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BOOK VI

THE SOURCE OF INTEREST

Book VI, Chapter I

The Loan and Loan Interest

In the previous book I tried to show, and account for, the natural difference that exists between the value of present and the value of future goods. I have now to show that this difference of value is the source and origin of all Interest on Capital. But as the exchange of present commodities for future commodities takes various forms, the phenomenal forms of interest are as various, and our inquiry must necessarily deal with them all. In the following chapters, therefore, I intend to take up, in succession, all the principal forms of interest, and I shall endeavour to show that, notwithstanding all differences in shape and appearance, the active cause in them all is one and the same, namely, the difference in value between present and future goods.

By far the simplest case of this difference in value is presented in the Loan. A loan is nothing else than a real and true exchange of present goods for future goods; indeed, it is the simplest conceivable phenomenal form, and, to some extent, the ideal and type of such an exchange. The "lender," A, gives to the "borrower," B, a sum of present goods—say, present pounds sterling. B gets full and free possession of the goods to deal with as he likes, and, as equivalent, be gives into A's full and free possession a sum of entirely similar, but future, goods—say, next year's pounds sterling.

Here, then, is a mutual transfer of property in two sums of goods, of which one is given as recompense or payment for the other. Between them there is perfect homogeneity, but for the fact that the one belongs to the present, the other to the future. I cannot imagine how an exchange in general, and an exchange between present and future goods in particular, could be expressed more simply and clearly. Now, in the last chapter, we proved that the resultant of the subjective valuations which determines the market price of present and future goods is, as a rule, in favour of present goods. The borrower, therefore, will, as a rule, purchase the money which he receives now by a larger sum of money which he gives later. He must thus pay an "agio" or premium (Aufgeld), and this agio is interest. Interest, then, comes, in the most direct way, from the difference in value between present and future goods.

This is the extremely simple explanation of a transaction which, for hundreds of years, was made the subject of interpretations very involved, very far-fetched, and very untrue. Since the days of Molinæus and Salmasius,1 the Loan has been conceived of as a transaction analogous to the Hire; as a transfer of the temporary use of fungible goods. This method of interpretation seems simple and natural enough. It has, too, the advantage and support of being in harmony with popular ideas and popular speech. We do not say, "I sell you, or exchange you £100;" but, "I lend you £100." The transaction is a loan, and interest a usura, a use of money. But, before a scientific basis could be given to this popular conception, a whole series of subtilties had to be invented, and to obtain these out of the circumstances of actual life taxed all the resources of sophistry.

First it had to be shown that, in transferring a thing, it is possible to transfer more than the whole of it; namely, that in giving the borrower possession of the loaned thing, it is possible to transfer to him the right to all and every use that can be made of the thing, even to the consumption that annihilates it, and, besides that, the right to a separate kind of remnant use, for which a separate claim, the claim of interest, can be made. Then the further subtilty had to be invented, that, in perishable goods—goods which perish in the act of use—there is, all the same, a continuous use, ever rising anew from its own ashes; a use which lasts even when the good "used" has long ceased to exist! It had to be discovered that a cwt. of coal can be burned to cinders on 1st January 1888, and yet be "used" uninterruptedly throughout the whole year, and, perhaps, for five, or ten, or a hundred years to come; and, what is best of all, that this lasting use can always be bought for a particular price, although and after the coal itself, and the right to consume it to the last atom, has been given away for another and a different price!

In my former book, Capital and Interest, I subjected this singular theory to a searching critical examination. I showed how, under peculiar historical conditions, it came into the world as the birth of circumstances, in which, to save interest and justify it against the unquestionably unjust attacks of the canonists, a decent foundation had to be found for it at any price, or, if not found, invented. I showed that this theory had its troubled source in a fiction. It was a fiction adopted, in its time, by the old jurists, in full consciousness that it was simply a fiction set up for certain practical legal purposes; but afterwards, by a strange misunderstanding, this fiction was adopted as a sufficient scientific fact. I tried, further, to show that this theory is, in itself, full of mistakes, internal contradictions, and impossibilities, and how, finally, when carried to its logical conclusion, it leads inevitably to further contradictions and impossibilities. In opposition to it, and in place of it, I now offer my own positive theory, then unpublished, and confidently leave it to the reader to judge on which side lies illusion and error, and on which truth.2

I would gladly refrain from any further commentary here, were it not that, quite recently, we have had a new literary pronouncement in favour of the Use theory which I opposed, and directed against the Exchange theory which I advocated; and were it not that this revived pronouncement emanates from no less authority than Karl Knies.

In 1885 Knies published a second edition of his book Das Geld. In it he replies to the criticism I made on some passages of his first edition, and, at the same time, expressly repeats certain positive objections he had made to the conception of the loan as an Exchange. On both counts I feel bound to answer.

It is unfortunate that Knies's reply touches only one of the many points on which I attacked his Use theory. I had, among other objections, put forward this;—that his method of proving the actual existence of a durable use in perishable goods rested on a dialectical confusion; and I had endeavoured to strengthen my contention by an exact analysis of the very words of his argument.3 To this Knies answers that I have, notwithstanding, mistaken his meaning, and he repeats his positive statement in such "altered expression, and with such additions" as may put his real meaning beyond question. As now put, Knies's demonstration is very much amplified (in the first edition it occupies pp. 72 and 73; in the second edition, pp. 106 to 114), but, substantially, I cannot consider it any more satisfactory. On the contrary, it seems to me to bring out more clearly that the existence of this durable use, which I disputed, is not proved, but only assumed.

In one of the weightiest of the new passages (p. 109), Knies has no hesitation in explaining, in so many words, that in the Loan, although "not the same individual grains of corn and pieces of money are returned, but (only) an equally large and equally valuable amount of grains of corn and pieces of money," still, "to economical consideration, the same goods are given back." Here he sanctions the fiction of identity between fungible goods, in optima forma, within the sphere of economical theory and economical discussion. All that follows he bases on the foundation thus obtained. He finds the essence of hire and lease in the fact that here "the hirer, leaseholder, etc., gets the land, house, or the like, transferred to him to use for his own purposes for such and such a continuous period, at the expiry of which he has to give back the good in question." In the Loan, perishable goods are likewise transferred "to be employed by the borrower for such and such a continuous but limited period of time." Consequently Hire and Loan are, essentially, analogous transactions—which was the point to be proved.

