming the nation to be enormously wealthy, is ten years: that the week’s work consequently yields 40 s. and that the labourer receives the whole of this as wage. What will happen? The undertaker who employs people to work with him in a ten years’ process makes no profit outside of his own personal labour. For the 40s., which the labour of his people yields him at the end of the production period, has already been wholly expended as wage. But how if he extends the production period still further? If the week’s labour has returned 40s. in the ten years’ process, experience tells us it will return more in a twelve years’ process, say 44s. In still longer processes, say, fifteen years, it may return perhaps 48s. Now as the undertaker, by hypothesis, can buy present goods at par on the subsistence market, it would be foolish of him not to extend the production period for himself and his employes to fifteen years. If he does so, he pays his workers out of the borrowed advances 40s., the price on the labour market: in fifteen years he recovers 48s. from the product: from that sum he pays back the advanced 40s. at par, and has remaining the respectable profit of 8s. out of each week of labour. And with this we have the “surplus value,” the profit on capital.

To prevent its appearance the labourer’s wage would have to be raised from 40 s. to 48 s. But this is not possible. For the well-known levelling tendencies of competition do not allow wages to rise permanently in any isolated branch—so long as it does not presuppose peculiar personal qualities—inasmuch as there will at once be a rush from less paying branches into any particularly paying branch. But neither is a general rise of wages to 48s. possible, because the existent stock of wealth is only sufficient for an average ten years’ period. The extension of the process to fifteen years, consequently, can occur only in isolated cases; the bulk of productive employments must continue the ten years’ process which yields only 40s. per week, and cannot, therefore, permit of any higher wage than 40s.

On the other hand, it is obvious that something else will make its appearance. However sharp undertaker A may be in borrowing money free of interest, and securing a nice surplus value of 8s. per week of labour, undertakers B, C, D and E will not be far behind. The desire to prolong the production period, and, with that, the demand for increased advances of subsistence, will become general: it will not be possible to supply this increased demand from the limited funds of subsistence: and, finally, the weeding out of competition will begin among the classes who constitute the demand. Here, then, we have the agio again appearing in the universal market price of present goods, from which, by hypothesis, we had for the moment banished it.

And this result, as regards the normal and really economic provision of society, is no less healthy than it is necessary. The possibility of obtaining means of subsistence free of agio would be certain to tempt undertakers into immoderate extension of the production period. If this were to occur only partially and in a few branches of production, naturally the limited stocks of subsistence would leave so much less for the other branches of production; these latter would have to curtail their processes unnaturally; and there would ensue a deficiency in the social provision which would outweigh the increased return got from the favoured branches through the immoderate extension of their processes.5 But if the excessive extension were to be introduced all over, the community’s stock of subsistence would come to an end sooner than the fruits of processes thus unduly extended could mature; there would be deficiency in provision, want, and distress; famine prices would recall the misdirected natural powers, and put them, with difficulty, to supply provision for the moment. All this could not happen without serious disturbance, expense, and loss.

Now the constant presence of the agio on present goods is like a self-acting drag on the tendency to extend the production period; without checking it all at once it makes it more difficult, and more difficult in proportion to the projected length of the process. Extensions which would be harmful as regards social provision are thus made economically impossible. Moderate extensions over the average process, however, are not absolutely prevented, but are limited to those branches where, from peculiar economic or technical circumstances, the productiveness that goes with the extension of the period is so great that they can bear the progressive burden of the agio. Branches, again, where longer processes are somewhat, but only a little, more productive, are tempted to escape the burden of agio by recurring to periods under the average. Thus, finally, under the influence of the agio, the total fund of subsistence is divided out automatically among the individual branches of production, in such amounts that each branch adopts that length of process which—in the given condition of the fund—is most favourable to the total provision.6

At this point I think we may congratulate ourselves on having finished one of the most important demonstrations in the scope of our present task. It fully confirms those inferences which we had drawn from the nature of the productive instrument Labour as a future commodity, and it gives us the key to the explanation of the much-disputed “Surplus Value “of the undertakers. It shows that, in the great combined subsistence market of society, present goods must have an agio, as legitimate consequence of the constant fact that present goods are more useful, and are more desired, than future goods, and that they are never present and offered in unlimited abundance. This agio, thus organically necessary, is given directly on the loan market in the shape of interest, while, on the labour market, it is given in the form of a price for labour which remains under the amount of the future product of labour, and which, on that account, leaves room for the accretion of a surplus value.

