The Positive Theory of Capital

CHAPTER VIII

INTEREST FROM DURABLE GOODS—(continued)

To proceed. The phenomenon of interest just explained is characteristic of all durable goods, consumption and production goods alike. But, in the case of production goods, there comes in one circumstance the influence of which has to be investigated. In goods which are to serve as instruments of production, not only are the future services remote from the present, but both the present and the future services are remote from that economical goal which is first to be reached through production. The final destination from which, according to principles with which we are now familiar, they derive their value, is the product obtainable from them1 in the future. But from the attainment of this goal the current service—even that service in the very act of realisation—is distant by the whole production period which must intervene between its incorporation in the process and the turning out of the finished product. If this period, for instance, amounts to two years, the current service is two years away from attaining its goal, and at the same time from attaining its full present value: the next year’s service is three years away, the next again four years, and so on; while, in the case of durable consumption goods, every service attains its full present value in the year, or in the moment it is rendered. Now this has a twofold result: first, the services of productive goods undergo a greater reduction as compared with their full final value, and, second, the growth of their value lasts longer on that account. After they are produced and set to work, they bear interest during the whole period of the production process on which they enter; only, in practice, this interest is ascribed, not to the durable good that forms an integral part of the “outlay”—from which, indeed, it is now separated—but to the “business “or “circulating” capital into which it is transferred at the moment of its separation.

To illustrate this. A durable consumption good which lasts six years, and yields at the end of each year a use2 of 100, is worth, as we have seen, 95·23 + 90·70 + 86·38 + 82·27 + 78·35 + 74·62 = 507·55.3 A durable productive good, on the other hand, which lasts six years, and whose year’s use affords a final utility of 100 after a further production period of two years, has the following value. Its “current “year’s use, which is first obtained by the end of the year, and then brings in the amount of 100 after two years more (that is, after three years in all), is only worth in present valuation 86·38. Its next year’s use, which will bring 100 in four years, is today worth 82·27. Similarly the third year’s use has a present value of 78·35, the fourth year’s, a value of 74·62, the fifth, a value of 71·06, and, finally, the sixth has a value of 67·68. The whole productive good, accordingly, has a value of 460·36.

At the end of the first year’s use the first service is detached; this, meanwhile, has come nearer to its final goal by a year, and accordingly advances in value from 86·38 to 90·70; the other services follow suit in the usual way. Thus the good, as still bearer of live prospective services of the individual values of 86·38 + 82·27 + 78·35 + 74·62 + 71·06, is now worth in all 392·68. It has therefore lost 67·68 in the course of the year’s use, and, as against the return of 90·70 represented by the service detached, has borne 23·02 of interest—exactly 5% on the initial value of 460·36. So far everything runs as before. But the service which was separated off, with the value of 90·70, neither remains in its former shape nor retains its former value. It is detached from the fixed capital, and has passed over into the circulating capital, where it remains incorporated in some or other of the intermediate products, say, in the yarn spun by the machines. In this new shape it is the object of the further production process, and is by it brought step by step nearer to full maturity, and so to its future value of 100. This it attains in the following—the second—year of use.

At the end of the second year’s use again, the service, which is now the current one, is detached from the parent good with a value of 90·70: the parent good, now valued at 321·62, has lost 7l·06, and, as against the return of 90·70, has borne 19·64 as interest. But during this same year, the service detached in the previous year and incorporated in the circulating capital, has risen from 90·70 to 95·23 in value, and bears another 4·53 of interest. And, again, in the same way at the end of the third year of use, a service of the then value of 90·70 is detached, by which the parent good loses 74·62 in value, and interest gains 16·08. But since simultaneously the service detached two years before, and incorporated in the circulating capital, increases from 95·23 to its full value of 100, and that detached one year before, from 90·70 to 95·23, there is a further gain in interest of 4·77 + 4·53; that is, of 9·30.

In this way the peculiar combination of circumstances in durable productive goods gives occasion to a twofold interest relation. The services already detached bear interest after the manner, and as integral part, of the circulating capital; that is, their claim or title to interest is based on their transformation into finished and final product. The services still contained in the good bear interest after the manner of durable consumption goods; that is, their claim is based simply on their approximation to the present. But, of these two elements of the interest return, only the second is formally ascribed to the parent good from which it springs: for it the calculation is concluded at the moment in which the individual service is detached, and with the value which it then has. What further happens with it is ascribed to the circulating capital into which it passes at the moment of its separation.4 And thus we come to the final result: All interest ‘borne by durable productive goods is borne by them simply in their character of durable goods, while their second property, that of being productive, only comes into play in the interest borne by the services already detached and transferred to circulating capital. In this lies the complete explanation of a developed interest phenomenon, which I before suggested but had to delay going fully into until now.5

There is still, however, another highly important explanation we may gather in passing.