To this I would simply answer, that the second premiss is not truth but poetry. The sober, prosaic truth is that, in the Loan, perishable goods are not transferred to the borrower "for a continuous but limited period of time"; they are transferred definitely and for ever; they are never given back. What is given back is, in fact, other goods. What now becomes of the inferred analogy?

I am not blind to the use of analogies, and even to the demonstrative force which analogies may have under certain circumstances. I have myself often used them in the course of this book to drive home an argument. But an analogy is a weapon which requires careful handling. Comparisons, as every one knows, are always imperfect; if the compared things have one side in common, they have always another in which they differ. The "legal person," for instance, may very well be compared with the physical person in questions relating to property, while, in questions relating to the family, it would scarcely be safe. If, then, we draw some conclusion from the similarity of two things, our conclusion must keep within the sphere in which the similarity actually exists; from similar circumstances in one sphere we cannot draw a conclusion that the circumstances are similar in another sphere to which the similarity does not extend. No one, for instance, would consider an argument like this legitimate:—the legal person is as much a person as the physical person; a physical person can marry; therefore, a legal person also can marry!

Yet it seems to me that it is into this vicious and false use of analogies, that Knies and the other theorists of his school have fallen. I grant at once that, in a certain point of view, the individual goods replaced may be looked upon as if they actually were the same individual goods which were given away in the loan: they have identically the same effect on the economical position of the lender who receives them. Now, so far as the ground of this identification extends, so far also is one justified in drawing conclusions from it—but no further. The analogical conclusions of the Use theorists, however, are entirely beyond this justifiable sphere. What has the theoretical question whether, in perishable goods, a continuous use is possible or not, to do with the fact that it is all the same, as regards the interests of the lender, whether he gets the individual goods X or the individual goods Y? Nothing at all—any more than the question of the marriageableness of a legal person has anything in common with the fact that, in matters relating to rights of property, an institution or a corporation may without hesitation be conceived of as an independent "person"! Indeed, if the reader will excuse a ridiculous but, as I think, a convincing example, one might as well use the identity of fungible goods to prove that oysters may keep fresh for ten years; they have only to be lent out for ten years, and the lender receives "them" back still fresh oysters! The application is so evident that I need scarcely put it in words. The identity of the oysters lent with the oysters returned is no true identity, but only an identity assumed ad hoc. So far as concerns the practical interests of the lender the identity may pass, but, as a scientific question of fact, like the physical question whether oysters can remain fresh for ten years, there is no identity at all. And just such a scientific question of fact is the question whether, in perishable goods, there is a continuous one year's or ten years' use. It is a question that must find its answer in considering the nature of the perishable good and the nature of the use; properly speaking, not the shadow of an argument can be got from the fact that it is of no moment, as regards the practical interests of a person, whether he receives the particular good X or the particular good Y!

Now Knies does make the attempt—and this is a second and indeed the weightiest of the new passages in this edition—really to point out a durable use in perishable goods, and to give some indication wherein that use consists. He names, by way of illustration, "the maintenance of life, and of labour power, the averting of a loss, the attainment of a business return or profit" (p. 112), as useful effects of this sort, which the borrower "may obtain and make for himself from the consumption (of the loaned goods) during the entire period of time before the similar quantum of perishable goods is given back." But by illustrations like this Knies again shows that he is on the wrong track. The enjoyment of effects indirectly obtained from the consumption of goods is not in the least a utility which we get in addition to the consumption; it is just the utility we get from the consumption. Accordingly it can never be the ground of a special equivalent which we should have to pay over in addition to the equivalent of the perishable good itself. What would be said of a person who proposed to sell a cwt. of corn on the following terms:—"For the quarter of corn itself, that is, for all the useful services which may be got from the corn by its—sudden or gradual—consumption, I want thirty shillings. But for the lasting indirect use of the corn—the use which consists in the subsequent enjoyment of useful effects, such as life prolonged, labour power maintained, and so on—I want another shilling." Now, if,—as probably no one will deny,—in selling grain, it is not possible to conceive of the subsequent enjoyment as the ground of a special equivalent; if the subsequent enjoyment is obviously included in the purchase price of the good transferred into the buyer's possession; it is inconceivable that, all at once, in the case of the loan (where, too, the quarter of corn passes into the full possession of the borrower, and justifies him in drawing all the uses he can from it), every indirect use is to be separately paid for. And why, again, should this indirect use be paid for only during one, five, ten years, or for so long as the loan runs? Is the utility of sustained life not enjoyed so long as life lasts? Is the utility of preserved labour power not one which lasts so long as we can work?

In Capital and Interest I had so thoroughly and, in my own opinion at least, so clearly laid down the facts about the lasting "indirect use," and shown the impossibility of its being the ground of loan interest,4 that I really did not expect to see the thing emerge once more as stay and support of the Use theory. Least of all did I expect it from a writer who knew what I had said on the subject, and that without a single word of explanation being vouchsafed in answer to the objections I had raised meantime. I cannot but express my regret—not indeed for personal reasons, but in the interest of our science—that Knies has taken so little notice of, and given such meagre answers to the theoretical considerations which I brought against the Use theory. He replies on one single point, and that a point which, however important it may be in itself, has only the importance of an incident in the struggle that is to decide the victory or defeat of the Use theory; while, to the multitude of really cogent considerations directed against that theory as a whole—considerations which, quite apart from the issue of this incidental question, show it to be internally contradictory5 and theoretically inadmissible,6 —he has, unfortunately, found no word of rejoinder. Once submitted for discussion these considerations must be met, and certainly no one was more called on to speak in the defence of his own Use theory than was Knies.7

Hitherto the discussion has been limited to attack and defence of the Loan theory of other economists. I have now to reply to an attack made on my own theory. The distinguished writer we have just been discussing has now repeated the objection he urged some years ago against my conception of the loan as a true exchange; it is, he says, in contradiction of the hitherto established conception of what an exchange is. "For an exchange—as we are not taking into account senseless and frivolous actions—takes place only when goods different in some way or other are bartered. But fungible goods, such as grain of similar kind and quality, are, economically, recognised as entirely similar goods."8

I must say that this statement seems to me to beg the whole question. Instead of inquiring what the connotation of the conception of exchange is, and arguing from that whether the loan can be called a true exchange or not, Knies starts with a preconceived conception of exchange, and that an arbitrarily and unnaturally limited conception. As a fact, Knies's limitation of the conception of exchange to the barter of goods of different kinds is one we do not find in the nature of exchange, nor does it correspond with the "hitherto established" use of the conception. In the nature of exchange what is involved is that two goods are given, the one for the other—nothing more; as to "established usage," it is very easy to show that transactions in which entirely similar fungible goods are bartered for one another are considered by all the world true exchanges, and are called so. In proof of this I might point out that two people, simply from whim or fancy, will "exchange" two fungible goods, the one for the other, e.g. two new copies of the same book. Knies guards himself, indeed, against this argument by saying that "we are not taking into account frivolous and senseless actions," but this is making too light of the matter. For, certainly, it cannot be denied that such capricious actions may happen, and occasionally do happen, and it cannot very well be denied that such transactions, when they do happen, are neither Hire nor Loan, nor anything else than true Exchange.