The same principles as regulate the price of the productive instrument, Labour, regulate the price of the original productive instrument “Nature,” or those services rendered by the earth which possess an economical character—generally called, from their chief representative, Uses of Land (Bodennutzungen). If a piece of land—after deducting the share of the complementary productive goods which co-operate—will produce in one year 100 bushels of corn, or will rear in five years 100 cwts. of beef, no one would be willing to pay the par value of 100 present bushels of corn or 100 present cwts. of beef for the use of the land, when these last-named amounts, employed in lengthening the production process, or directly exchanged against future goods on the loan market, or spent in buying labour, could obtain more than the 100 future bushels or cwts. Thus Uses of Land, when exchanged against present goods, cannot escape a deduction in price any more than can the productive good Labour.

And, finally, on exactly similar grounds the very same is true of the price of Intermediate Products. Concrete capital generally—raw materials, tools, and so on—is bought and sold at a price which remains under the amount of the future product resulting from it. It would be a very easy matter to prove this point by point, as we did with the price of labour, but the case of intermediate products is so closely allied that it seems to me quite unnecessary.

Speaking generally, the importance of the demonstration we have just completed does not consist in its proving that productive. instruments are bought at a price which remains under the price of their future product, for this is an old and familiar fact taught not only by daily experience but by the theory of the most diverging schools. The really important result of our investigations is, that this well-known fact has been shown to be the necessary outcome of the same causes as give present goods the superiority in value over future goods.

A few chapters back I assented to one feature of the Socialist interest theory—that which explains surplus value from the low price at which productive powers are purchased. I may now add wherein the theory is wrong. It is wrong, first, in explaining interest by the cheap purchase of labour only. Interest is got as much by the cheap purchase of uses of land. Quantitatively, of course, the profit from buying labour bulks much more largely in importance. The profit from the “cheap “purchase of intermediate products need not be mentioned here; it is explained on the same principles as the profit from the purchase of the original productive powers.

Second, as I have already said on p. 301, the purchase is not so cheap as it seems to be, because the object of purchase is measured in (undervalued) future goods, while the price is measured in (full-valued) present goods.

And, finally, the fact that the price of labour is relatively low, is not the naked result of an exploitation in which want forces the labourers to acquiesce. To some extent, although, probably, to a less extent, the same would be the case without any compulsion, if wealth were divided almost equally among all To prove this let us recur for a moment to the consideration of those primitive circumstances which I hurried over as not immediately appropriate to modern economy.7 Suppose a society where all are owners of wealth, and all independent producers. Their labour, embodied in, say, a two years’ process, is moderatively productive. Suppose that, in this society—which is not a poor one—a certain producer possesses means enough to make it possible for him, either to maintain himself for six years, or to maintain himself and one worker for three years. The product of a year’s labour, we shall suppose, is as follows:—in a two years’ production period £52 (at 20s. per weeK), in a three years’ process £60, in a six years’, £65.8 If this man employs his wealth in lengthening the period of his production without employing an assistant, he obtains by his six years’ labour 6 x 65 =£390. If he employs an assistant, and works along with him in a three years’ process, he reaps from his own labour in six years 6 x 60 = £360, while the same amount is produced by the labour of his employe. How much can he pay this employe in wages?

Obviously it is quite impossible to give him the full £360 (that is £60 per year) in wage, for this would be to inflict positive injury on himself. Working by himself he would have obtained in six years £390; by employing another he gets only £360. To avoid loss he must, therefore, keep back of the product of the employe at least £30, and thus he will be able to pay him at most £330, or £55 per year. If he does so, the whole advantage of the business is, obviously, still on the side of the labourer. The undertaker gains nothing, but the labourer gains, inasmuch as he now earns £55 instead of the £52, which is all he could have earned as an independent undertaker with a two years’ process. In these circumstances the idea of exploitation is out of the question: so is the idea of a forced -agreement: and still the wage, although stretched in favour of the labourer to the extremest limit of the economically possible, remains under the full amount of his future product. Surely this is a clear enough proof that there is some other reason for the “cheap “buying of labour than compulsion and exploitation!

