The Online Library of Liberty

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• Translator's Preface
• Author's Preface
• Introduction
• Book I: The Nature and Conception of Capital
• Book I, Chapter I: Man and Nature
• Book I, Chapter II: The Nature of Capital
• Book I, Chapter III: Historical Development of the Conception
• Book I, Chapter IV: The True Conception of Capital
• Book I, Chapter V: The Competing Conceptions of Capital
• Book I, Chapter VI: Social and Private Capital
• Book II: Capital As Instrument of Production
• Book Ii, Chapter I: Introductory
• Book Ii, Chapter II: Capitalist Production
• Book Ii, Chapter III: The Function of Capital In Production
• Book Ii, Chapter IV: The Theory of the Formation of Capital
• Book Ii, Chapter V: Formation of Capital In a Community
• Book Ii, Chapter VI: Possible Objections
• Book III: Value
• Book Iii, Chapter I: The Two Conceptions of Value1
• Book Iii, Chapter II: Nature and Origin of Subjective Value
• Book Iii, Chapter III: The Amount of Value
• Book Iii, Chapter IV: The Marginal Utility
• Book Iii, Chapter V: Complications
• Book Iii, Chapter VI: What Determines Marginal Utility
• Book Iii, Chapter VII: Alternative Uses
• Book Iii, Chapter VIII: Subjective Exchange Value
• Book Iii, Chapter IX: The Value of Complementary Goods
• Book Iii, Chapter X: The Value of Productive Goods. Value and Costs.
• Book IV: Price
• Book Iv, Chapter I: The Fundamental Law
• Book Iv, Chapter II: Isolated Exchange
• Book Iv, Chapter III: One-sided Competition
• Book Iv, Chapter IV: Two-sided Competition
• Book Iv, Chapter V: The Law of Supply and Demand
• Book Iv, Chapter VI: The Individual Determinants of Price
• Book Iv, Chapter VII: The Law of Costs
• Book V: Present and Future
• Book V, Chapter I: Present and Future In Economic Life
• Book V, Chapter II: Differences In Want and Provision For Want
• Book V, Chapter III: Underestimate of the Future
• Book V, Chapter IV: The Technical Superiority of Present Goods
• Book V, Chapter V: Co-operation of the Three Factors
• Book VI: The Source of Interest
• Book Vi, Chapter I: The Loan and Loan Interest
• Book Vi, Chapter II: The Profit of Capitalist Undertaking. Principles of Explanation.
• Book Vi, Chapter III: The Profit of Capitalist Undertaking. Complications.
• Book Vi, Chapter IV: The Profit of Capitalist Undertaking. the Labour Market.
• Book Vi, Chapter V: The Profit of Capitalist Undertaking. the General Subsistence Market.
• Book Vi, Chapter VI: The Profit of Capitalist Undertaking. the General Subsistence Market—(continued)
• Book Vi, Chapter VII: Interest From Durable Goods
• Book Vi, Chapter VIII: Interest From Durable Goods—(continued)
• Book Vi, Chapter IX: Results
• Book Vi, Chapter X: Interest Under Socialism
• Book VII: The Rate of Interest
• Book Vii, Chapter I: The Rate In Isolated Exchange
• Book Vii, Chapter II: The Rate In Market Transactions
• Book Vii, Chapter III: The Rate In Market Transactions—(continued)
• Book Vii, Chapter IV: The Market For Capital In Its Full Development
• Book Vii, Chapter V: The Market For Capital In Its Full Development—(continued)
• Appendix to Page 327 [book Vi, Chapter V]: Amount of Subsistence Fund Necessary Before Entering On a Production Period of Given Length

BOOK II

CAPITAL AS INSTRUMENT OF PRODUCTION

Book II, Chapter I

Introductory

In expounding the theory of capital as Instrument or Tool or Means of Production we have to describe and explain the emergence and effects of capital in the economic production of goods. What we have to say on this matter groups itself round two questions: How does capital originate? and what is the nature of its productive work? The first question has to do with the theory of the formation or accumulation of capital; the second, with the productive function of capital.

The reader who has waded with us through the dozen theories and dozen definitions of capital will scarcely be surprised at meeting a similar divergence of opinion on the question we have now to consider. Of course there is no dispute about the fact that capital is, in the highest degree, useful to production. But I am much afraid that this is the only proposition on which our economists are quite agreed. So soon as the further question is asked: In what does this usefulness consist, or what character does the co-operation of capital in itself bear?—agreement is at an end. One finds the utility of capital in putting labour in motion;1 another, in saving or supplanting labour;2 a third, in performing labour;3 a fourth praises it as giving man the mastery over the powers of nature;4 and a fifth, as enabling the labourer to "put an interval between the beginning and the end of an enterprise."5 Some, like Lauderdale, see in it an independent, original factor of production along with land and labour; others, like Gide, call it an independent but still merely derivative factor. Kleinwächter looks on it simply as a "condition"; Carey, again, as an "instrument" or "tool" of production. Indeed, our theorists cannot even agree as to the way in which that useful auxiliary of production comes into existence. If we ask the question concretely: How is a plane, or a plough, or a steam-engine made?—they would probably be able, with perfect certainty, to give minute information as to how those concrete portions of capital come into existence. But whenever they have to generalise what they have observed, they divide into hostile camps. Capital originates in saving, says one; no, says another, it must be produced; while a third proclaims that it originates in the two together.

It is a much greater cause for wonder that economists came to no agreement in these and similar questions than that they remained apart in their theories of interest. The task here was quite different, and essentially easier. In the interest theory the difficulty is to give the proper explanation of facts which are really much entangled, while here there is almost nothing to do but to describe the facts correctly; and facts, moreover, with which everybody is quite familiar. As we have said, every one knows how a plane or a steam-engine comes into existence. Similarly every one has a sufficiently exact idea what and how a plane, a machine, a plough, a raw material, does in production. It was only necessary to leave out everything peculiar in those cases, and to describe in appropriate words everything universal and typical in them, and the theory of the formation and function of capital would almost have been written.

The reason why economists failed in this simple task was that they did not allow the facts to speak for themselves. Instead of simply describing them as they were, explanations were read into them and added to them; one feature was pushed into the foreground, another kept in the background, a third was quite overlooked, while perhaps a fourth was entirely absent, but was read into them. When every man had thus imported his own particular views bodily into the facts, it was, of course, no wonder that everybody got something different out of them.

To my mind the most important duty of the theorist in such a case is to avoid the faults we have just condemned. To make certain of this we shall make a clear distinction, even in outward form, between the statement of the facts and the interpretation of them. The next chapter, therefore, will delineate and describe the process of capitalist production. When a solid basis of fact has thus been obtained, the interpretation and construction will follow in the chapters on the productive function of capital, and on the theory of the formation of capital.6

Book II, Chapter II

Capitalist Production

We have already sketched, in its most general outlines, the process of capitalist production.7 There are certain features of it which now require more exact treatment. I shall briefly recapitulate, interpolating what remains to be said as we go along.

All human production aims at the obtaining of goods for consumption. These consumption goods are dependent for their existence on physical conditions, and are subject to natural laws. To obtain them, as we have seen, we must seek to bring about such combinations of active forces as will result in the desired object. Thus we get a product which has come into existence under natural law and continues to exist under natural law. Now look a little more closely at the nature of the power which man can employ towards these productive combinations. It is made up of two components very dissimilar in amount—first, an enormous mass of powers which the natural world exerts spontaneously year out year in; and second, the much more limited natural powers which reside in the human organism.

The natural world, in midst of which man lives, is endowed with a vast number of forces which are never for a moment idle. Gravitation holds this ball of earth together; keeps all things fast to its surface; makes the rain fall to earth, and rolls streams and rivers to the sea; governs the ebb and flood of the tides; works unceasingly at every point of the earth's crust as stress, weight, pressure. The sun sends our earth light and heat, and thereby develops an infinity of mechanical and chemical processes, of which vegetation particularly attracts our attention, both by its mysterious magic and by its enormous importance for the human race. Uncounted and countless again are the molecular, electric, and chemical effects and counter-effects which every atom of matter exerts without intermission on its neighbours. The total of those energies which nature pours forth in ceaseless stream, without help from man, we may look upon as one branch of the productive endowment of humanity; and this extremely valuable branch we shall call man's natural endowment. It is an infinite treasure-house from which the producing man may draw as much as he will and can. As yet it is only the very smallest part of this treasure that has been touched. As yet by far the greater portion of the energies of nature pass away in combinations which, from the human teleological standpoint, seem useless or even harmful. The resistless rise and fall of the tide, the rush of rivers and waterfalls, the atmospheric movements, the giant forces of electricity, magnetism, and gravitation slumbering in our earth, are powers turned to human account only to a very small extent. Others again, such as the vegetative powers of land, have been utilised to a greater, but still very far from complete extent. The steady advancement in agricultural science not only leads us to expect a constantly increasing amount of utility from the land, but makes us suspect that the possibility of such advance is still far from being exhausted.

Now, as we have seen, the way in which we get command of these natural treasures is through the other branch of our productive endowment, our own personal powers. We put forth our labour in all kinds of wise combinations with natural processes. Thus all that we get in production is the result of two, and only two, elementary productive powers—Nature and Labour. This is one of the most certain ideas in the theory of production. Man finds ready to hand an abundance of natural processes, and allies his own powers with them. What nature by herself does, and what man does along with her—these form the double source from which all our goods come, and the only source from which they can come. There is no place for any third primary source.

These two elements, then, technically do everything in the work of production. But, economically, a further and very suggestive limitation must be drawn. Of the vast natural endowment which serves as foundation for man's productive combinations, one portion particularly claims the interest of economics, and that is, those useful things offered by nature only in limited amount. In nature, indeed, there is no lack either of materials or powers; carbon and nitrogen, oxygen and hydrogen—generally speaking, most of the "elements"—are per se not more scarce than are electrical, magnetic, chemical, and gravitation forces. But certain spontaneous combinations of these elements that are peculiarly well adapted to human want may be, relatively, scarce; such, for example, as useful plants and minerals, water for driving power, fertile land, etc. These limited gifts and energies of the natural world obtain for us a peculiar economic importance. It would be foolish not to economise them. Technical elements of production which we may have in any quantity, like atmospheric air or water or sunlight, we may employ or waste as we please without suffering loss in our productive returns. But the limited technical elements must be treated with consideration, must be saved, must be fully utilised. In a word, within the technical natural endowment, as a wider circle, they form the specifically economic natural endowment of man. Since all, or at least almost all, limited sifts and energies of nature are connected with land, we may, without much danger, take Land, with its activities or uses, as the representative of this economic natural endowment.8

To the uses of land the exertions of labour form the counterpart. Labour has almost entirely an economical character. This is due partly to the fact that physical strength is given us in such scanty measure, as compared with the very extensive claims put forward by human needs, that even the most assiduous exertions of labour power cannot fully satisfy our desire for goods, not to speak of supplying them in superfluity; partly to the fact that the exercise of our powers is usually attended by the painful feeling of distress and fatigue—at least when carried beyond a certain point,9 —and the feeling warns us to economise our labour.