But there is no need to appeal to rare cases like these. There is one group of instances where men, quite deliberately and on entirely rational economic grounds, do barter similar fungible goods; that is where goods, otherwise perfectly similar, are available under different modalities—to use a philosophic term—as, for instance, in different places. Take the case of a farmer A, who owns a plantation of trees two hours' journey away from his farm, while there is a plantation belonging to his neighbour B immediately beside him. In both plantations, the wood, cut or ready for cutting, is of exactly the same quality. Now, evidently, it is more convenient and more profitable for A to have ten loads of wood near his house than ten loads ten miles away from it. It will, therefore, be considered quite reasonable, and quite intelligible, to propose that B should make over to A ten loads from the near plantation, in return for which A will give B ten loads—or perhaps twelve loads, including a premium—of the similar wood from his far-away plantation. And if this is agreed to, everybody would pronounce it a real and true exchange.

Or can we imagine anybody, from the fiction of identity between fungible goods, drawing an analogical conclusion like the following about the nature of the transaction;—"A makes over to B ten loads of wood at a spot ten miles away from his house, and receives from B ten loads of wood here at his house. It is all the same to A whether he receives back the same ten loads or ten other loads. 'From an economic point of view,' therefore, it is essentially the same ten loads which he receives back, only at a different place. The essential nature of the transaction is, accordingly, not an exchange—since no exchange takes place between similar goods—but a transfer of the same goods to a different point in space,—that is to say, a freight transaction. And if, for the advantage which lies in this transfer from one place to another, A pays B a premium of two loads, the payment is essentially, from an economic point of view, an expense of carriage." I very much doubt whether anybody would follow him in this conclusion from analogy, although it is, feature for feature, the same as the one above. We should rather have expected that Knies would have been ready to own that the exchange of two amounts of wood, alike in every respect except that they are available in different places, was a real and true exchange.9

And now I ask: If it falls within the limits of the conception of exchange when goods present in one place are bartered for goods entirely similar but present in another place, with what right can we exclude from the conception the case where goods present at one time are bartered for goods entirely similar, but present at another time? When so much has been made of analogies in the whole course of this controversy, why exclude the one analogy which is, most evidently, the appropriate one? If the difference of the place at which goods are available is a sound economic reason for exchanging fungible goods that are in other respects entirely similar, and if the advantage and convenience of the present place may justify the claim and allowance of a premium, just as much may the difference of the time at which similar goods are available be a sound reason for their exchange, and a guarantee that there will be a premium on the—more valuable—present goods. This premium, and nothing else, is Interest.

A great tree does not fall at one blow. And I cannot expect that a loan theory, which has dominated human intellects for centuries, should fall at the first attack. But I venture to hope that I have at least awaked a general feeling that it is necessary to submit the principles of that theory to critical revision. There is one task which the next economist who proposes to maintain the Hermann-Knies loan theory will not, I imagine, venture to omit; namely, once and for all, to point out positively the existence of that "enduring use" of perishable goods, distinct from their consumption, for which interest is supposed to be paid, and to say, clearly and distinctly, wherein that use peculiarly consists. Up till now its defenders have acted in a somewhat curious way; they have pointed out, by more or less questionable analogies, that, in the loan, a temporary use is transferred, and concluded from this that there must be such a use; the consequence being that—with the exception of this last unfortunate attempt of Knies's—the nature of the use, its contents and so on, were left entirely in the background. I consider that our science has a right to demand the opposite and the natural method of demonstration. Let it first be shown that there is such a use, and wherein it consists; if that can be done, we shall willingly believe that it is transferred in the loan. If that cannot be done—and I doubt very much if it can—then I shall have the greater confidence in pointing to my solution of the question. To the latter, at any rate, I have no fear that the stigma of sophistry and unnaturalness can be attached.

Passing from this polemical digression—which I considered only due, as well to the importance of the subject under dispute, as to the scientific standing of my esteemed opponent,—let us return to the main subject. According to our conception interest is a complementary part of the price payable for a sum of present goods in future goods. It is a part-equivalent of the "principal" lent. In itself there would be nothing to prevent this part-equivalent being paid along with the bulk of the price; in other words, interest and "principal" might be put together in one single payment at the end of the whole loan transaction. Reasons of practical convenience have, however, made it the general rule that, in loans made for any considerable length of time, the premium should be paid separately, and in rates graduated according to time,—monthly, half-yearly, yearly, etc. With the essential nature of interest this method of payment has nothing to do; it may, indeed, be expressly provided otherwise by the loan contract. But quite possibly it is the case that this custom, which, practically, has prevailed from time immemorial, of separating the payment of interest from the payment of principal, has assisted—perhaps, even, directly caused—the popular opinion that the principal sum paid back is, by itself, the equivalent of the sum originally given, and that interest is a thing by itself, an equivalent for another and separate something.

Now and then a loan may be granted without interest; but the reason of this is seldom or never that the market price of present goods, as against future goods, is so favourable to the latter, that, in the general loan market, they can purchase an equal amount of present goods without premium. Almost invariably these are cases where the lender dispenses with the payment of premium on some special personal ground, such as friendship, charity, humanity, class obligation, and so on. It has been usual to conceive of the loan without interest as a gift of the temporary "use" of the thing lent.10 Our theory, of course, demands another conception. We put this kind of loan simply among cases where a man, from some personal motive, parts with his commodity under the market price. We say it is the same thing as where a manufacturer gives personal friends at the cost price, say, of 4s. the article which he can sell anywhere at the general market price of 5s.

