Distribution of Products and the Share of Capital in the Proceeds of Production
We have seen how competition tends to reduce the price of all articles, necessary for humor consumption, to a point approximating to the test of production. With absolute freedom in this regard, the consumer should be able to obtain any given article for a sum equal to the expenditure involved in reconstituting the material, and the productive agencies, employed, and in maintaining them continuously at his service. We must now inquire into the manner in which products are shared between the two essential factors in production—Capital and Labour.
The socialist maintains that capital monopolises a lion's share of these products, but the most cursory review of the conditions of modern industry will demonstrate why capital takes this greater share, and how the incessant progress induced by competition tends to reduce its amount.
All industrial enterprises depend on a certain combination of the agents of production, land, buildings, tools, machines, raw materials, food reserves; also upon human material, directors and workers. The former of these are generically styled capital, the latter labour. Capital may be applied to an undertaking in the form of money, in which case the producer uses it to procure the materials that he needs; or it may be applied, directly, in the form of these materials. But, under present industrial conditions, the products of an undertaking are usually received in the form of money, and it is in this shape that they are divided between capital and labour.
Capital is the product of thrift. An economical and provident man does not expend all his income upon the desires of the moment, but reserves and accumulates a portion either to satisfy future needs, educate his children, support his old age, and provide against the innumerable chances and accidents of life; or to increase his income by enabling him to take part in some industrial enterprise. He may keep his capital unemployed and available for future needs, use it to enlarge his own business by increasing his machinery or labour, or invest it in another business for a contingent return. He may also loan it to others who need it for no matter what purpose, but undertake to supply him with a fixed return—with interest. A man is persuaded to part with capital in the two last cases, first because he looks for a return sufficicnt to indemnify himself for the privation that he may suffer should his capital be unavailable in case of one of those eventualities which determined its original accumulation; and, secondly, to recoup the risks of investment plus a margin, however small, sufficient to induce him to part with it rather than hoard it in idleness. Such are the essential conditions of the remuneration of capital. Competition approximates the current rate of returns on capital in direct use towards this figure, whether the saver himself employs his capital in actual undertakings, or uses it indirectly under an arrangement for sharing profits or on loan. When the current rate falls below this scale, or necessary, rate, capital is withdrawn or offered in less quantities, since the compensation is inadequate to the privation, or the risk is insufficiently covered. When the rate-current passes the necessary rate, capital is attracted, or the amounts on offer are increased. These two contrary movements are accelerated according to the degree of variation, until they cause it to disappear.
The share of capital in the proceeds of industry cannot, for this reason, be diminished until progress has achieved a permanent reduction in the necessary rate by diminishing possible privations and possible risks. A general fall in the rate of interest has been apparent during the last fifty years, and has been attributed to increased production of capital, and a progressive increase in the habit of thrift. But if the supply of capital has increased, demand has not failed to do likewise. The true reason for this fall in the rate of remuneration on capital—the rate of interest—is to be found in that progress which has caused a larger proportion of the capital lent or employed on profit-sharing terms, to become readily realisable. This has reduced the inconvenience incurred in parting with its actual possession, and consequently the amount of the requisite compensation. Thanks to the possibility of instantaneously realising personal estate, the privation—very real in less advanced industrial communities—resulting from inability to recover or convert capital in actual employment, has vanished. No doubt the capitalist who has invested money in personal estate runs a certain risk of loss in the case of a forced realisation, but he may also be able to sell at a premium, and this possibility counterbalances the contrary risk. Doubtless, also, capital is by no means all invested in personal estate, but the proportion so placed increases every day, and the result of a state of competition is always to reduce the current rate on services and products to the lowest minimum necessary rate. Between the returns on real and personal estate, there tends to grow up an average return, and every increase in the proportion of money invested in realisable property tends to reduce the rate of this average return. When all capital has become capable of immediate realisation, the considerations determining this average rate will cease to include the idea of compensation for possible inability to realise.