Nature and Labour are, then, the technical elements of production; Uses of Land and Labour are the economic elements. These latter are the talents which the producing man puts out at usury with nature, with her great fruitful soil and infinite store of force. They are the only powers that require economic treatment, inasmuch as the co-operation of the free natural powers, which, technically, is also indispensable, is given without question and without cost. It is only the man who has command over the requisite uses of land and services of labour who receives the desired economic product; the man who has not these must do without the product; the man who owns a double allowance or a half allowance of them will—if the technique of production remain the same—receive double or half the product. In production, therefore, they are the only powers with which the economic community has any concern, and with which it has to reckon. In short, land and labour—or, more accurately, uses of land and services of labour—are the primary economic productive powers.10

Now in what way does man use these original productive powers? In answering this question we turn back for a little into familiar paths.

To construct goods for human consumption out of these productive elements man may take one of two ways. He may combine the economical productive powers with one another,—or with activities of free natural powers,—in such a way that the desired good immediately emerges as result of the combination; as when he gathers shellfish on the shore. Or he may take a roundabout way, and, with the element at his command, may make, first, another good, and then, with its assistance, the good he wishes; as, for instance, when he makes a boat and net and takes to fishing systematically. We already know that the former method is identical with what the Germans call kapitallos production, the latter with capitalist production; and that the intermediate products, which come into existence in the course of the indirect methods, represent economic social capital.

The adoption of capitalist methods of production is followed by two consequences, equally characteristic and significant. One is an advantage, the other a disadvantage. The advantage we have already looked at; it consists in the greater technical productiveness of those methods. With an equal expenditure of primary productive powers11 (that is to say, labour and valuable natural powers) more or better goods can be produced by a wisely chosen capitalist process than could be by direct unassisted production. This proposition, which is quite convincingly accredited by daily experience, we illustrated and tried to explain in the second chapter of Book I. by a number of examples. We found the explanation to be that, when roundabout methods are skilfully chosen, new allies are obtained from the immense stores of natural powers, and their activity is enlisted in the work of production. It is this well-known fact that is usually indicated by the term "productivity of capital." This name, however, imports into the facts a particular interpretation, the correctness of which has yet to be examined in the next chapter.

The disadvantage connected with the capitalist method of production is its sacrifice of time. The roundabout ways of capital are fruitful but long; they procure us more or better consumption goods, but only at a later period of time. This proposition, no less than the former, is one of the ground pillars of the theory of capital. We shall see later on that the very function of capital, as a means of appropriation or source of interest, to a great extent rests upon it. I must, therefore, guard it against any misunderstanding by the two following remarks.

In the first place, it may very well happen, in an exceptional case, that an indirect method of production is not only better but speedier. A man wishing to gather apples from a high tree will evidently attain his purpose sooner by first cutting a stick from another tree, and using it to knock down the apples, than by climbing the tree and trying to break off the apples one by one with his hand. But this is not the rule. In the overwhelming majority of cases we must tread the roundabout ways of capitalist production under technical conditions of such a nature that we have to wait, and often for a very long time, before we get the ripe final product. Instead of giving examples which must occur of themselves to every reader, I would rather draw attention to the fact that, in the loss of time which is, as a rule, bound up with the capitalist process, lies the sole ground of that much-talked-of and much-deplored dependence of labourer on capitalist. If capitalist production led as quickly from the hand to the mouth as unskilled direct production does, there would be nothing to hinder the workers carrying on such roundabout methods from beginning to end on their own account. They would still be dependent on the landowners, who could prevent them from access to the land which at the outset they require, but they would not be dependent on the capitalists. It is only because the labourers cannot wait till the roundabout process—which begins with the obtaining of raw materials and making of tools—delivers up its products ready for consumption, that they become economically dependent on the capitalists who already hold in their possession what we have called "intermediate products."12

Again—though this scarcely needs pointing out—when we speak of capitalist production taking time, it is not relevant to raise the objection that, with a piece of concrete capital once made, say a tool, a definite product can be made more quickly than it could be without the assistance of capital; that, for instance, a tailor takes three days to sew a coat by hand, and one day to do it with a sewing-machine. For it is clear that the machine sewing forms only one part, and indeed the smaller part, of the capitalist process; the principal part falls to the making of the sewing-machine, and the total process lasts considerably longer than three days.

Thus far we have considered capitalist production as an undivided whole, and have contrasted it with production carried on entirely without capital. But here we are reminded of a fact that has to be reckoned with, viz. that in capitalist production there are stages and degrees; to speak accurately, there are innumerable degrees of "Capitalism." In the making of a consumption good the possible roundabout methods are of very varying length. We may make intermediate products from which the final good will be obtained in a month, or a year, or ten years, or a hundred years. The question now is, what influence such differences of degree have on product.

On the whole it may be said that not only are the first steps more productive, but that every lengthening of the roundabout process is accompanied by a further increase in the technical result; as the process, however, is lengthened the amount of product, as a rule, increases in a smaller proportion.

This proposition also is based on experience, and only on experience. What it says must be simply taken as a fact of the technique of production. The reader, moreover, will easily be able to check its accuracy if he follows in thought the steps which lead to the production of any consumption good. For instance, firewood can be got quite directly so long as we limit ourselves to the gathering of dry branches or breaking off of weak twigs. We take a short roundabout path in making and using a stone axe. A longer process involves digging ore out of the ground, getting the fuel and necessary tools, and smelting iron out of the ore, working up the iron into steel, and finally turning out a finished steel axe. Beginning farther back, we may construct cunning machinery for mining and raising the ore, elaborate blast furnaces for smelting it, special machines for making and sharpening the axe. Going farther back still, we may put up engineering shops and machinery for constructing each kind of appliance, and so on. It will scarcely be doubted that every additional step increases the productiveness of the total process; that is, results in the obtaining of the unit, say the cubic foot of wood, at a smaller total expenditure of labour (mediate and immediate). But just as little will it be doubted that the first two productive methods, the use of the stone axe and then of the steel axe, must have caused a much greater revolution in the productiveness of woodcutting than the later improvements, although, absolutely, these may be by no means inconsiderable.

If necessary, this may easily be proved to demonstration by a little calculation. Assume, for example, that a labourer working with his hands can cut in one day 2 cubic feet of wood, and working with a stone axe, which has taken three days to make, can cut 10 cubic feet: the three days' capitalist process is rewarded by a surplus return of 8 cubic feet per labour day. Now possibly the doubling of the process—say that the more careful fashioning of the stone axe takes six days—may also double the surplus return, and give 16 cubic feet. But it is scarcely likely that trebling the roundabout process can treble the surplus return. And it is quite certain that extending the roundabout process a thousandfold—say by sinking of pits, from which the ore for the axe may be got after years have elapsed—will not be able to increase the surplus return a thousandfold. Otherwise we should have the all but inconceivable possibility that a worker in one day could cut 8000 feet of wood! From some one point—probably a point not far off—the surplus, though still increasing, will increase in a less ratio than the production period.

Of course in such cases no definite figure can be named, either for the point from which the productiveness of further extensions of the process begins to decrease, or, speaking generally, for the amount of surplus result connected with any definite length of process. These data vary according to the technical circumstances of each branch of production, and at each stage of productive skill. Every new invention alters them. The discovery of gunpowder, for example, opened up at a flash the possibility, which did not exist the moment before, of increasing the productiveness of the chase by perhaps one half, and the productiveness of stone-quarrying by perhaps a hundredfold.13 We may, however, with sufficient confidence repeat the proposition already formulated, that every extension of the production process (so far as it is wisely chosen, of course) leads, generally speaking, to some surplus result. It may be confidently maintained that there is not one branch of production the returns of which may not be considerably increased in this way, as against the method of production prevailing at the time; and that without any new invention, but simply by the intercalation of intermediate members long familiar to capitalist production,—whether it be by the adoption of a steam motor, or an apt transmitter, or some ingenious gearing, blast, lever, regulator, or the like. How far behind, indeed, in capitalist equipment are the most of our agricultural and industrial businesses compared with the most advanced typical businesses! And certainly these latter are no less far behind an ideally perfect equipment.14

The fact that the prolongation of production processes leads to surplus results, and the fact that these surplus results usually decrease from a certain point onwards, have long been noticed and acknowledged in our science; mostly, I must say, in another form, and one borrowed from the jargon of the Productivity Theory. It is many years since Thünen put them in the most impartial manner, and showed that, in the case of progressive increase of capital, the capital that comes last does lead to an increase in the product of labour, but in a constantly decreasing proportion.15 On this foundation of fact he himself framed the well-known doctrine that the rate of interest adjusts itself to the productiveness of the last dose of capital applied in the least productive employment, and, in the wake of this doctrine, the facts were recognised and received in the widest circles.16 In harmony, however, with the fashion of the time, these facts were forced into the special forms of presentation and terminology of the Productivity Theory, whereby the most vexatious mistakes and confusions slipped in along with them.17 Before going further it seemed to me advisable here to try to restate the facts in their naked simplicity.

It scarcely, perhaps, requires to be proved that the capitalist production of consumption goods, although carried out in roundabout ways and by many stages, does not, on that account, cease to exhibit an intimately connected and united work of production. The labour which produces the intermediate products—the mediate labour, as we shall call it with Rodbertus18 —and the labour which, out of and with the intermediate products, produces the desired good—the immediate labour—both form apart of the production of the consumption good. The production of timber is more than the labour of felling wood in the forest; it embraces the labour of the smith who makes the axe, of the carpenter who cuts the haft, of the miner who raises the ore, of the iron workers and steel workers who prepare it, and so on. True, our modern division of employment to outward appearance breaks up the unity of the process into a number of independent parts, but it is the theorist's business to understand economic processes in their living connection, and he dare not, of course, let himself be deceived by appearances, but must reproduce in his own mind the real unity of the work of production thus obscured. The masterly manner in which Rodbertus has done this is one of his best services to economics.

But this very consideration, essentially economic as it is, raises a doubt we must fairly meet. According to what has been said, the production period of a consumption good is, strictly speaking, to be reckoned from the moment on which the first hand was laid to the making of its first intermediate product, right down to the completion of the good itself. In our times, when unassisted production has almost entirely disappeared, and one generation builds on the intermediate products laid down by earlier generations, the production period of almost any consumption good could, in any strict calculation, trace its beginning back to early centuries.