Lastly, it very seldom occurs, and then never as regards present and future goods in general, but only as regards one particular kind of goods, that the relations of supply and demand are such, that future goods obtain a higher price than present goods of the same kind, and that a premium in present goods must be paid for future goods. It will only happen in cases where, presumably, the relations of supply and demand in the future will be essentially more unfavourable than in the present, and where, at the same time, for personal or technical reasons, it is not possible to preserve the present ample stocks till that future point of time when they are assured of a higher value.11 Suppose the case of a brewer whose ice-cellars are too small for his requirements. If in January he puts in as much ice as the cellars will hold, and has still two hundred carts of ice over, he may be very willing to exchange these for one hundred carts of ice deliverable in August.12 But the possibility of such a case seems to me rather to afford a not insignificant proof of my loan theory. For, I should like to ask, how would the Use theorists explain this? As a transfer of use like the loan; only that the use has a negative value, and that the borrower, instead of paying a premium, demands a premium? Or, perhaps, as a storage transaction, the difference between the quantity given and that received being considered a fee for safe deposit?

I think both interpretations are so clearly artificial and fictitious that very few people would seriously entertain them. Probably the Use theorists would be quite willing to admit this as a case of real exchange; but, so far as they did so, they would be untrue to their own contention, according to which exchange is only possible between goods of different kinds, and not between fungible goods of the same kind. Our theory, on the other hand, explains everything naturally, and by one formula. Without forcing an interpretation, it can recognise that, here, the position is exactly the same as in the loan. There is a mutual transfer of property in two sums of goods, which are entirely similar in every other respect but that of being disposable at different points of time. And to this entirely similar state of matters it gives an entirely similar explanation: that, in both categories, there is an exchange between present and future goods, the prices of which are the resultant of the subjective valuations put upon these two classes of goods within the market.

Book VI, Chapter II

The Profit of Capitalist Undertaking. Principles of Explanation.

We come now to the principal form assumed by the interest problem. Among the phenomena of interest it is the one which has, practically, been of most importance. Usually, indeed, it passes for the spring and source from which all the others are derived. And it has chiefly been the attempt to explain this form of interest that has led to the terribly involved war of opinions which gave only too ample material for my Capital and Interest.

A word or two will indicate generally the peculiar kind of activity which the undertakers exert, and from which they draw their profit. They buy goods of remoter rank, such as raw materials, tools, machines, the use of land, and, above all, labour, and, by the various processes of production, transform them into goods of first rank, finished products ready for consumption. In doing so they obtain—independently of compensation for their own personal co-operation in the work of production as leaders of industry, head-workers, etc.—a gain approximately proportioned to the amount of capital invested in their business. This gain is called by some "Natural Interest on Capital" or "Profit," and, by others, "Surplus Value." How is this gain to be explained?

I must introduce the explanation by establishing one important fact. Goods of remoter rank, although, materially, present commodities, are, economically future commodities. As present commodities they are incapable of satisfying human want; they require first to be changed into consumption goods; and since this process, naturally, takes time, they can only render their services to the wants of a future period,—at the earliest, that period distant by the time which the productive process necessarily takes to change them into consumption goods. A group of productive instruments, such as Seed, Manure, Agricultural Implements, Labour, etc., which cannot be transformed into the finished product Grain under a year's process, can only serve for the satisfaction of next year's subsistence wants. In this respect, then, goods of remoter rank available in the present (present productive goods) are similar to future consumption goods; their utility is a future utility; they are "future commodities."

It is evident that this fact cannot be without some far-reaching influence on the value which such goods obtain. As we know, we value goods of remoter rank, in general, according to the marginal utility and value of their finished and final products. The group of productive instruments from which we get one hundred bushels of corn, has exactly the same importance for the satisfaction of our wants as the hundred bushels of corn into which it is transformed. But these hundred bushels, the value of which is the standard for the value of the productive group, are still, for the time, a hundred future bushels, and, as we saw in previous chapters, future goods are worth less than present goods. A hundred future bushels are, therefore, worth, we may say, only as much as ninety-five present ones. From this it follows that Means of Production also, if estimated against present goods, are found of less value than the amount of finished and final products which can be made out of them. Our group of productive instruments which, in a year's time, will furnish us one hundred quarters of grain, is equal in value to one hundred quarters of next year's grain; but, like that grain, is equal to, say, only ninety-five quarters of this year's grain. Or, if we translate the whole matter into terms of money economy, and assume that, next year, the quarter of corn will be worth twenty shillings, then our group of productive materials, wherewith we hold in our hands the condition of our obtaining a money return of £100 next year, is equal in value to £100 next year, but to no more than £95 now. If, then, we buy or exchange these means of production now, the purchase price, naturally, is measured in present money, and we buy them for a smaller number of pounds sterling than they will bring their owner in the future.

Knowing now that the undertaker buys the future commodity, "Means of Production," for a smaller number of pieces of present goods than the number of pieces which will compose their future product, we ask, How does he come by his profit? The answer is very simple. From his "cheap" purchase, indeed, he does not get any result; for, estimated by its present value, the commodity is dear.13 The profit comes first into existence in his hand. It is during the progress of production that the future commodity ripens gradually into the present commodity, and grows at the same time to the full value of the present commodity. Time elapses; what was next year becomes this year; and on the great changing stage of life everything—man himself, his wants and wishes, and with them the standard by which he measures his goods—shifts one scene forward. The wants which, last year, were future wants, and little thought of as such, attain their full strength and their full right of present wants; and a similar advance attends the goods which supply these wants. A year ago they were goods of the future, and had to be content with the lower value that attached to them as such; to-day they are present goods, ripe for consumption, and enjoy the full value of such goods. A year ago it was to their prejudice that they were measured in the, then, "present" goods. To-day that standard has sunk into the past, and if the men of to-day measure them again in "present" goods, they stand equal with them in the first and chiefest rank, and suffer nothing by the comparison. In short, as time passes it cancels the causes by reason of which the then future commodity suffered a shrinkage of value, and brings it up to the full value of the present good. The increment of value is the profit of capital.

This is not to say, of course, that, to make present goods out of future goods, it is sufficient that time should elapse and the future become the present. The goods themselves must not remain stationary. On their part they must bridge over the gap which divides them from the present, and this they do through the production which changes them from goods of remote rank into finished and final products. If there is no production process, if the capital is left dead, the means of production always remain undervalued future goods. In the year 1888, a group of means of production which can be changed into a finished product in a year's process,—that is to say, by 1889,—is one year away from satisfying the wants of the present. If this group is left unused till 1889, its product, of course, cannot now be obtained till 1890 at the earliest, and it remains, as before, one year away from satisfying the wants of the present; its value has no opportunity to expand, and suffers the common fate of "dead capital"; it bears no surplus value, and no interest.