This factor in determining the necessary rate of return on capital is tending to disappear, but that which constitutes the premium on risks is by no means in similar case. It is, indeed, so far from diminishing that one might almost maintain that it has risen during recent years. The risks to which capital is exposed are divisible into two categories—particular and general. Particular risks arise from the more or less speculative element which enters into all industrial undertakings, and the great liability of the prices, which their products command, to be influenced by all kind of considerations. They vary with the nature of each industry, the mining industry, particularly gold-mining, being notoriously speculative. Agricultural profits are, again, affected by every change of weather. But the rates of return on industrial undertakings tend regularly to approximate to the risks of loss, and the returns derivable from any one industry approximate to the average profit in all, provided, only, that all are equally open to capital and labour. Competition, again, is always seeking out the most profitable industries and is, therefore, always tending to reduce the rates of return to a common level.
General risks attach in varying degrees to every industry in the country of their origin, and a species of sympathy even extends their influence beyond it. They are the result of wars, of changes in the assessment and rates of imposts, especially of the customs-tariff, and from whatever cause they spring every new tie cementing the comity of nations, improved means of communication, enlarged markets, extends the area of their influence. Every industry is likewise subject to risks arising from imperfect organisation, or the errors of judgment, or wilful misconduct, of its managers. General and particular risks alike also fall on that part of the capital engaged in production which bears the liabilities and takes its remuneration in the form of profits or dividends. That portion of capital which takes its remuneration in the form of interest, and that labour which is remunerated by wages, are only affected indirectly and when an undertaking is on the point of disaster.
The capital responsible for liabilities—in common language, the business capital—bears the risks of loss, and assures the auxiliary capital and wage-earning labour against these risks. But no assurance is worth more than its assurer, and it may, and does, happen that the undertaking meets with such losses that the business capital not only fails to pay the interest on the borrowed capital, but that even this borrowed capital is wholly or partially lost.
Borrowed capital is, likewise, capable of division under two heads, corresponding to the manner in which it is employed. It is either invested in particular undertakings, being sometimes more or less realisable and sometimes fixed, or it is loaned to governments and absolutely realisable at will. Such loans are assured by the borrower, no less than those borrowed by particular industries. Their material guarantee is such part of the national income as is collected from imposts, and this may, in the last resort, be equal to the nett annual production of the national activities—granted always that the people are willing to bear this crushing burden. Its moral guarantee is the rectitude of the governments concerned and their promptitude in meeting engagements. The guarantee of the English National Debt, for example, may be called absolute, and the rate of interest in that country may be said to have fallen to the actual minimum of remuneration, with no allowance for assurance against risks. Other countries pay interest at higher rates, which vary more or less according to this risk-assurance.
If the deprivation, which constitutes the first element in the necessary remuneration of capital, is disappearing, thanks to progressive extension of the degree in which capital is realisable, we have seen that risks, and the premium of assurance against them, are by no means following in the same direction. This premium, which includes the assurer's necessary profit, will finally constitute the sole costs of obtaining the use of capital. The rate will fall as each advance—resulting from competition and imposed by the pressure of that principle—diminishes the general and particular risks of industry. Nor is it purely Utopian to dream of a time when these risks will be so reduced that the cost of obtaining capital will be practically nil, or certainly limited to the minimum rate necessary to induce a man to lend his money rather than retain it unemployed—and such idleness, it must be remembered, involves liability for the cost of storage.
But the cost of production is only an imaginary point round which competition groups the price-current and price-actual of a product or a service. To make the price-current coincide with the costs of production, with, properly speaking, the natural or necessary price, competition must be absolutely free, and capital must be able to move, without fear of either natural or artificial obstacles, to any part of the immense world's market where the demand is greatest and the supply least. Moreover, there must be complete, or the best obtainable, knowledge of the varying needs of this market. Considerable progress has been made in these respects during the last century, and this progress will continue more and more rapidly as production accumulates in the hands of associations with realisable capital. The modern Stock Exchange List informs capitalists of the current values of most realisable securities. Foreign values are still fenced with limitations issuing from the old spirit of monopoly; but such hindrances must disappear, or become less effective, as the investing agencies—the Banks—multiply, and obtain greater liberty and more power. Nor is the time so far distant when the universal money market will be an open book, and obstacles to the circulation of capital be removed by improved communications, and the cessation of protectionist regulations. An equilibrium will then be established between the supply of, and the demand for, capital, at the minimum rate of returns—a rate little above zero.