The boy who cuts a stick with his knife is, strictly speaking, only continuing the work of the miner who, centuries ago, thrust the first spade into the ground to sink the shaft from which the ore was brought to make the blade. Of course the finished product of to-day owes a quite infinitesimal fraction—not worth calculation even if that were possible—to the firstlings of labour in these far-off centuries, and it would therefore give a very false view of the degree of capitalism expended in the cutting of the stick, if we were to estimate it by the absolute period of time intervening between the atom of labour first put forth and the completion of the work.

It is more important and more correct to look at the period of time which elapses on the average between the expenditure of the original productive powers, labour and uses of land, as successively employed in any work, and the turning out of the finished consumption goods. Production is more or less capitalistic according to the average remoteness of the period at which the original productive powers exerted during the process are paid. Say, for example, that the production of a commodity costs in all a hundred days of labour—for the sake of simplification we shall leave out the co-operating uses of land—and that, of these hundred, one day was expended ten years before the completion of the work, another nine years, others respectively eight, seven, six, five, four, three, two, and one year, while the remaining ninety days were expended immediately before the completion. Then the first day of labour is paid ten years later, the second nine years later, the third eight years later, and so on, while the last ninety days are paid immediately. The calculation is as follows.—

That is to say, on the average the hundred days of labour are paid in about half a year. Say that the production of another good were also to demand in all a hundred days of labour, likewise spent in the course of a ten years' period, but spread over it in such a way that twenty days' work was expended ten years before, other twenty days' work nine years before, five days' work in each year from the eighth to the first successively, while the last twenty clays were spent immediately before the completion of the work, the average would come out quite differently and much higher:

or more than five and a half years. It is highly probable, moreover, that in both cases some fraction of a day's work will have been spent centuries before, but such a small element will scarcely influence the average, and may in most cases be simply neglected.19

Where I have spoken above of extension or prolongation of the roundabout process of production, and of degrees of capitalism, I must be understood in the sense just explained. The length or the shortness of the process, its extension or its curtailment, is not to be measured by the absolute duration of the period that lies between the expenditure of the first atom of labour and the last—otherwise the cracking of nuts with a hammer which might chance to be made of iron brought from a mine opened by the Romans would perhaps be the most "capitalistic" kind of production. Nor is it to be measured by the number of independent intermediate members which the production process embraces—otherwise when, by means of the three intermediate products, twig, lime, and bird-lime, a boy catches birds on the same day as he commences making these three forms of capital, his bird-catching would be more capitalistic than the far-back labour of the miner who devotes years to the sinking of a shaft. But it is to be measured by the average period which lies between the successive expenditure in labour and uses of land and the obtaining of the final good. It is only in methods of production where the expenditure in original powers is distributed equally over the whole production period that the absolute length of the process affords at the same time the proper measure for the degree of capitalism.20

Let us now apply what has been said of single acts of production to the circumstances of an entire community. Every year a community comes anew into possession, and gets the disposal of a certain quantum of original productive powers, the powers represented by its labour and land. The farther away its production is from capitalist production—there is no production, of course, absolutely without capital—the greater will be the proportion of the year's productive powers that is changed into consumption goods during the same year. The more capitalistic the production is, the smaller will be the proportion of the year's productive powers consumed within the year, and the greater the proportion invested in intermediate products that will come to maturity as finished goods only in future years. And again, the higher the degree of capitalism is, the more remote will be the period at which these intermediate products mature. Thus a community producing from hand to mouth consumes in each year the fruits of the productive powers of that same year. A capitalist community consumes only to a small extent the fruits of the productive powers of the present year, and to a great extent the fruits of the productive powers of past years, while it again is making intermediate products for the service of future years. And the higher the degree of capitalism, the farther back in the past, on the average, are the years whose productive powers it consumes, and the farther on in the future are the periods for which it provides.

And now, I trust, the following proposition, which puts together the chief features of the capitalist production process, will be understood beyond possibility of mistake.

All consumption goods which man produces come into existence through a co-operation of human power with natural powers, which latter are partly economic, partly free. By means of these primary productive powers man may make the consumption goods he desires, either immediately, or through the medium of intermediate products called Capital. The latter method demands a sacrifice of time, but it has an advantage in the quantity of product, and this advantage, although perhaps in decreasing ratio, is associated with every prolongation of the roundabout way of production.

Book II, Chapter III

The Function of Capital in Production

After what has been said in the preceding chapter it should not be difficult accurately to indicate the role which capital plays in economic production.

Capital has, first, a symptomatic importance. Its presence is always the symptom of a profitable roundabout production. I say, deliberately, "symptom" and not "cause" or "condition" of profitable methods of production; for, as a fact, its presence is rather the result than the cause. If men to-day are fishing with boats and nets instead of picking the fish out of pools on the shore with their hands, it cannot be said that they have adopted those more fruitful methods because they possess boats and nets. Obviously they possess boats and nets because they have adopted these methods. They must have already chosen the roundabout way of production before these goods, speaking generally, come into existence.21

This, however, does not exhaust the importance of capital. It is, secondly, and herein lies the chief point of its productive efficiency,—an effective intermediate cause of the consummation of this profitable roundabout process. Every piece of capital is, to a certain extent, a store of useful natural powers, the working of which helps to bring to a successful issue the roundabout process in the course of which the piece of capital has come into existence. I say "intermediate cause;" not "cause." Capital gives no independent impulse; it only transmits an impulse given by the original productive powers, just as one billiard ball transmits motion to another. The function of capital, indeed, has been called the "prisoning of natural powers." The expression is quite appropriate, and very happy. Only it must never be forgotten that this attribute belongs to the entire capitalist process, not only to the "descending branch," generally called the use of the capital, but also to the "ascending branch," in which the capital itself is first made. Man does not first prison natural powers by means of capital; capital itself originates as the result of a previous imprisonment—by the original productive powers that are at man's own bidding—of certain compliant natural powers. Taken all in all, among the many predicates which economists have given to capital, the one that best fits this aspect of the case is that of "Tool of Production."

But, thirdly, capital is also the indirect cause of other profitable roundabout ways of production being entered on other, that is, than those in the course of which it itself has come into existence. When a people possesses much capital not only can it successfully complete those processes in the course of which the capital presently existing has come into being, but it can also adopt other and new methods. For the stock of capital in hand (which, essentially, is nothing else than an aggregate of consumption goods in a transition state22 ) throws off every year a certain quantity of its constituents, which have just completed their transition state and become finished goods, and places them at the disposal of the current economic period for purposes of immediate consumption. In this way the greater the stock of capital, the larger is the share taken by the productive powers of the past in providing means of consumption for the present, and the less are the new productive powers of the present drawn on for the present. Thus a larger proportion of these current powers is free for the service of the future, that is, for investment in more or less far-reaching processes of production.

If a community is so poor that the consumption goods maturing out of capitalist intermediate products in any year, say in 1888, scarcely cover 1/20 of that year's wants, then the remaining 19/20 must be provided out of the labour and uses of land of 1888, and only a fractional part of the productive powers of that year remains over to initiate methods of production that will turn out consumption goods in the years following. If, on the other hand, the past has accumulated a treasure of intermediate products—raw materials, tools, machines, factories, workshops, etc.—so great that their successive maturing covers the consumption demand of the year 1888 to the extent of 35/10, that of 1889 to the extent of 4/10, that of 1890 to the extent of 3/10, and so on, then only one half of the productive powers of 1888 will be claimed to make up the current wants, while the entire other half may be spent unhesitatingly in producing intermediate products which will come to maturity, as consumption goods, only in later years—all the later in proportion as the next year's wants are already covered by accumulations of capital in the past.

In this sense, but only in this sense, is it correct to say that man must already have capital before he can enter on roundabout ways of production; that want of capital prevents man taking advantage of far-reaching and profitable methods of production, such as the laying of railways, building of canals, irrigation schemes, altering of river-beds, and so on. It would be quite incorrect to understand this proposition as meaning that a community must have, finished and ready to hand, that kind of concrete capital with which the methods of production in question are carried out, or even the concrete capital (raw materials, tools, etc.) out of which are made the forms of capital first needed. All that is required is, that the community possess so much capital, whatever its shape, as will cover—while it is being gradually changed into consumption goods—the demand of the present and near future for such goods sufficiently to leave the current production powers free for investment in intermediate products of the kind required. It would be essentially more correct to say that we require consumption goods before we can enter upon roundabout ways of production, whether these be in the form of finished stocks of goods ready for consumption, or in the transition form of intermediate products.

Lastly, we can now answer, easily and categorically, the much-disputed question, whether any independent productive power is inherent in capital; or, to put the question in its usual form, whether capital is a third and independent "factor in production" alongside of labour and nature?

The answer must be a most distinct negative. This seems to me the only conclusion any one can come to, provided he makes clear to himself the sense in which this question is put, and must be put if it is worth the trouble of putting at all. And this sense is a very emphatic one. The following analogy will make it perfectly clear. A man throws a stone at another man and kills him. Has the stone killed the man? If the question is put without laying any special emphasis it may be answered without hesitation in the affirmative. But how if the murderer, on his trial, were to defend himself by saying that it was not he but the stone that had killed the man? Taking the words in this sense should we still say that the stone had killed the man, and acquit the murderer?

Now it is with an emphasis like this that economists inquire as to the independent productivity of capital. The question comes up in the course of the inquiry concerning the elements which constitute our material goods. A similar interest to that which the chemist has in the analysis of compound bodies leads the economist to analyse the multiform transition stages of material goods, to trace them back to their source, and to resolve the thousandfold instruments and auxiliaries of production, to which, directly or indirectly, they owe their existence, into the simple fundamental powers from the co-operation of which everything proceeds. In this connection the doubt arises whether capital is an independent productive power or not. The whole spirit of the inquiry allows only one meaning to be given to the question, and the emphasis is very marked. We are not asking about dependent intermediate causes, but about ultimate independent elements. The question is not whether capital plays a part in the bringing about of a productive result—such as the stone does in the killing of the man—but whether, granted the productive result, some part of it is due to capital so entirely and peculiarly that it simply cannot be put to the credit of the two other recognised elementary factors, nature and labour. Now can this question be answered in the affirmative?