In goods capable of only a moderate number of services the contraction of value, even in the case of the last services, is but small. The result of this is, on the one hand, that the value of the parent good is only a little behind the gradually developing value of its collective services—in our first example the value of the machine lasting six years was not quite 600, but still it was over 500; and, on the other hand, that the amount of wear and tear, even in the first year,6 is relatively high, and almost equal to the entire value of the current service—in our illustration the value of the current service was 100, the value of the last service, that which decides the wear and tear, about 78.

In goods, again, capable of a very long series of services, both the value of the parent good and the amount of wear and tear fall proportionately. A good capable of rendering services.f the annual value of 100 for 100 years, is very far from being valued at 100 x 100 = 10,000. At most (where the usual under-valuation of future goods is at the rate of 5%) it is worth 2000; and the loss of value in the course of the first year’s use—although a service worth 100 has been consumed and detached from the use-content of the good—is, not 100 but 76, that and no more being the present value (at a discount rate of 5% per annum) of a sum of 100 falling due in 100 years!7

Finally, if a good is capable of rendering not only a great many, but, practically, an infinite number of services, the phenomenon just mentioned is seen in full development: the present value of the parent good is infinitely less than the successively increasing value of its services. A piece of land, for instance, which bears £100 each year for an infinite series of years, is worth, not 100 times infinity, not £100,000, not even £10,000, but only some £2000, and its loss of value sinks to zero: the piece of land whose annual current service is worth £100, yields the whole, £100 net. The law remains just as before; but the very remote services of the second, third, tenth century, have so exceedingly small a value in the present that they can.add almost nothing to the present value of the land, and the last service, the one which should decide the amount of depreciation, as infinitely far away, has no present value at all.

This is the ultimate reason why rent of land appears as a net income, and here first is the solution of the problem of rent traced to its real issue. The old rent theory gave only a preliminary and partial answer, and, strangely enough, had not the slightest suspicion that its tentative solutions had never come near the heart of the problem. All preceding attempts, from Bicardo downwards, exhausted themselves in more or less successfully pointing out that the annual uses of land have an economic value, or yield an economic return, and why they do so. But the yield of such services is in itself, first of all, a gross return. That the owner gets a net return, a net income, has nothing to do with fruitfulness, situation, kind of ground, or any such thing, but simply with the lower value put upon future goods, and the determination of the present value of the land in conformity with that. Suppose that a quarry, after deduction of all other recognised costs, produced for a hundred years a—what we may call—net annual return of £100; and suppose that future services were not less valued than present; the value of the quarry would be the full amount, 100 x 100. The quarry-owner would draw an annual income of £100, but not a shilling of that would be “rent “in the present sense of that term, that is to say, a net income. The whole of it would be a protracted consumption of the parent wealth of £10,000. And the case of all other lands is different from that of the quarry, not in kind, but only in degree. If a field is considered capable of producing crop for 1000 years—or 2000 years if one should prefer it, for literal infinity in human affairs is out of court—and if the future crops are to be valued as highly as the present ones, the valuation put upon such a field will reach an exorbitant height, viz. £100,000 or £200,000, and the yearly rent of £100 will present the character of a breaking-off of the parent stem of wealth—a very gradual destruction of the stem, but still a destruction, not a net income. Landowners would be lords of a giant stem or stock of wealth, but they would have no net income.

The theoretical explanation of rent from land, then, coincides ultimately with the explanation of interest obtained from durable concrete capital, and land rent is nothing but a special case of interest obtained from durable goods. That the two explanations do not entirely coincide, and that, on the contrary, the current rent theories are substantially so very different from the interest theories, is only traceable to the fact that, in the course of the explanation of rent, an intercalation had to be made which did not require to be made in the case of interest on durable capital; and that, at the same time, from a faulty conception of the rent problem, economists exhausted the whole content of the rent theories in making this special intercalation. In the case of all products of labour, and, consequently, in all goods that constitute capital, it needs no explanation that they and their material services have economic value: were it not so they would not be produced. In the case of the services of land, on the other hand, this is not self-evident. And, therefore, the economist must first exert himself to show why and under what circumstances the use of land receives a value and a price. With, a correct value theory, a few strokes of a pen will supply this proof;—by means of the doctrines of marginal utility and of complementary goods. Wanting the guidance of such a theory, and entangled in the fetters of the labour value theory, economists gave it a shape which was un-necessarily circumstantial and clumsy, and was, at the same time, not very satisfactory in principle. Of Ricardo’s rent theory, which in essence has remained the ruling one up till the present day—the theories of his opponents Carey and Rodbertus being quite exploded—it must be said that it contains an abundance of truth put in a formula essentially false. It is a brilliant piece of casuistry, which is out of connection with the central fire of correct principles; it lights up a bit of the road, but leaves the rest in obscurity and error. Hence the peculiar fate of the Ricardian theory. It does not quite satisfy anybody. Even its friends are fain to discover a number of weak points in it, and its most universal propositions are, for the most part, its weakest. But there remains in it an indestructible core of truth, which lives on under the most varied metamorphoses, and, even to-day, constitutes the better part of its substance.8