This is the truth about Undertakers' Profit, and I trust it will be found simple enough. The Socialists are fond of calling this profit "surplus value." The name is more applicable than they have any idea of. It is, literally, a profit from the increment of value of the future commodity transmuted, in the hand of the undertakers, into a finished present good.

Book VI, Chapter III

The Profit of Capitalist Undertaking. Complications.

The principle laid down in last chapter is simple, but in practical life it is, as usual, obscured by a multitude of casuistical details and developments. These do not, indeed, prevent its operation, but they conceal it under various phenomenal forms such as make recognition of it not always easy. Some of these developments we must take up, and we shall begin with one of the simplest.

The contraction of value from which, in our estimation, future goods suffer, is, as we know, by no means uniform for all future goods. It is graduated according to the time which intervenes between the present and the date at which the goods are ready for use. £100, for instance, which will be available in a year's time, will be valued at, perhaps, something like £95 in present money; £100 available in a couple of years, at £90; £100 available three years hence at £85, and so on.14 To this graduated contraction of value corresponds a steady graduated increase in value of those goods which are in process of ripening into present goods. A group of instruments which, at the end of a three years' production process, promises a product of the value of £100, and, in virtue of that promise, is valued at £85 at the beginning of the process, does not remain stationary at the value of £85 till the moment when the production is completed, and then make one bound up to its full present value of £100. Its value increases gradually as the time passes which divides the group from maturity, and the production process nears its completion. This circumstance is of great practical importance. Under the division of labour, scarcely any kind of production is carried through from beginning to end in the hands of one person. The separate stages of production become branches of production, visibly independent, and conducted by separate undertakers. As the value thus increases by stages, a corresponding gain accrues, as profit on capital, not only to the last undertaker,—the one in whose hand the good becomes an actual present commodity,—but to each of the undertakers, even to one who has brought the product only a single step nearer maturity.

A very common complication arises from the fact that productive goods contribute various portions of their useful content to the making of various final products, which products arrive at maturity at various points of time. This is the case with all durable productive goods. A plough, for instance, which lasts twenty years, will contribute a twentieth part of its life-work and use to the ingathering of twenty different harvests. Corresponding with this twofold property—that of being means of production, and at the same time durable goods—such goods, both in the formation and in the increase of their value, manifest a peculiar combination of phenomena; they unite the phenomena already known to us as characteristic of productive goods with certain other special phenomena which accompany all durable goods—even those that are not devoted to productive purposes. We have, however, to deal particularly with this latter class of phenomena in a later chapter, and accordingly we must postpone the full explanation of this complication until then.

Another complication arises from the fact, that almost all productive instruments admit of various kinds of employment, and that these employments turn out their finished products at different points of time.15 The same fuel, for instance, may be employed in cooking a meal, or in keeping up a smithy fire where the tools are made for boring a coal seam. In the first case, only a few hours elapse till the finished product is turned out; in the latter it may be years, perhaps decades of years. This is true in particular of that most important productive good, "unskilled labour." Various portions of it are always being employed simultaneously for productive purposes that come to maturity in the most varying periods of time. Some labourers must always get finishing work, which pays its wages almost on the moment; others must be employed in the intermediate stages; others, again, at the very beginning of the total work of production. Yet none of them has it written on his forehead whether his work is spent for the present, or for the coming year, or for the remote future.

At first sight it might appear that this complication must sensibly prejudice what we have laid down as to the formation and the increase of value. Here is a good which will be used, perhaps as a present good, perhaps as a future good. Suppose that it is valued as a future good, and therefore suffers a proportionate diminution of value, it seems as if this diminution were unjustifiable if, after all, the good is used as a present good. But, again, suppose it is valued, without deduction, as a present good, and is, after all, employed as a future good, there is no room for increase of value. But obviously, again, it is least of all possible to estimate different portions of the same commodity at different values,—one portion as a present good without deduction, another as a future good with deduction. Of ten loads of fuel of exactly the same kind and quality, one load is worth just as much as the other, as well to the householder as in the timber market.

The apparent difficulty, however, entirely disappears if we apply the universal law of value carefully to the special circumstances of the case. The value of a good is determined by its marginal utility. This marginal utility is the least important use or employment that is provided for out of the available stock of goods. Suppose the stock contains five hundred pieces of a kind which we shall call A. These goods possess the three-fold capability of serving (1) immediately as consumption goods, (2) as means of production in a five years' process, or (3) as means of production—in another branch of employment—in a ten years' process. If they are used for immediate consumption the capabilities are as follows:—one hundred pieces can be used with a useful result which we shall represent by the figure 6, another hundred with a result which we shall call 5, and a third hundred with a result which we shall call 4. But if the goods are employed in a five years' production process, there will be a product—call it X—of which the first hundred can be remunerative at 9, the second at 8, and the third at 7 per piece.16 But these products will not be available before five years. In to-day's estimate, therefore, their value, like the value of all future goods, suffers a reduction: the amount of this reduction depends upon the amount of the agio which emerges in favour of present goods as resultant of the many intersecting subjective valuations in the market. If this agio, for instance, amount to 5%, the value of the products available in five years, as compared with present goods, suffers a reduction of a little over a fifth part.17 In the valuation of to-day, therefore, the prospect of obtaining in five years, from one of the pieces employed as a means of production, a product which will then have the value of 9, is equal to a use realisable at the moment of 7.05. In the same way the prospect of obtaining products of the value of 8 and 7 in five years is equal to present uses valued at 6.26 and 5.48 respectively. Similarly if the goods are employed in a ten years' production process. If this gives the prospect of obtaining a product—call it Y—of which the first hundred can be remunerative at 16, the second hundred at 12, and the third hundred at 8, these products, as not available before ten years, suffer a reduction in to-day's estimate of something like two-fifths, and are equal, respectively, to 9.82, 7.35, and 4.91.

If we group together the present valuation of all these possibilities, we get the following table.