Emphatically it can not. Capital is an intermediate product of nature and labour, nothing more. Its own origin, its existence, its subsequent action, are nothing but stages in the continuous working of the true elements, nature and labour. They and they alone do everything from beginning to end in bringing consumption goods into existence. The only distinction is that sometimes they do it all at once, sometimes by several stages. In the latter case the completion of each stage is marked outwardly by the appearance of a fore-product or intermediate product, and capital has emerged. But, let me ask, is a thing any the less the work of its author that it is not produced all at once, but in instalments? If to-day, by allying my labour with natural powers, I make bricks out of clay, and to-morrow, by allying my labour with natural gifts, I obtain lime, and the day after that make mortar and so construct a wall, can it be said of any part of the wall that I and the natural powers have not made it? Again, before a lengthy piece of work, such as the building of a house, is quite finished, it naturally must be at one tine; a fourth finished, then a half finished, then three-quarters finished. What now would be said if one were to describe these inevitable stages of the work as independent requisites of house-building, and maintain that, for the building of a house, we require, besides building materials and labour, a quarter-finished house, a half-finished house, a three-quarters-finished house? In form perhaps it is less striking, but in effect it is not a whit more correct, to elevate those intermediate steps in the progress of the work, which outwardly take the shape of capital, into an independent agent of production by the side of nature and labour.

This would never have been called in question had it not been that the introduction of division of vocations and labour had split up the united work of producing consumption goods into a number of apparently independent acts of production. It was this that made economists forget to look at it as a whole, and made them, with singular modesty, bow before the dependent intermediate creations of previous human activity as if they represented an independent power. But even as it was, it was scarcely possible for any acute theorist to make this confusion if another circumstance had not conspired to assist it. That was the accepted parallelism between factors of production and branches of income, and the awkwardness economists feared to encounter in the explanation and justification of interest if they had to refuse recognition to capital as an independent factor of production. All natural income, it was taught, is based on participation in the production of goods. The various branches of income are nothing else than the forms in which the different contributories to production are paid. Rent of land is the payment for the factor of nature, wage the payment for the factor of labour, and interest—well, interest appeared to have no substantial foundation if it also could not be interpreted as a payment for a third independent factor of production. It did not seem to be explained theoretically, nor—what indeed might be more serious to the theorists in question—to be justified practically. Thus it was that many a learned thinker was driven into a corner, and preferred rather to shut an eye to clear facts than to sacrifice the independent productivity of capital, and with it the welcome basis for the current theory of interest.

Facts certainly spoke with perfect distinctness. It was impossible to deny that capital is no element in the proper sense of the word, inasmuch as it itself springs from the co-operation of nature and labour. Not only so, but by a singular irony of fate this had to be expressly proved—as it had been by Adam Smith before them—by those very theorists who maintained its independent productivity. In their theory of price, in having to show how all prices resolve themselves finally into rent, wage, and interest, they were forced to demonstrate in the most minute way that concrete capital is not an element; that, for instance, copper and steel, which serve as capital in the manufacture of watches, originate in the co-operation of the natural mineral deposits, of the work of miners, and of older capitals, which themselves have originated in similar ways, and so on.23 In the face of this, to maintain the independent productivity of what they had just demonstrated to be a dependent and intermediate product, they were driven to adopt very singular expedients. The favourite ones were obscurity and brevity. Instead of making an earnest effort to bridge the yawning contradiction, they either did not suggest the doubt at all, or, if a doubt had already been raised, they dismissed it with some laconic phrase or other. A long series of writers make no scruple about expounding capital on one page as a factor of production "derived" from nature and labour, and on the next as a third independent factor of production along with nature and labour.24 Mill has so far yielded to the pressure of facts as to admit that capital is itself the product of labour, and that its instrumentality in production is therefore in reality that of labour in an indirect shape. But with a quick turn he saves its independence. "Not the less," he continues, "does it require to be specified separately. A previous application of labour to produce the capital required for consumption during the work is no less essential than the application of labour to the work itself."25 Therefore, because labour must be applied twice, in two different stages of production, something else besides labour must be recognised as the independent condition of production!

Some writers, of course, treat the matter more seriously. They do not evade the difficulty, but try to get a real solution of it. They cannot overlook the fact that capital first comes into existence through combination of simpler factors. Quite correctly, therefore, they do not attempt to claim for capital itself the character of an element; but they still require an independent support for interest. This they obtain by resolving capital into its elements, and finding that, besides nature and labour, there is still a third independent element: Senior calls it Abstinence, Hermann calls it the Use of Capital. These attempts at solution, which I went into in detail and pronounced upon in my former book, Capital and Interest, were certainly not very happy. Hermann's, in particular, is singularly unfortunate in being obliged to explain the "use" which capital gives as more elementary than capital itself—as if the egg which the hen lays is antecedent to the hen! Nevertheless as regards our present question these theories are very instructive. They show that several of our most clear-sighted thinkers preferred to take refuge in the most hazardous and artificial constructions rather than agree in the current doctrine that capital itself, while originating in the co-operation of nature and labour, is, all the same, an "independent" factor of production along with them!

We may confidently, then, strike capital out of the list of independent productive powers, as a portion of the English school did long ago, and as the Socialists have done more recently. I may say, however, that the manner in which they have done so is not quite appropriate. In the instrumentality of capital they see only the instrumentality of the labour expended in producing it; they explain it as "previous stored-up labour." This is not correct. Capital—to keep the same form of expression—is "stored-up labour," but it is something more; it is also stored-up valuable natural power. It is the medium through which the two original productive powers exert their instrumentality. To the instrumentality of gold, which is employed as capital in gilding the lightning-rod, the labour of the miner, who finds the ore and refines it, is not the only contributory: nature also has contributed her share in depositing the valuable vein or placer.

Although, then, we have traced its instrumentality in production to nature and labour, is capital itself not productive at all? Certainly it is, in more than one sense of that too ambiguous word.26 It is, first, "productive" because it finds its destination in the production of goods; it is, further, productive because it is an effectual tool in completing the roundabout and profitable methods of production once they are entered on; finally, it is productive indirectly because it makes the adoption of new and profitable methods possible. One thing, however, it is not; it is not independently productive in the sense on which the most important part of the controversy turns. As the old economist Lotz expressed it, briefly and succinctly "Of any independent labour in capital there is simply no question."27

Book II, Chapter IV

The Theory of The Formation of Capital

In our science there are three views in circulation as to the formation of capital. One finds its origin in Saving, a second in Production, and a third in both together. Of these the third enjoys the widest acceptance, and it is also the correct one. But the formula will have to be amplified to some extent, and presented in a way that is, at once, clearer and more true to life than has usually been the case.28

To put the matter, first of all, in its simplest conceivable terms. Suppose a recluse working absolutely without capital—say some Robinson Crusoe thrown on a lonely shore without either tools or weapons. Being without capital he must at first support life in the most primitive fashion, as, for instance, by gathering berries which grow wild. Now what must happen before he can get possession of his first capital, say a bow and arrow?

Let us put the first theory to the test. Is saving by itself sufficient to call capital into existence? Certainly not. With the one possession that he has—his wild fruits—our Crusoe may save and stint as much as he please; he will accumulate a store of berries—goods for consumption—but that will never give him a single bow or arrow. As we can easily see, these must be positively produced.

Is it sufficient, then, for the origination of capital that it be produced? Again, certainly not. Of course, once Crusoe has got the length of commencing to produce capital, the formation of capital is as good as accomplished. But before he gets that length, there is something else to be done, and that something is by no means self-evident. Productive powers are to be set free for the proposed formation of capital, and this can only be done, as we shall see, through saving.

The amount of original productive powers which our Crusoe has daily at his command is equivalent—leaving natural gifts out of account—to one day's labour, which we shall assume to be ten hours of labour. Suppose, now, that the berries within reach of his hut are so scarce that a full day's labour of ten hours is necessary to provide as much food as will just support him in bare life, obviously no formation of capital is possible. There is no use advising him to produce a bow and arrows. Producing requires time and strength, and all the time and strength our Crusoe has is fully claimed already to keep him in life. To produce capital, then, may be difficult enough without something else; and what that is will appear immediately on our varying a little the assumed facts of the illustration.

Suppose there is such wealth of berries that the result of nine hours' gathering is sufficient to support bare life, while ten hours' gathering gives a return such as to guarantee a subsistence amply sufficient to maintain Crusoe in health and strength. Obviously he has now a choice between two lines of conduct. Either he may take advantage of the opportunity thus offered to complete his provision, and consume each day the fruits of an entire ten hours' day of labour—in which case it is perfectly clear that he has now no time and strength left to make a bow and arrows; or, although the productive power at his disposal would enable him to live better, he may content himself with the barest living, which, as we said, can be provided by the nine hours' labour of gathering; then, and then only, has he a tenth hour free in which to make weapons for future use. This amounts to saying, in other words, that, before capital can actually be formed, the productive powers necessary to its making must be saved by encroaching on the moment's enjoyment.

To anticipate and avoid a mistake very apt to be made, it must be said distinctly that this encroaching on the moment's enjoyment need by no means involve downright privation. With more productive labour, Crusoe's choice would not lie, as in the above illustration, between bare living and comfortable living; but, perhaps, between comfortable and ample living. It is not a question of the absolute insignificance of these claims on the moment's enjoyment, but on their relation to that amount which I may indicate in the shortest and most generally intelligible way by the word "Income"—an expression, unfortunately, not yet strictly enough defined in scientific usage.29 The essential thing is that the current endowment of productive powers should not be entirely claimed for the immediate consumption of the current period, but that a portion of this endowment should be retained for the service of a future period. But such a retention will undoubtedly be called a real saving of productive powers.

A saving of productive powers, be it noted; for productive powers, and not the goods which constitute capital, are the immediate object of saving. This is an important point, which must be strongly emphasised because, in the current view, too little consideration is given to it. Man saves consumption goods, his means of enjoyment; he thus saves productive powers, and with these finally he can produce capital.30 It is only exceptionally that capital itself is the immediate object of saving; it may happen in the case of those goods which, by nature, admit of being used either for consumption or for production, such as grain. To the extent that a man withdraws such goods from immediate use in consumption, his saving directly lays the foundation of capital. To build on that foundation, of course, the negative element of saving must have added to it the positive element of devoting the saved goods to production, as intermediate products.

It is easy to show that every further increase of the existing stock of capital is limited by the same conditions as the first formation. Assume that for a month our Crusoe consumes daily only so much fruit as he can gather in nine hours' labour, and devotes the tenth hour to making weapons. As result of this thirty hours' work he now owns a bow and arrows, and in them he has the possibility of making his living much more easily and amply than before. Naturally his desires widen. He wishes decent clothes, a house, all sorts of things that minister to comfort. But for these he requires the suitable intermediate products—axes, nails, braces, etc. Now we ask further what kind of conditions must be fulfilled that Crusoe may obtain this new capital?