But how far does the Ricardian, or any other rent theory, take us, even if it were correct in every point where it is disputable? It takes us no further than we get in the question of interest, when it has been shown that a threshing-machine, after deducting all other costs, yields an annual gross interest, and why it does so. Where Ricardo ends his rent theory, there in truth ends the intercalation, which, because of its obviousness, did not require to be made in the case of movable capital. But it is just then that the chief question of the problem suggests itself: why there is a net interest within that gross interest which is yielded by the year’s use or service of the threshing-machine or the field, after deduction of all other costs. And to this question—which the rent theory up till now has entirely omitted to put—no answer can be given, either as regards the field or the machine, but to point to the under-valuation of future goods and future services.9

10 After deducting the share of the co-operating complementary factors.

11 Here I must assume that the utility is not obtained in advance, but at the expiry of the particular period, because, in the case of durable productive goods employed in a personal undertaking—with which the comparison is to be made—there is, in the nature of things, no anticipative use. The utility, e.g., which an agricultural implement affords in farming, cannot possibly be obtained on 1st January, for the whole year in advance: obviously it can be realised only at the end of the year, in the harvest.

12 P. 343, note 1. At a different interest rate, of course, the figures would be different.

13 This is most clearly shown when the intermediate product made by the assistance of the durable good—e.g. the cotton yarn spun by a machine—is immediately sold to another undertaker by whom the process is completed, and the yarn made into thread or cloth. All increment of value which the inter-mediate product, the yarn, thus obtains, is now naturally put to the account of this particular intermediate product (or the money capital for which it is sold) and not to that of the parent durable good.

14 See above, p. 305.

15 In the later years the “wear and tear” increases progressively, because the last service, which is not replaceable by any one coming after it, gets always nearer to the present, and becomes, therefore, always higher in value. See above, particularly the table on p. 346, note 1.

16 Spitzer’s Tables, p. 121.

17 On the relation of Ricardo’s rent theory to the modern value theory, see Dr. James Bonar’s suggestive remarks in an article entitled “The Austrian economists and their view of value “in the Quarterly Journal of Economics, October 1888.

18 Manifestly the fact that Rent of Land and Rent of Capital have one common final cause is not a sufficient reason for abolishing every distinction between them. Between land and capital there are so many important differences, both theoretical and practical, that, notwithstanding the common feature just described, we are justified in adhering to the decision made in a former chapter to keep land out of the conception of capital.—Quite lately Carl Menger, in Conrad’s Jahrbücher, vol. xvii. p. 48, has ably put forward the necessity of a comprehensive “universal theory of the return to wealth.” I trust that, in the contents of the present chapter, he will see an earnest attempt to develop such a theory.

• 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.
• 5Cossa [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).
• 6In the later years the “wear and tear” increases progressively, because the last service, which is not replaceable by any one coming after it, gets always nearer to the present, and becomes, therefore, always higher in value. See above, particularly the table on p. 346, note 1.
• 7See Mill’s Principles, i. 1. 2.
• 8If 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.
• 9Slaatswirthschafiliche 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.”
• 10If 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:—
• 11When 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.
• 12Originally 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.”
• 13The 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.
• 14Again, 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.
• 15In goods capable of only a moderate number of services the contraction of value, even in the case of the last services, is but small. The result of this is, on the one hand, that the value of the parent good is only a little behind the gradually developing value of its collective services—in our first example the value of the machine lasting six years was not quite 600, but still it was over 500; and, on the other hand, that the amount of wear and tear, even in the first year, is relatively high, and almost equal to the entire value of the current service—in our illustration the value of the current service was 100, the value of the last service, that which decides the wear and tear, about 78.
• 16If 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.
• 17Again 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.
• 18The 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.