The stock of five hundred pieces admits of only five of the above possibilities being utilised. Naturally those five will be taken which, in the valuation of to-day—the only standard for to-day's decision—are the most remunerative. They are indicated in the above table by black figures, and we find them to be as follows:—

100 pieces used in immediate consumption; 200 pieces employed in a five years' process, in making the goods X; 200 pieces employed in a ten years' process, in making the goods Y.

The least remunerative of the employments indicates the marginal utility, and with it the value of the single good A. That least remunerative use bears the value 6, and, as it happens, belongs to the present. A good of the class A, then, will be valued at 6.

How does this stand now as regards the increment of value and the interest on capital? In the case of the hundred pieces which are employed in the service of the present, and fetch a utility measured by 6, there is no room for an increment of value. But as they afford their marginal utility immediately, they do not require to bear any interest. The pieces invested in the five years' process are worth 6, and in five years turn out a product which will be worth 8.18 Here there is room for an increase,—at the usual rate of 5% for five years,—in the ratio of, say, four to five; that is, from 6 to 7.5. Indeed, the room for increase, and the gain in value, is much greater. Beyond the normal interest, which is secured when the product obtains the value of 7.5, there is a further profit of 0.5 per piece as premium for finding and utilising the most favourable opportunities of employment in the present conjuncture; in other words, as undertaker's profit. But usually this premium will not long continue. According to principles with which we are familiar, its existence attracts competition, and competition depresses price. How far will it depress it?—Not lower than 7.5, for 7.5, obtainable in five years, is equal, in present valuation, to 6 of present money, which is just the value of the productive good itself. Anything less than this price of 7.5, consequently, would not be thought a sufficient equivalent for the sacrifice of a good valued at 6, and, in this unremunerative branch, production would be suspended until the limitation of supply again raised the price of the product to 7.5 of future money, as equal to 6 of present money. This being a state of things favourable to permanence, although the productive (and, therefore, future) good has received its value of 6 from a marginal utility which belongs to the sphere of the present, and so suffers no deduction on account of its future nature, there remains quite sufficient room for a rise to the higher value of the future product.

It is the same with the value and increase of value of those pieces invested in the ten years' process. At the moment, valued at the common marginal utility, they are worth 6. Their product, which becomes attainable in ten years, will then be worth 12. This leaves room for the normal increase of 5% per annum, from 6 to 10; and, therefore, over ten years, makes possible an increment of about two-thirds of the original value. Beyond this again it leaves room—at least in the first instance—for the obtaining of an undertaker's profit. Should this profit disappear later on in consequence of competition, the future value of the product remains, all the same, at 10, and thus leaves room permanently for the normal increase of value, in which consists the customary interest.

Thus we see that, although all the pieces of class A were valued at the one figure, this one value guarantees to each of the possible uses exactly that room for increase of value which the remoteness of its finished and final result demands. To the immediate use, where the utility of the good is at once realised, it guarantees nothing; to the five years' process it allows an expansion of about one-fourth; to the ten years' process an expansion of about two-thirds more than the original value. Perhaps there is even a greater expansion, in which case there remains a premium to the undertaker, but, in any case, it guarantees the expansion just named.

And this nice harmony is easily explained from what has just been said. In estimating the present value of the many-sided good, its possible future employments had already been reduced to present value, whereby they experienced a discount in exact ratio to their futurity. But only those future employments are found economically permissible, whose present (reduced) value is, at least, equal to the fixed value of the good, and whose effective future importance, therefore, is at least greater by the amount of the discount made pro rata temporis. Therefore each of these future uses has assured it in advance a corresponding scope for recovery of its value. The lapse of time replaces the value which was taken from the estimate by way of discount, and this, in the near-hand uses which require to bear little interest, is small, and is correspondingly great in the remote uses which must bear much interest.19

What has here been represented on a small scale by one slight instance, obtains over the whole field of industrial employment. It is not a few hundreds, but millions of productive units—days of labour, tons of coal, bars of iron, and so on—that are invested; they are invested, not in two, or three, but in hundreds and thousands of separate employments; and each of these employments has a different period of production. All those means of production enjoy one homogeneous market price. That price is formed by the available stock being distributed out among the most remunerative employments, and according to the degree of advantage which they bring.20 The most remunerative branches, in virtue of having the strongest purchasing power, are supplied first and with the greatest certainty; then the next remunerative branches; and so on down the scale till the stock gives out. Some last portion of the stock, then, is taken for some last branch of employment, and the modest advantage that accrues determines the modest measure of what those last buyers can pay for the productive unit. But as the market price for all portions of the commodity is a homogeneous one, the value of the employment last supplied determines the total market price of the means of production. But how, then, has the advantage and value of the individual kinds of employment been determined?—By applying the same discount to employments for future advantage as has been described in our illustration; only that, in rough, practical life, the discounting is made in a rough way that takes a great deal for granted. In practical life men generally find already in existence the things of which we have tried to explain the elements, and are glad to accept them, without much reflection, as accomplished facts. In the same way do they take interest for granted as an every-day fact, and without more ado, in all calculations relating to future employment, they add or deduct it. If an undertaker is considering whether or not he should lay out one hundred pounds on a productive instrument which will yield a result in two years' time, he simply calculates whether the future return will leave, at least, one hundred pounds over and above the two years' interest, and after deduction of the same. If he has thus deducted, in advance, from the future result an amount of interest proportioned to time and capital, it is a very natural thing that the future proceeds, when actually realised, should contain and yield that very amount of interest.

The foregoing cases do not by any means exhaust the series of casuistical complications which obscure the working of our principle in the infinite variety of practical life. Happily it is not necessary to exhaust them. Many are not of sufficient importance to justify us going into the tedious abstract demonstrations that would be needed to explain them, and, for the rest, I venture to hope that, in what has been already said, the careful reader will find enough to guide him among complications not expressly discussed, without further assistance from me.

There still remains for us, however, another important and by no means easy task. It is, in a word, to follow the abstract into the actual, and give it form and colour. Hitherto, by an argument which I hope is incontrovertible, but which I know to be highly abstract and general, I have tried to prove that it must be as I have maintained: I have now to show how it actually is so in the world of industry. So far I have deduced everything from the general proposition that productive goods are, by nature, "future commodities." I have shown that, as logical result, the general reasons which explain how future commodities have a less value, must also apply to productive goods, and thus explain how there is room for expansion into the full value of present goods, and for the appearance of a surplus value. I shall now attempt to show positively that all this is as I have said, and why it is. To this end I shall give a description of the markets, where, in economic life, means of production or productive instruments are exchanged against present goods, and shall try to show that, in these markets, the same motives, to which we ascribe in general the power of calling forth a difference of value between present and future goods, do really emerge, and emerge indeed in such combinations, and with such strength, that, as the result of the formation of price, there must always appear a disagio to the prejudice of the means of production. In doing so I hope not only to bring forward an adequate proof of the correctness of my general deductions, but also to obtain a number of new and important lights on the subject generally.