This is very easily answered. If he makes use of the improved circumstances, which he owes to the possession of the bow and arrows, simply to increase his immediate consumption—that is, if he spends the whole labour time at his disposal in the service of the moment, hunting, gathering fruits, and sleeping,—not only is it impossible for him to acquire new capital, but he will lose the old. Bows and arrows do not last for ever. In a month's time, we shall say, his arrows will be spent, and his bow worn out. If, therefore, his capital is to remain in existence, he must, obviously, employ at least one of the ten hours in renewing his weapons, and, at the most, he can employ nine only in gathering and hunting.

To put it in propositional form. To retain capital in existence, man must make over, and devote to the service of the future, at least so much of the productive powers of the current period as he has consumed, during the current period, of the produce of former productive powers.31 Or, to put it in other words, the consumption of the current period is limited by the produce of as many productive powers—present and past taken together—as come into existence anew during the current period.

Finally, if an increase of capital is to become possible, obviously a still greater proportion of the current productive powers must be withdrawn from the consumption of the present, and transferred to the service of the future; of his ten hours of labour our Crusoe must devote one to renewing his weapons, and less than nine to gathering berries and killing game, if he is to make the new capital he desires in what remains free of his labour time. To put it generally, he must curtail the immediate consumption of the current period to such a point, that it uses up the produce of fewer (past and present) productive powers than come into existence anew in the same period; he must, in a word, save productive powers.

All this is quite clear and simple; indeed it is even a little too simple for our purpose. Robinsonades and pictures of primitive circumstances are very good when the object is to present clearly the simplest typical principles—to give a kind of skeleton of economical procedure,—and to that extent, I trust, our Robinsonade also has done good service. But, naturally, they cannot give us an adequate picture of those peculiar and developed forms in which this skeleton clothes itself in the living actuality of a modern economic community. And it is just at this point that it becomes important to fill out the abstract formula with explanation and illustration taken from life. We shall, therefore, leave the lonely shore of our Crusoe, and come to the industrial conduct of a great nation with its millions of people.

Book II, Chapter V

Formation of Capital in a Community

Let us take the case of a community embracing ten millions of able-bodied persons. Leaving out of account the current uses of land, so as not to cumber the statement unnecessarily, the annual endowment of such a nation—its original productive powers—thus amounts to ten million years of labour. Its accumulated stock of capital, we shall suppose, represents the fruit of thirty million labour-years (and a corresponding amount of uses of land) invested during previous economic years in intermediate products. Now look at the constitution of this stock of capital more closely.

Every capital is, by its nature, composed of a mass of intermediate products, and the common goal of all these products is to ripen into consumption goods or means of enjoyment. They reach this goal through the continuation of that production process in the course of which they themselves have come into existence. They are all, as it were, on the way towards the goal of human consumption. But the length of the road which they have had to travel is different. This is partly because the various branches of production adopt roundabout ways of various length: mining, for instance, or railway building, takes a much more roundabout and lengthy method than wood-cutting. But it is partly, also, because those goods which constitute the community's capital at the moment are at various points on their respective roads. Many an intermediate product has just entered on a very lengthy roundabout road, as, for instance, a boring machine, whose life-work it will be to drive a gallery in a mine. Some are midway. Others, again, like clothing stuffs ready for making into coats and mantles, are near the end of the journey their particular production process has to take. Now the inventory of capital lays a kind of cross-section through the production processes, thus unlike in length and unlike in stage of progress, and intersects them, of course, at the most different points, just as a national census lays a section through the paths of life, and encounters and registers the individual members of the nation at the most different stages of life.

Considered with reference to the varying distances at which intermediate products lie from the goal of consumption, the total mass of capital divides itself into a number of annual classes or stages of maturity, which may be very appropriately pictured by a diagram of concentric annual circles. The outmost circle (Fig. 1) embraces those goods which will be transformed into goods ready for consumption within the coming year; the second circle represents those goods which will ripen into consumption goods in the year after; the third circle, those which will be ready the year after that, and so on. In a community where production is not yet strongly capitalistic, the inner circles will rapidly contract (Fig. 2), because, in such a community, very lengthy roundabout ways of production, such as turn out their finished goods only after many years, will be rare. In rich and well-developed communities, again, there will be a considerable number of comprehensive circles, and of these the inner ones will have a content that, although relatively smaller, is not inconsiderable.

This representation of the stages of maturity by concentric circles is peculiarly appropriate on this account that it also gives a very happy expression to the quantitative relations of these stages. Exactly as the outmost of the concentric circles possesses the greatest area, while the inner circles possess a gradually decreasing one, does the first of these classes—that nearest to the completion of the process—always, by its very nature, embrace the largest quota of the total mass of capital, while a decreasingly smaller quota falls to the more remote classes. There are two reasons for this. The first is that the various branches of production generally adopt processes of different lengths—lengths varying with the technical circumstances of each branch. Many complete the entire work of production, from the preliminary processes to the turning out of the finished product, within a year; many require two, three, and five years; only a few have a production period extending over ten, twenty, and thirty years. The result is that in the highest classes—those farthest removed in time from the finished product—only a few branches of production are found; intermediate products, for instance, in the tenth circle can only be provided by those branches of production which have at least a ten years' production period. But the lower circles are filled, not only by those last-named branches of production (for the intermediate products of these very long processes must pass circle by circle towards maturity), but also by those branches of production which have shorter periods. Thus the quantity of intermediate products grows larger and larger up to the first class, and to this first class every branch of production, without exception, sends its representative.

But there is still another circumstance that works in the same direction. The ripening of intermediate products into consumption goods demands a steady addition of current productive powers. At each stage of the production process new labour is added to the intermediate products which have been passed on to it from the previous stage, and they pass on to the following stage in a more advanced state. In one stage the intermediate product wool is changed, by the addition of labour, into the intermediate product yarn; that again in a following stage, by the addition of labour, into the intermediate product cloth, and so on. This has the natural result that, within each branch of production, the amount of invested capital increases with each advancing stage of the production, or, what is the same thing, at every change into a lower circle. Consequently not only are the lower circles, as has been shown, supplied from more branches of production, but they are supplied with relatively larger amounts of capital, and this gives the lower classes a twofold numerical superiority over the higher ones.32

On these lines we may now put our illustration into figures. To facilitate our survey we shall assume that the total capital of the community is comprised in ten yearly circles. If thirty million labour-years are embodied in this total capital (for simplicity's sake I again leave out invested uses of land) we may assume the following division of the circles. The

In the normal course of things the outmost circle becomes divided off from capital each year, and is changed into consumption goods, but the succeeding circles press forward, each circle, by the addition of new labour, advanced one stage, both as regards nearness to maturity and amount of capital invested. The first class, therefore, is changed into consumption goods, the second class into the first, the third into the second, and so on. Now the following important questions suggest themselves. What use must the community make of the original productive powers which come anew into its possession during the current year—that is to say, the new ten million labour-years if, for simplicity's sake, we still leave out uses of land—in order to conserve the capital that is in existence? And how must it act to increase that capital?

These questions are easily answered. To keep the capital at the present level the community must not spend more than four million labour-years in present-time production.33

With the remaining six million labour-years the stock of capital, reduced by the separating off of the first year's circle, must be brought up in quantity and quality to its former level. This demands that the nine other yearly circles be brought each one step nearer maturity by the addition of the requisite labour, and that the tenth class, which is now non-existent, be new created. The amount of labour necessary for this may be exactly determined. The former second class, in which as yet only five million labour-years have been embodied, needs, in order to make it entirely equal in value to the former first class, an addition of

It should be noted that it is not a matter of indifference at what point, in which particular circles, the six million labour-years are spent. If, for instance, they were to be spent in making intermediate products, but not according to the above distribution—say they were all spent in making intermediate products of the first circle, which would come to maturity in a year's time—the disadvantage would be twofold: first, the production processes which had only got the length of intermediate products of the higher classes would be brought to a standstill; and second, as we know, the shorter methods would be less productive. With six million labour-years invested in a one year's process, the present would hand over to the future the same number of productive powers indeed, but—what in the last resort is the important thing—these powers would, in virtue of their one year's process, be capable of producing only a smaller amount of products than the present has received for consumption from the past. The next year's production, therefore, would necessarily be reduced, and the stock of capital would not be maintained at its former level.

Again, if the present stock of capital is to be increased, it is evidently necessary that the community give up a portion of the consumption which it might have enjoyed—while still maintaining the stock at its former height;—that it withdraw a portion of the productive powers at its disposal from the service of the present; that it save and employ them for additional future production. Productive powers may be saved in various ways. (1) Other dispositions remaining unchanged, a smaller portion of the current productive powers—say three instead of four million labour-years—may be employed in immediate "present-time production." Or (2) the arrangements for saving may have been already made, and the total capital organised in such a way that the circle which is now passing over into the stage of full maturity contains a less quantity of capital, say five instead of six million labour-years. Inasmuch, then, as only five instead of six million labour-years are now required for the replacement of capital, there remains—if, as before, four out of the ten million labour-years which are the current productive endowment are spent in "present-time production"—one million over, available for the formation of new capital. Or (3) it is conceivable that, at the last moment, the disposition of the capital should be so altered that less passes into the stage of full maturity than was originally contemplated. It is a familiar fact that there are many goods which admit of being employed in a variety of ways. This often makes it possible to put back goods which have already attained full maturity, or which stand quite near to maturity, by several stages. Grain, for instance, instead of being ground for food purposes, may be stored for seed, or used in distilling; coal may heat the blast furnace instead of the domestic oven; iron may build machinery instead of park railings; and so on. If, by thus disposing goods differently, the amount of capital which arrives at maturity becomes reduced from six to five million labour-years, there will, after four million labour-years have been expended in "present-time production," be one million labour-years free for the making of new capital.

All three methods, then,—of which, in practical life, the second is most common, and the first is least so,—agree in one essential point, that during the current year the produce of nine million labour-years only is consumed, while ten million labour-years come forward; that accordingly, in other words, one million labour-years of the current productive endowment are saved.34

Hitherto we have spoken of the formation of capital by a community as if in such a community there was one single economy, guided by one individual will. Of course this is not the case. It remains, therefore, for us to show how, in a community where industry is divided up and managed by many heads, the productive forces that conduce to the formation of capital are actually disposed, and to inquire whether, as we have maintained, these dispositions presuppose "saving." And since it is claimed, and not without reason, that universal truths should be proved to hold not only in the present and historical organisation, but in every social organisation, I propose in this inquiry to look both at the actual economic form, which is pre-eminently individualistic, and at that form which is at least conceivable, the socialistic. We may begin with the latter as being the easier from the standpoint of our present problem.