9 I repeat again that it is quite true that, during the period of the national production process, the idle capitalists and rentiers also must be maintained by advances of wealth, and, indeed, as a rule maintained at a pretty fair rate. Their claims on subsistence, however, are not causes but effects of the condition of the market creating an agio on present goods. If there is no agio, and so no interest, then no one could live in idleness as a rentier; he would either have to work or positively consume his parent wealth. See above, p. 320 in note.

10 It is scarcely necessary to note that we have now changed the names of the parties who enter the market. So long as we were considering the special relations of the labour market, we thought of labour as the commodity offered, and of the means of subsistence as the equivalent price. Now, conversely, the means of subsistence appear as the commodity looking for a market, or as Supply.

11 Never, of course, quite 20s.; otherwise they would have no advantage from the exchange, and consequently no motive to conclude it; but, perhaps, 19s. 6d. or 19s. 9d.—a difference so insignificant that it may be entirely neglected in our inquiry.

12 I might name, as a fourth group of demand, those landowners who live, not on the return of their labour but on their rents, and who, like the labourers, get the price of a future commodity sold by them—in this case the productive good, use of land—advanced them in the form of subsistence. I intentionally, however, make no mention here of this group of demand since there need not be in every economy landowners living on their rents, and since, in any case, the emergence of interest which we have to prove in the text is quite independent of the simultaneous existence of rent from laud.

13 The deficiency is greater, because it is well confirmed by experience that the surplus return constantly tends to decrease as the production period is extended. (See above, p. 84.) The difference between the return which can be obtained in a five years’, and that which can be obtained in a ten years’ production period, is greater than the difference between the returns of a ten and a fifteen years’ period. If now, in a community where the stock of wealth is such as to allow of an average ten years’ period, one branch is forced to limit its own period to five years because another branch has extended its period to fifteen years, the greater difference is lost to the community, and the lesser one is won. The total result of such a procedure is, therefore, uneconomic.

14 The fact that the agio stands at a certain height may now and then lead to the appearance of there being a deficiency in remunerative opportunities of employment, and a “glut of capital.” The truth is that there is always a surplus of remunerative opportunities of employment, and a deficiency of capital; only that the high agio, which is the result of the deficiency of capital, excludes a mass of remunerative opportunities as not remunerative enough economically. It is exactly the same as when, in a year of bad crops, sufficient buyers cannot at the moment be found in some one market for the strongly appreciated grain, on account of the price being so high. It cannot be truly said that there is a surplus of grain and a deficiency of demand; on the contrary, there is so great a deficiency of grain that, after the weeding out which has resulted from the war of competition, only a very small part of the demand finds, economically, admittance to the scanty stocks.

15 See above, pp. 316, 317.

16 I assume that the figures of the return in a six years’ period are a little, but not very much higher than those in a three years’, in harmony with the experience, so often alluded to, that gradual extension of the production period tends to always decreasing surplus returns.