Book VI, Chapter IV

The Profit of Capitalist Undertaking. The Labour Market.

The exchange of Means of Production against final and finished present goods—practically against Money—is made in three kinds of market: the Labour market, the market for Uses of Land, and the market for Intermediate Products, such as raw materials, tools, machines, factories, etc. Inasmuch as labour and uses of land are the original means of production from the co-operation of which all finished products come into existence, the formation of their price is peculiarly the one which decides the existence of profit on capital. In the markets for intermediate products we have only the continuance of a process which has received its own peculiar impulse in the other two markets. And, of these two markets, again, the labour market is by far the more important. I shall, then, first take up the circumstances of this market, and shall endeavour to show and explain how the market price of the productive good "Labour" must always be less than the value and price of the finished product of labour.

Let us assume that, in the methods of production current in economical society at the moment, the making of a product ready for consumption requires a period of time extending in all over two years. The technical productiveness of this method, we shall assume, is such that it takes a week's labour to turn out a product which will have the value of 20s. The same product may be turned out by shorter methods, but the result will be disproportionately unfavourable. If a three months' process is adopted, the technical result falls to one-half; if the worker has no capital, and his process is, accordingly, one that yields its return immediately, the productiveness falls to one-quarter; that is, respectively, to 10s, and 5s. The price which can be paid for the commodity "labour" in these circumstances is the question now under discussion on the labour market between the labourer and the employers of labour. The price is fixed, in methods with which we are familiar, as resultant of the subjective valuations of both parties. How is it now with these valuations?

In the circumstances of modern industry, the wage workers scarcely ever possess sufficient means to utilise their own labour in methods of production extending over years.21 They have, therefore, to face the alternative of selling their labour, or of employing it on their own account in such short and unproductive processes as the scanty means at their disposal permit. Naturally they will make that choice which is most advantageous to them. Those workers who are well enough off to embark, on their own account, on a production process lasting at least three months, and yielding a return of 10s. per week, will be willing to sell their labour at any price over 10s.;22 at any price under 10s. they will rather work on their own account. On the other hand, those workers who are entirely without means, and who, working on their own account in a hand-to-mouth process, could only have a return of 5s., will be willing to sell their labour at any price above 5s. As, unfortunately, the labourers who are entirely without capital, form to-day the great majority, we may assume for our illustration that the "Supply" of labour will be represented by a long row of workers who are ready, in the worst case, to sell the week's labour for 5s., and a shorter row who will do the same for 10s. present money.23

How is it now with the Demand for labour that confronts this supply?

Once for all, let us make this entirely clear. If the capitalists were to realise their entire resources as present goods,—that is, to consume their wealth in present enjoyment,—the want of the present would evidently be provided for in superfluity, while the want of the future would have no provision whatever. They must, therefore, find it positively advantageous to change a part of their resources into future goods of some kind or other. In other words: if we look only at the relations of want and provision for want in present and future, present goods, as such, are worth even less than future to the owner of a stock of wealth which is greater than his present wants. It is true, of course, that there is a very simple way of changing present goods into future: they can be stored away either in natura, or in the neutral form of future money. This possibility naturally saves them from the prejudice to their value, which would, in itself, result from the overabundant provision for the present, but, on the other hand, it does not give them any positive advantage in value, or, at any rate, a very trifling one.24

Nor can the underestimate of future wants form a reasonable basis for any such advantage. It will seldom be strong enough to outweigh the counteracting consideration of the overabundant provision for the present, and to prevent the capitalists from preferring to employ part of their wealth in the service of the future. Persons, moreover, in whom this want of foresight might, exceptionally, be found, are not, or at least would not long remain, capitalists. An estimate like theirs, dictated by momentary desire and carelessness of the future, would soon bear its consequences, and bring their fortunes into spendthrift consumption.

Of the three considerations, therefore, which, as we have seen, generally serve as foundation for the preference of present over future goods, the first two do not apply as regards the great majority of capitalists. It is our third consideration, the well-known technical superiority of present goods, or, as it is usually called, the "productivity of capital," which is decisive with them. The way in which it takes effect is essentially different in simple circumstances from what it is in the full development of our modern economic life.

In simple circumstances, where the undertaker is himself a worker, and has no capital to speak of, present goods immediately obtain a higher use value. An undertaker, for instance, has just enough wealth to defray the subsistence of one working person for four years,—or to advance that amount. The choice is now open to him, either to work by himself in a four years' process, or to assume a helper and work alongside of him in a two years' process. In a two years' process the week's labour yields, as we have assumed, 20s.: in a four years' process—since longer methods are, technically, more productive—it will yield, say, 24s. The balance now stands as follows. If our capitalist pays his helper, for the week's work, the full 20s. in present money, he has to pay him £104 for the two years' work; from its product he recovers just this sum of £104; and finally, he can pay himself only 20s. a week, that is, in all, £104. His total net income, for the two years, thus amounts to £104. On the other hand, if, instead of spending £104 in paying a labourer, he spends it on his own maintenance during a third and fourth year of production, he may, from the 104 weeks of his own labour time at the higher rate of 24s. per week, recover £124:16s.; so that his two years' net income is increased by £20:16s. In these circumstances it is obviously more advantageous for the capitalist to have no helper. To obtain any advantage from a helper it must be possible to pay him at such a price, that the capitalist gains more by the buying of another person's labour than what he loses in the realisation of his own labour by the shortening of the production period: in other words, that 20s. a week present money paid in wages should bring him more than 24s. a week, future money, in products. This will only be the case if he can pay a weekly wage that is under 16s. 8d.25

Were the circumstances of capitalist production generally so simple as this, the value to the undertakers of 20s. in future products would, speaking generally, be equal to the value of 16s. 8d. present money,—the actual figures varying a little, but not the tendency. And if the buyers value the commodity labour at not more than 16s. 8d., while the sellers value it at, perhaps, 5s. or 10s., it is clear that the resultant of these valuations, the price of labour, will, in no case, exceed the amount of 16s. 8d., and must a fortiori come under 20s., the full sum of the future product—which was the point to be proved.