In a socialist state from which private capital and private undertaking were banished, and where the entire national production was organised by the state, the formation of capital, and the previous saving of productive powers necessary thereto, would be controlled officially. The method would simply be to put a considerable proportion of the national workers to very lengthy processes, whereby the making of capital, in the form of intermediate products, would be very great, and the amount of matured products in the future would be much increased. Many workers, relatively speaking, would be put to mining, railway-building, regulation of rivers, machine-making, and the like, and few to wine-growing, silk-spinning, lace-making, beer-brewing, cloth-making, and the like. The people would thus be compelled to save by pressure from above, inasmuch as, of the national production thus conducted by the state, in each year relatively few goods would be put at their disposal for immediate consumption—less, that is to say, than might be annually produced and consumed if the existing stock were merely to be maintained. The productive powers left free would be invested in lengthy capitalist processes of production.

Somewhat more complicated, but still easy to grasp in principle, is the procedure in the individualistic organisation of society as we find it in the present day. Here, in the first instance, it is the undertakers who decide how the productive powers, as they come forward annually, shall be employed, and they thus decide the direction which the national production takes. But they do not decide it at their pleasure; they follow impulses given by the prices of products. Where lively demand promises a profitable price they extend their production, and curtail it in those kinds of goods where failing demand can no longer take off the supply, and the prices fall below a paying level. Extension and contraction of supply continue till such time as production has adapted itself to the desire for the particular commodities. In the last resort, therefore, it is not the undertakers who decide the direction of national production, but the consumers, the "public." All depends on the effective desire they exert by means of their income. The income of a people is, in the long-run, identical with the return of its production. The circle that represents a year's income coincides, roughly,35 with the circle that represents a year's return of its productive powers. If every individual in the community were to consume exactly his year's income in the form of consumption goods, there would arise a demand for consumption goods which, through the agency of prices, would induce the undertakers so to regulate production that, in each year, the return of a whole year's circle of productive powers would take the form of consumption goods. If ten million labour-years (and the corresponding uses of land) form the annual endowment of a people, and this people wishes to consume, and does consume, the whole of its income in the form of consumption goods, it is a necessity that the produce of the whole ten million labour-years (together with the corresponding uses of land) be changed each year into the form of consumption goods. In this case there is no productive power left to dispose of in increasing capital, and capital only remains as it was.

If, on the other hand, each individual consumes, on the average, only three-quarters of his income, and saves the rest, obviously the wish to buy, and the demand for, consumption goods will fall. Only three-fourths of the former consumption goods will find demand and sale. If the undertakers, however, were for some time to continue the old dispositions of production, and bring to market consumption goods to the amount of ten million labour-years, the over-supply would very soon press down the price, business would become unremunerative, and the pressure of loss would compel the undertakers to adapt their production to the changed circumstances of demand. They will now provide that, in one year, only the produce of seven and a half million labour-years is transformed into consumption goods (whether it be by the maturing of the first class, or by adding to "present-time production"36 ), and the two and a half millions which remain of the current year's endowment may and will be spent in the increasing of capital. I say "will be spent," for an economically advanced people does not hoard, but puts out what it saves—in the purchase of valuable paper, in deposits in a bank or savings-bank, in loan securities, etc. In these ways the amount saved becomes part of productive credit; it increases the purchasing power of producers for productive purposes; it is thus the cause of an extra demand for means of production or intermediate products; and this, in the last resort, induces those who have the regulation of undertakings to invest the productive powers at their disposal in these intermediate products.

We see, therefore, as a fact, an intimate connection between saving and formation of capital. If no individual saves, the people, as a whole, cannot accumulate capital, because the great consumption of consumption goods forces the producers, by the impulse of prices, so to employ the productive powers that, every year, the produce of a whole year's endowment is demanded and used up in the shape of consumption goods, and no productive powers are left free for the increasing of capital. But if individuals save, the altered demand, again through the impulse of prices, compels the undertakers to dispose of the productive powers differently; fewer powers are put, each year, at the service of the present, and thereby is increased the amount of those productive powers whose produce will be found in suspense as intermediate products; in other words, the economical capital will be increased with a view to an increased consumption in the future.

Now there is still a third possibility. Individuals may consume, on the average, more than their income; instead of saving they may waste their parent sum of wealth. According to our theory, this must lead to a diminution of the community's capital, and, as a fact, it does so. The steps of the process are as follows. By the prevailing extravagance more than a year's income of the community, and, therefore, more than the produce of one year's circle of productive powers, is demanded in the shape of consumption goods. Production, compelled by the impulse of prices, yields to the demand. For instance, the former disposition was that the first circle, with its six million labour-years, should mature during the current year, and that, of the ten million labour-years that form the current endowment, four millions should be spent in "present-time production," and the other six in replacing the capital consumed. Now we shall suppose that, through the extravagant manners of the citizens, the year's demand for consumption goods rises till it requires the produce of twelve million labour-years. The undertakers will act in something like the following manner. Of the current labour endowment they will invest, perhaps, not four but five million labour-years in present production, and, in correspondence with this, the amount devoted to the replacement of capital will shrink from six to five millions. This will cover one million of the extra amount required. At the same time, by differently disposing of such goods as allow of more than one employment, they will perhaps divert the produce of another million of labour-years from a more remote class into the first class, and thus add it to the consumption of the current year. This will cover the second million of the extra demand. The community now receives and consumes what it desires, the produce of twelve million labour-years in the form of consumption goods;37 but it does so at the expense of the stock of capital, which is insufficiently replaced, and so diminished by two million labour-years.38

Possibly I have wasted too many words in proving a truth so obvious that no thinking man unskilled in science would ever doubt it. Every child knows that a piece of capital, say a hammer, must be produced if it is to come into existence. And to every simple man it is obvious that no stock of capital can be made, or can increase, if men regularly consume their whole available income; if, in other words, they do not save. It was reserved for the sharp and subtle wits of learned theorists to suggest the first doubt about it. This, however, it would have been difficult to do if, instead of dogmatising on the formation of capital, they had attempted to give a complete and faithful representation of the process by which capital is formed. Here lies the entire, but almost the only, difficulty of these and many other economical doctrines; and this suggests, I might add, the reason why so many abstract deductions are discredited and fail of result. It is not the deductive method that deserves the distrust, but the persons who misapply it. Vulgar errors in thought, indeed, are quite exceptional among capable thinkers; and here the fault lies mostly in this, that the economists in question could not put a sufficiently clear and life-like picture before their minds of the circumstances and processes which they introduced into their deductive arguments as assumptions, or, at least, did not keep it persistently enough before them through all stages of the deduction. Hence, losing touch with life, they began to make deductions, not from truth of facts, but from words of formulas, and so fell without knowing it into the emptiest dialectic. It is because so many economists, as it seems to me, have made this mistake, that I risk being tedious rather than being suspected of sophistry.

Book II, Chapter VI

Possible Objections

It is perhaps advisable to supplement our positive statement by a brief critical consideration of the most important objections that might be urged. Two of these appear to me particularly worth noticing. The first is, that the majority of goods which constitute capital are, by nature, quite unfitted to immediate consumption. There is, therefore, no sacrifice in withdrawing them from a use which they could never serve. Indeed, it is ridiculous to speak of the "non-consumption" of steam-engines and land improvements, of roofing tiles and bars of metal, as an act of saving or abstinence.39

To me this seems a somewhat cheap, but still perfectly good, argument against those who formulate the theory of saving superficially or falsely. But, as against the essence of the theory, it proves nothing. If any one is stupid enough to interpret the theory of saving as meaning that finished capital, in its form as concrete capital, must be "saved," he must submit to the retort that man cannot eat iron machines.40 But this is not at all the meaning of any thoughtful representative of the theory. What is maintained is only that, without saving, capital cannot be made or increased; that saving is as indispensable a condition of the formation of capital as is labour. And this is literally correct. The machines themselves have not been saved, but built. But in order to build them, men had previously to withdraw the productive powers necessary to building them from the service of the present; they had, therefore, in the strictest sense of the term, to save them.41

It may serve towards the settling of this controversy to remark that the idea of sacrifice, of renunciation, and thus of moral desert, need not be associated with the conception of saving.42 There may be sacrifice in saving, and it may be praiseworthy, but not at all necessarily. A man with a small income will, of course, feel it a sensible privation, and it will require strong self-denial in him to lay past anything; while one who has an income of £100,000, and is content to consume one half of it, has little claim to be considered a hero of asceticism because he saves the other half as capital. It is simply the fact of a saving that is indispensable to the formation of capital; whether there is sacrifice and moral desert in it or not is all the same to the result. And it follows from this that the theoretical truth, that "saving" is necessary to the formation of capital, cannot and must not be used to justify, either morally or socio-politically, all and every taking of interest. This is another instance of that confusing of the theoretical with the socio-political problem of interest which I adverted to in another place43 as having done so much harm. One side mixed up the theoretical doctrine that the formation of capital must be preceded by saving, with the moral judgment that interest is justified as the "reward of abstinence," and the other side, which saw, quite correctly, that interest could not be justified in such general terms, was misled, by the same confusion of the problems, into denying not only the false socio-political deduction but the true theoretical premiss.

If these two problems are kept distinct it will help us to give both parties their due. To Rodbertus and Lassalle we may grant at once that saving need not be moral heroism, and therefore is no sufficient socio-political justification of interest; but we must stand for the recognition of the theoretical truth that the fact of saving is in any case required to the formation of capital.