• 1See Monger’s Grundsätze der Volkswirthschaftslehre, p. 93.
• 2See my Capital and Interest, 1890, p. 111.
• 3The English word “Cattle,” as Knies (p. 7) has rightly remarked, has nothing in common derivatively with our conception.
• 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 were to carry our analysis of what man does in production a step further, we might appropriately distinguish three fundamental ways in which the producing man “moves things.” The first is what, for want of a better name, we may call simple movements or changes of place—where men transport entire objects from one locality to another. Thus the miner brings the ore from the depths of the shaft to the upper air; the merchant takes his goods from the place where they are produced to the place where they are demanded and used. The second embraces those movements of parts of one and the same object whereby it experiences a change of form, as when nails are made from iron, statues from marble, pipes from clay, dials from ivory, combs from caoutchouc, tumblers from glass, furniture from wood. The third, and much the most common way, is where different objects are brought together in space to form combinations of matter. These combinations may be merely temporary, or they may be lasting. Instances of the one are where the stamp falls on the coin, the chisel chips at the marble, the carving tool is applied to the wood, the ore put into the furnace, the yarn into the loom, the paper under the printing press, the stuff under the shears, the plough through the clods. Instances of the other are where we build a house out of wood, stone, lime, iron, etc.; where we put together a watch out of wheels, springs, pendula, weights, stop-action and many other things; in fact in manufacture generally. I must warn the reader that this division into three fundamental forms neither has, nor is meant to have, the character of strict scientific classification. Indeed, these forms merge in many instances into one another. Temporary combinations, for instance, are very often half-way to changes of form, and what I have called a simple change of place is at the same time, in a certain point of view, a material combination, a bringing together of the thing moved and the object (personal or impersonal) to which it is moved. This division, however, will make it easier to find our reckoning, and will prove too, if necessary, the correctness of the general characteristics which I have ascribed in the text to productive processes. I mean to say that it is easy to see that every productive activity which one can think of ranges itself under some one of these three fundamental forms, and to that extent it is proved that such an activity must, a fortiori, range itself also under the general formula given in the text, where we have described the nature and method of the production of material goods as the mastery of natural powers by means of putting objects in motion.
• 7Slaatswirthschafiliche Untersuchungen, Munich, 1832, p. 59, and similarly in the second edition of 1874, p. 111. On p. 56 he expressly calls capital “Wealth which brings in income.”
• 8Grundlagen und Ziele dea sog. wissenschaftlichen Sozialismus, 1885, p. 184.
• 9If 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:—
• 10When 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.
• 11Originally the word Capital (Capitale from Caput) was used to signify the Principal of a money loan (Capitalis pars debiti) in opposition to the Interest. This usage; already foreshadowed in the Greek formation κεϕάλαιον, became firmly established in mediæval Latin, and appears to have remained the prevailing one for a very long time, even pretty far down in the new era. Here, therefore, Capital meant the same thing as “an interest-bearing sum of money.”
• 12The 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.
• 13If 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.
• 14Again I say a control over the time in which a natural power may become effective. This proposition, also, must not be taken too literally. It must not be imagined that natural powers work intermittently; that man can sometimes bring them to a standstill, sometimes set them working again. On the contrary, natural powers are always at work; a natural power not active would be a contradiction in terms. But it is possible that several powers may be so combined that their activities may for a time mutually balance each other, and the resultant be rest—if not complete rest, still some movement so slight that, as regards human purposes, it may be neglected. When this is the case, before any new resultant can emerge that is of interest to man, there must be an entirely different combination of materials and powers. This suggests how man may get control of the point of time at which a definite resultant emerges. It is only necessary for him, by skilful use of his power to move objects, to provide the causes of the desired effect, all but one. So long as this one is not present the conditions are unfulfilled, and there cannot be the desired result. But when at the proper moment he adds the last condition, the movement hitherto held in leash, as it were, is suddenly set free, and the desired effect is obtained at the opportune time. Thus the sportsman moves powder and lead into the barrel of the gun; he shuts the breech; he raises the cock. Each of these things has for long possessed and expressed its peculiar powers. In the powder are present the molecular powers whose energy later on is to expel the shot from the barrel. The barrel now, as formerly, exerts its forces of cohesion and resistance. The trigger which is to let the cock smash down, strains and presses against the spring. Still the arrangement, the disposition of the collective powers, is such that the resultant of their mutual energies is rest. But the sportsman covers the wild fowl with the barrel: there is a slight pressure on the tongue, a little dislocation of the arrangements, and the shot flies.
• 15The variation which Hermann, however, has given must be considered an independent one, and is the fourth reading in arithmetical order given to the conception. He goes back to capital as the source of income, and makes this the object of his definition: Capital, he says, is “every durable foundation of a utility (Nutzung) which has exchange value.” In opposition to the last definition this one includes under the conception of Capital all land, and besides embraces such consumption goods as are durable, like furniture, houses, etc., even if they are personally used by the owners.
• 16A sixth variation comes from Kleinwächter. He finds it a characteristic mark of capital that it lightens the toil of acquisition or productive labour. Now this characteristic appears to him not to belong to all means of production, but only to one category of these, the tools of production, while the matter or materials of production are absolutely passive during the whole production process; they are worked up or used up but give no assistance in working. “Logically,” therefore, “the conception of capital should be limited to tools of production.”