A second objection lays emphasis on the fact that, for a man to be able to accumulate capital, he must acquire more than he uses, and draws the conclusion that it is essentially the productivity of labour—industriousness and not abstinence—to which the formation of capital is due. Thus Rodbertus says, in so many words, that if, in the beginnings of economic development, an "isolated worker has no time to make a tool because he must always live from hand to mouth," the blame lies simply in the productivity of labour being too small. If, later, this productivity increases so much that, say, eight hours' labour is sufficient to produce the day's maintenance, then "from the labour time, which up till now he had to devote entirely to make what was absolutely necessary, he has a portion over for other labour, and it is this spare labour which he is now able to devote to the making of a tool." And from this quite correct consideration Rodbertus draws the conclusion that it is only the increasing of the productivity of labour, and not saving, which makes the existence of such a primary capital possible.44 And still more briefly and strongly does Kleinwächter give expression to the same idea when he says: "He who transfers a portion, say a half, of his revenue to the bank is merely industrious. He might, for instance, by a five hours' day of labour earn his bare maintenance, and devote, say, every afternoon to his recreation or enjoyment; instead of which the man works ten hours a day, and regularly carries what he earns in the afternoon to the savings-bank."45

I think this objection is very easily met. It is simply not correct to say that the man is "merely industrious." He is industrious and saving. If he were simply industrious he would, every day, spend the produce of the afternoon's labour, along with the produce of the forenoon's labour, in immediate enjoyment of life. That he does not do so is because he is saving as well. I freely admit that greater industriousness, causing a return far exceeding necessary requirements, and, similarly, greater productivity of labour, very much facilitate saving, just as I admit also that, without acquisition, saving, as well as formation of capital, is absolutely impossible. But I must as emphatically claim recognition of the fact that the greatest acquisition could not lead to the formation of capital if a portion of it were not withdrawn from present use and "saved." Production and Saving form two equally indispensable conditions of the formation of capital, and it is only dialectical one-sidedness—which, unfortunately, has already played much too great a part in the doctrine of capital—that could deny the co-operation of either of them.46

But does not this involve me in contradiction with the proposition so earnestly contended for in last chapter, that all goods (and consequently all capital) proceed from two elements, of which saving is not one, viz. from nature and labour?47 Certainly it does not. It is not my intention to do as Senior did,48 and try to make Saving a third factor in production along with Nature and Labour. It does not stand beside these factors, but behind them. It does not share with them in the work of production in such a way that any part of the same is due to it solely and peculiarly; it only effects that the productive powers, nature and labour, which in any case must do the whole work of production, are directed straight to this and no other goal—the production of capital and not of consumption goods. In a word, it has its place, not among the means of production, but among the motives of production—the motives which decide the direction of production. The proposition, then, that nature and labour are the only true productive powers, can stand perfectly well beside the wider assertion, that, if capital is to come into existence at all, there must, first, be certain intellectual dispositions through which renunciation is made of a portion of the immediate consumption that is otherwise possible; in other words, there must be "Saving."

Saving, it is objected again, is a "non-consumption"—something purely negative; and a pure negation can bring forth nothing.49 To my mind there is more dialectic than truth in this argument. Is it quite correct to say that saving is something purely negative? How comes it, then, that, although nothing is easier than a "pure not-doing," so many people feel saving an uncommonly difficult and disagreeable thing? In truth, saving is a mental business; and often, indeed, though not always, a very troublesome mental business, preceded by long deliberation and conflict between contending motives. This, of course, does not constitute an act of production, and the representatives of the above dialectical objection are, in the end, quite right in raising it as an argument against those theorists who would dignify saving by the name of a third factor in production. But, indeed, simply mental as saving may be, it is sufficient to effectually fill the rɄle which we have assigned to it in the formation of capital, viz. exerting an influence on the direction of production.

For the rest, whether it be a "pure negation" or not, we can, in no case, allow dialectical considerations to interfere with establishing important scientific facts. And it is an important scientific fact, which must be reiterated all the more emphatically that it has been disputed, that the progress of capital stands in a causal relation with the extension of the immediate claims put forward by individuals and peoples. Whatever body—be it an individual or a people—extends the claims of the moment so far as to exhaust, during the current period, the entire amount of consumption goods which its income makes possible for the current period, can neither make new nor increase old capital; and this fact finds accurate and straightforward expression in the proposition that saving is an indispensable condition of the formation of capital.50

Suppose now that we have succeeded, after considerable trouble, in establishing the proposition that capital comes into existence through saving and devotion to production of what is saved, we have still got but half the answer to our inquiry as to the formation of capital. We have now to face the further question: On what does it depend that people can, will, and actually do save and produce intermediate products? Strictly speaking, this second question is the more important of the two; it points to the impelling and working forces in the formation of capital, while all that has preceded has merely laid down the external forms of the process.

The most general answer, but still, it must be confessed, insufficient for all its generality, runs thus: what people look to in economic life is the Value of goods. Here we touch a subject which is too important and too difficult to be spoken of merely in passing. To obtain the basis for the principal part of our work—the explanation of interest—we require to go into the theory of value. I shall, therefore, leave the theory of the formation of capital at this stage, returning to it shortly in the last chapter, where we shall give it the logical conclusion that it still lacks.

[1.]Adam Smith, book ii. chap v.

[2.]Lauderdale, Enquiry, p. 181, passim.

[3.]Lauderdale, ibid. So also J. B. Say, "Il faut, pour ainsi dire, que les capitaux travaillent de concert avec l'industrie" (Traité, i. 3).

[4.]Strasburger, Hildebrand's Jahrbücher, vol. xvii. (1871), p. 325; and Carey.

[5.]Jevons, Theory of Political Economy, second edition, 1879, p. 243.

[6.]In economic literature the clearest views as to the nature of capitalist production are, in my opinion, to be found in Rodbertus, Jevons, and Carl Menger. The works of Rodbertus, where they are not directly disfigured by the influences of his one-sided Socialist standpoint, are of quite classical accuracy and clearness. Unfortunately there are certain features which very sensibly mar what he has said. This is true in particular of his omission to notice the share which the valuable natural powers take in production, and the influence of time—two things which, obviously, could not easily be fitted into the "exploitation" theory he maintained so vigorously, and so were suppressed. We shall see this more fully later on. Carl Merger, again, by his arrangement of goods according to "rank" (Grundsätze, p. 7), and his statement of the laws which connect together goods of various ranks, has given at once a brilliant proof of his clear insight into the developed phenomena of production, and an invaluable tool to the hands of succeeding investigators.

[7.]Book i. chap. ii.

[8.]Where population is scanty, of course, it is possible that land, or at least certain of the uses of land, such as the growing of timber, may be free goods, as obtainable in any quantity. But in modern communities, to which naturally I refer by preference in this statement, the uses of land—with the exception of waste land or desert—are entirely economic goods.

[9.]On the common experience that "as labour is prolonged the effort becomes, as a general rule, more and more painful;" see Jevons, Theory of Political Economy, second edition, p. 185; and Gossen, Entwicklung der Gesetze des menschlichen, Verkehrs, 1854.

[10.]This is the state of the case, as I believe, expressed with perfect clearness in the facts, and this is what Rodbertus profoundly misunderstood when he maintained, and repeated with emphasis, that labour is the sole original power with which human economy has anything to do, and drew from that the conclusion that all goods, economically, are to be conceived of as products of labour alone (Zur Erkenntniss unserer staats. Zustände, theorem i.; Zur Erklärung, second edition, p. 160; Zur Beleuchtung, p. 69). If to-day we allow a fruitful field to lie fallow, or a mine or water power to remain unexploited; if, in short, we do not act economically with valuable uses of land, we act as directly against our economic wellbeing as when we throw away labour uneconomically.

[11.]"Primary productive powers" is the more correct expression, which we must now employ instead of the partial expression "labour" used by me in the second chapter of Book I. in order to avoid tedious explanations.

[12.]It is very characteristic that Rodbertus, when describing the economical effects of adopting roundabout ways of production, chooses his illustration just out of that minority of cases where the roundabout way is the quicker (Das Kapital, p. 236). The consequence is that, on this and other occasions, he leaves in the shade all the economical elements which form the basis of the phenomenon of interest—and of these the most notable is the loss of time connected with the carrying through of productive methods—and, taking a very one-sided view, lays the origin of rent at the door of the existing circumstances of private right (e.g. p. 310). But private rights in capital would not, by themselves, do any harm to the labourers, and it would be very easy for them to avoid the toll-bars which the capitalists have erected, if the fatal lapse of time between beginning and end of the lengthy capitalist process did not make it impossible for labourers to adopt similar processes on their own account.

[13.]Inventions, so-called, generally mean the discovery of a new and more productive method of production. Frequently—probably in most cases—the new way is longer than the old, and in this case to utilise the invention requires the making of a great number of intermediate products, or, as it is usually expressed, a large investment of capital: e.g. in machinery, building of railways, and the like. But often a happy invention may lead to a better, and at the same time shorter, way of production, such as the manufacture of certain dye-stuffs from chemical instead of plant bodies. However elaborate the former may be, it is still certainly far more direct and speedy than a manufacture which has to wait on tedious processes of growth.

[14.]It may be asked here, by way of objection, why man does not fully utilise the chances offered him of increasing the technical result by the technical knowledge he has at the moment. The common explanation runs—from want of capital. With the limited amount of capital at his disposal man can only utilise those chances of employment, among the infinite number of remunerative ones, which are most remunerative, and a great number of less, but still remunerative, employments must be passed over. This explanation is not quite exact, but it is at least right in the main contention. We may therefore be content with it until, in another connection, we can examine the matter with perfect accuracy.

[15.]Der isolirte Staat, third edition, part ii. div. i. p. 97. See particularly the table on p. 101.

[16.]For instance by Roscher, Grundlagen, § 183; by Mangoldt, Volkswirthschaftslehre, 1868, p. 432; by Mithoff in Schönberg's Handbuch, second edition, p. 663, and by many others. Jevons independently adopted quite similar views, Theory of Political Economy, second edition, p. 277.

[17.]In particular the "physical" or "technical productivity," which is founded on these facts (that is, the circumstance that by the assistance of capital more products can be produced than without it), was confused with a "value productivity" (that is, a pretended power of capital to produce more value than it itself possesses). See my Capital and Interest, pp. 112, 131.

[18.]Das Kapital, p. 236.

[19.]The first of the above schemes corresponds to the case of a production where one single tool is employed, and where the total process extends over ten years—for instance, the making and using of an axe of Bessemer steel. The second scheme, again, corresponds to a production where, besides the axe, a number of other capitalistic tools, auxiliary mechanism, and materials, are employed, the existence of which, however, does not date from farther back than ten years. This comparison clearly shows how, without increasing the absolute length of the production period, the degree of capitalism may be very considerably increased; all that is necessary is to alter the proportion between the number of early workers and that of the finishing ones. Whether it is ten workers employed in the final stage against one worker employed ten years before, or one worker in the final stage against ten workers ten years before, in either case the total production process extends over a period of ten years. But in the former case the finishing workers would be very sparingly provided with tools, machines, etc.; in the latter case they would be very amply provided. The latter, of course, would be far and away the more capitalistic of the two.

[20.]See the interesting calculation and graphic statement of the amount of investment of capital in Jevons's Theory of Political Economy, second edition, p. 249.

[21.]It would be somewhat different if we were to adopt the other conception of capital, and understand by it, not intermediate products only, but the entire national subsistence fund, which would therefore include the labourers' subsistence. In that case, but only in that case, one might say that capital was the cause of these profitable roundabout ways of production being adopted.

[22.]Schäffle very finely speaks of capital as "Consumption wealth as it were in the stalk, when it is still only swelling bud and ripening fruit" (Schönberg's Handbuch, second edition, vol. i. p. 208).

[23.]e.g. Say, Traité, seventh edition, p. 344.

[24.]Of older writers, e.g. B. Fulda, Grundsätze der Oek. pol. or Kameralwissenschaften, second edition, 1820, p. 135; Schön, Neue Untersuchung der National-Oekonomie, 1835, p. 47. Of later writers Cossa himself, Elementi, eighth edition, p. 34; and Gide, Principes d'Éc. Pol. 1884, pp. 101, 145.

[25.]Book i. chap. vii. § i.

[26.]See Capital and Interest, p. 114.

[27.]Handbuch der Staatswirthschaftstlehre, Erlangen, 1821, i. p. 66, in note.

[28.]The dispute as to the share which Saving plays in the formation of capital is almost old as economic science. The theory which ascribed it the prominent place was the first to appear. Already suggested by the Physiocrats, it was formulated by Adam Smith in the often-quoted proposition, "Parsimony and not industry is the immediate cause of the increase of capital" (Wealth of Nations, book ii. chap. iii.) Supported by his authority it was for a long time almost the only one that held the field, and, although in later times it has suffered many reverses, it still finds some notable apostles: thus, among others, Mill—"Capital is the result of saving" (book i. chap. v. § 4); Roscher—"Capital is mainly the result of saving" (Grundlagen, § 45); Francis Walker—"It arises solely out of saving. It stands always for self-denial and abstinence" (Political Economy, p. 67). But from a very early period there was sharp opposition to the theory, first from Lauderdale (Inquiry, 1804, chap. iv.); then, after some time, from the socialist theorists, Rodbertus (Das Kapital, pp. 240, 267—"Just as the capital of the isolated individual originates and increases, so does the national capital,—only through labour and not through saving"); Lassalle (Kapital und Arbeit, p. 64); Marx (Das Kapital, i. second edition, p. 619). To these opinions a great many recent writers of other schools more or less incline; thus, very clearly and decidedly, Gide (Principes, p. 167); less decidedly, Kleinwächter (in Schönberg's Handbuch, second edition, p. 213), and R. Meyer (Das Wesen des Einkommens, 1887, p. 213); more by way of reconciliation, Wagner (Grundlegung, second edition, § 298); and, a little obscurely and confusedly, Cohn (Grundlegung, 1885, § 257). Although, however, this tendency to ascribe capital to labour is unmistakably rapidly gaining ground, that view which ascribes to saving a share in the formation of capital is still the view of the majority. But the later representatives of this view are in the habit of rightly limiting it, and expressly emphasising the fact that saving alone is not sufficient, and that there must also be "labour," or "devotion to productive purposes," or such like—which, indeed, may very well have been the true meaning of many of the older adherents of the Saving theory, and only not expressed by them because of its assumed obviousness. See, e.g., Rau (Volkswirthschaftslehre, eighth edition, i. § 133), Ricca-Salerno (Sulla Teoria del Capitale, chap. iv. p. 118—"Il capitale deve la sua origins all' industria e al risparmio"), Cossa (Elementi, eighth edition, p. 39), and many others.

[29.]On the many divergent and contradictory readings of the conception of Income, see R. Meyer's Das Wesen des Einkommens, 1887, particularly pp. 1-27. I purposely avoid going into the controversy as to this conception, which Meyer's work, notwithstanding its many merits, seems to me to have by no means adequately settled. Where I use the word Income in the sequel it is to be understood, not in Meyer's sense, but in a sense very much in agreement with popular usage.

[30.]Adam Smith's celebrated proposition therefore—"Parsimony and not industry is the immediate cause of the increase of capital"—is, strictly speaking, to be turned just the other way about. The immediate cause of the origin of capital is production; the mediate cause is a previous saving.

[31.]It is only in cases where, in the meanwhile, the technique of the particular production has improved, that the transference of a less amount of productive powers to the service of the future is sufficient. If, for instance Crusoe learns how to make in fifteen days those weapons which formerly had taken thirty days, it is, of course, sufficient for the upkeep of the capital if he works only half an hour daily at the repair of his weapons, and nine and a half hours can now be spent in directly obtaining a more plentiful maintenance without prejudice to his economical position

[32.]Durable productive goods, which give off their use gradually in the course of several years, belong naturally (in various parts of their content as useful goods, or in various annual circles of their activity) to several circles simultaneously.

[33.]Under this name (Gegenwartsproduktion) I mean to group, for the sake of shortness, all those acts of production which agree in this, that the original productive powers which are put forth in these acts reach their goal, and turn out consumption goods, within the same economic period. This applies to two kinds of productive acts; partly and principally to those of the final stages, the labour required to transform the first circle of capital into consumption goods (e.g. agricultural labour, the labour of the miller, baker, shoemaker, tailor, etc.), partly to industries where the production process is short, and can be carried through from beginning to end within a single economic period.

[34.]If, during the current year, there should be introduced such improvements in the technique of production that the capital, which had taken six million labour-years to produce, could be fully replaced by an expenditure of five million labour-years, there would be a change in the figures of our illustration, but the principle would remain the same. It would now be possible to preserve the capital already in existence, even if five million labour-years were spent in present production, and if the produce of eleven million labour-years in all were spent in immediate consumption (see above, note to p. 109). But in any case the formation of new capital would require the renunciation of some portion of that immediate consumption which would be possible if it were only wished to preserve capital at the same level; in other words, would require that a portion of the "income," which might be consumed without diminishing the stock of capital, be not consumed but saved. Moreover, if technical improvements did not continue to be made, then, after some years—that is to say, when the capital produced according to the old methods of production was quite used up,—the old figures would come true again; capital would be kept at the same level if in any period the produce immediately consumed just corresponded to the productive powers which came forward anew in the same period.

[35.]I have neither time nor desire to go into subtle distinctions here, although there is material enough for them. Interesting investigations into the relation between national product and national income—although I cannot altogether agree with them—may be found in R. Meyer's book, pp. 5, 84. See also the investigations of Loris (which appeared while the present volume was passing through the press), entitled Ueber gewisse Werthgesammtheiten und deren Beziehungen zum Geldwerth(Tubinger Zeitschrift, forty-fourth year, part ii. p. 221), where also the yearly "consumption sum," "production sum," and "primary income sum" are treated as "quantitatively, approximately equal" amounts.

[36.]The change of disposition will, as we have seen, be made essentially easier by the adaptability of many forms of capital to various uses.

[37.]Viz. six million from the original provision of the first circle, one million diverted and added to that by changed disposition, and five millions from the current labour endowment.

[38.]The stock originally embraced the return of thirty million labour-years; it now gives seven millions to the consumption of the correct year, and it receives only five millions to replace them, whereby it falls from thirty to twenty-eight million labour-years.

[39.]This is very strongly put by the Socialist writers, as, e.g., Lassalle (Kapital und Albeit, p. 69); Rodbertus (Das Kapital, p. 271). In a somewhat diluted form the same doctrine appears in Wagner (Grundlegung, second edition, p. 600), who makes a distinction between goods in which the peculiarities of capital are inherent, and those in which they are not. The former are not, at least "directly," objects of saving. Similarly Kleinwächter (Schönberg's Handbuch, first edition, p. 173).

[40.]Lassalle.

[41.]In the second edition of Schönberg's Handbuch (p. 214) Kleinwächter comes a long way nearer our conception in assenting to it, as regards at least one of the chief forms of capital—tools of production. He allows that the making of such tools "always involves, to a certain extent, the renunciation of an immediate enjoyment," because the materials which are made use of in making the tools of production might have been employed in making some kind of consumption goods; and thus there is no reason for objecting to call such a renunciation of enjoyment by the name of Saving. But it is different, he says, with the materials of production. Such things as raw wool, stone, and lime, etc., could not in any way be objects of direct consumption, and so could not be saved; they must be looked on, therefore, economically as products of labour only, and not as the result of saving. In this Kleinwächter is not logical. As regards the tools of production he, quite correctly, does not consider whether the finished tools themselves might have been consumed, but whether, by the instruments from which the tools were made, any consumption good might have been made; and because this is the case he answers the question as to saving in the affirmative. But if he had kept to this line of thought as regards the materials of production, he must have seen that, by means of the same productive powers as man uses to quarry stone, to build a house, or obtain lime for mortar, he might have made himself goods for immediate consumption,—e.g. hunted wild animals or caught fish,—and that here, consequently, on exactly the same grounds and in exactly the same way as in the case of tools, saving does come into the question.

[42.]See above, p. 102.

[43.]See Capital and Interest, p. 3.

[44.]Das Kapital, p. 242.

[45.]Kleinwächter, in Schönberg's Handbuch, second edition, p. 215.

[46.]A very striking illustration of these words may be found in the already-mentioned utterances of Rodbertus on the subject. On p. 242, from the fact that, if the productivity of capital is too small, there can be no saving and no formation of capital, he contents himself with drawing the quite correct conclusion that "necessarily some other element besides saving must intervene." Thus he ascribes to saving its proper place, as not sufficient by itself, but, all the same, as a factor of the formation of capital. It is only on p. 243 that the fact of a certain degree of productivity of labour being indispensable is dialectically changed into the statement that only the increase of productivity, and not saving, makes the formation of capital possible.

[47.]A similar objection was urged by the old economist Lauderdale against the Saving theory, Inquiry, pp. 207, 272.

[48.]Political Economy, third edition, p. 57, where three great agents or instruments of production are distinguished—Labour, Natural Agents, and Abstinence.

[49.]Marx, Das Kapital, second edition, i. p. 619, in note (English translation, p. 608): "It has never occurred to the vulgar economist to make the simple reflection, that every human action may be viewed as 'abstinence' from its opposite. Eating is abstinence from fasting, walking abstinence from standing still, working abstinence from idling, idling abstinence from working, etc. These gentlemen would do well to ponder, once in a way, over Spinoza's Determinatio est Negatio." Gide, Principes d'Éc. Pol. p. 168: "Un act purement négatif, une abstention ne saurait produire quoi quo ce soit.... Sans doute on peut dire que si ces richesses avaient été consommées au fur, et à mésure qu'elles ont pris naissance, elles n'éxisteraient pas à cette heure, et qu'en conséquence l'épargne les a fait naître une seconde fois. Mais à ce compte, il faudrait dire qu'on produit une chose toutes les fois qu'on s'abstient d'y toucher et la non destruction devrait être classée parmi les causes de la production, ce qui serait une singulière logique."

[50.]I will not, a priori, deny that possibly one might contrive to hunt up some subtle examples where capital (particularly social capital) comes into existence without saving properly so called. But all the more strongly do I hold by my proposition that, as regards the great mass of the economic formation of capital, saving, in the way I have indicated, has its place.