But the circumstances of present-day industry are not so simple. The great majority of our undertakers are not themselves workers, and their capitals, moreover, are generally so great as to be far above what any one man could use for his subsistence during the very longest practicable process. The possibility, which capital gives its owner, of employing his own labour in longer production processes does not, therefore, as a rule, under present conditions, give any higher use value to present goods. Our illustration of simple circumstances has very great importance in other lines of proof,—of which later,—but it does not suffice to explain the profit of capital in the circumstances of capitalist industry. These very complicated circumstances, however, develop a phenomenon which works, in another form, to the same end; this phenomenon is Credit. The capitalist cannot use his present goods to make his own labour more fruitful, but others are willing to take them in exchange for future goods to make their labour more profitable, and are very willing to pay an agio in future goods. And, evidently, the capitalist need not barter his present money at par with the workers for their future product, when he can obtain on the loan market, for a certain sum of present goods, a greater sum of future goods.

One is tempted to apply this fact to the explanation of profit, as if it were owing to the chances offered on the market for loans that the capitalist's present goods had, in all cases, a higher subjective exchange value than future goods. But this is not my idea of explanation. We have no right either to represent loan interest as a fait accompli, and explain natural profit on capital from it, or, conversely, to represent the latter as a fait accompli, and explain loan interest thereby. The fact is that the Loan market and the Labour market are two markets on which one and the same commodity is mutually offered and demanded, viz. Present Goods. On both markets the demand is for means of subsistence, with the view of making labour more profitable by longer processes of production; only the circumstances of demand are different. For the present goods which he receives the wage worker gives, wholly and entirely, the indefinite future product which his labour may create: the borrower in productive credit—consumptive credit is much less important, but manifests its effects, in the long-run, in exactly the same direction—gives, in exchange for present goods, a definite quantity of future products, and, if the actual product differs from this quantity, may gain or lose by it. Thus wage workers and borrowers form two branches of the same demand; they mutually support its effect; and jointly help to form the resultant price. Only in outside appearance are they two distinct markets; in reality they overlap each other; and the market price of present goods is their joint result.

To get to the root of the matter therefore, before considering isolated and partial markets, we must take a comprehensive survey of that total market for advances of subsistence which, in every economic community, is built upon numerous communicating partial markets.

Book VI, Chapter V

The Profit of Capitalist Undertaking. The General Subsistence Market.

At the outset we must enunciate a proposition, as simple as it is fundamental, but one on the proper understanding of which everything depends: In any economical community the supply of subsistence, available for advances of subsistence, is—with one trifling exception—represented by the total sum of its wealth (exclusive of land). The function of this wealth (Vermögen) is to maintain the community from the time that their original productive powers are put in motion till these powers obtain their final and mature fruits—in other words, to maintain the community during the average social period of production. The greater the total stock of wealth in the community the longer may be this social period of production.

Here we really have three propositions, but they are so intimately connected that they may be conveniently grouped into one, and explained and proved by one and the same argument.

If we look at the uses to which a country's accumulated wealth is destined and put—leaving land out of account—we get something like the following picture. Some few owners of wealth, whether from necessity or from prodigality, themselves consume it. Others who produce on a moderate scale for their own account spend their wealth in furnishing themselves with the necessary maintenance during their production period. But all other wealth—and that is by far the greater amount—is, in some form or other, brought to the great market for Advances of Subsistence as Supply. The owner either puts it into some undertaking carried on by himself, or he lends it to other people. If he puts it into his own business it is, directly or indirectly, employed in giving advances of subsistence to labourers. I say directly or indirectly, for the division of labour, splitting up, as it does, the one united work of production into a series of apparently independent stages, causes an important distinction in form, although it does not affect the essence of the matter. If the different stages of one and the same production process were united in the hand of one and the same undertaker, he would not buy any previous product: all previous and intermediate products needed would be made, from the beginning, by the workers in his employment. Here, therefore, his entire "business capital" would evidently be directly devoted to advancing subsistence to labourers. As it is, under the division of labour, he gets his previous products made by other undertakers, and buys them from these other undertakers. This amounts to saying that, by this purchase, he takes upon himself the burden of the advances hitherto borne by the other undertakers, and thus puts them again in a position to take upon themselves the burden of advancing subsistence for the following period of production. These previous and intermediate products, then, thus purchased, he gets worked up by labourers who are directly in his pay. In this way, therefore, by his wage payments he advances subsistence directly to one set of workers, and indirectly by his "outlays" to a number of other sets (employed in the preceding stages).26

If, again, the owner lend his wealth to others, it may be either for consumption or for production. If the former, the sum lent is a direct advance of subsistence to the borrower: if the latter, it passes, as already described, from the borrowing employer to the labourers, as advance of subsistence. Thus the entire accumulated wealth of society—with the very trifling exception of that portion which the owners themselves consume27 —is really brought into the market as supply of advances of subsistence.

But the objection may be raised: How can the entire stock of wealth be offered as advances of subsistence when that stock consists only partially, and, indeed, to a very small extent, of actual means of subsistence, such as food, clothing, dwelling-houses, etc., while the great bulk of wealth is represented by goods that are not adapted for immediate consumption, such as tools, machines, raw materials, factory buildings, and the like?

The seeming inconsistency is, however, easily explained; it is simply that men never need their subsistence for the entire production period all at once. If, in any community, ten millions of men invest their original productive powers, Labour and Uses of Land, in an average production period or two years, it is quite unnecessary—indeed undesirable—that at any one moment the means of subsisting the ten millions for the whole two years should be accumulated in finished form. It is sufficient if there is enough in finished form for, say, one month, and if, in the meantime, the means of subsistence for the following month are ripening into finished goods. In other words, all that is needed is that previous labour should have provided so many goods—partly ready for consumption, partly in the intermediate form of products ripening successively into consumption goods—as will cover the subsistence needs of two years, and thereby make it possible for the workers to invest their current labour in methods of production that will turn out the finished product in two years.

Here we come to the second part of our threefold proposition. The entire wealth of the economical community serves as subsistence fund, or advances fund, and, from this, society draws its subsistence during the period of production customary in the community. All goods which appear to-day as the stock or parent wealth of society, so far as they are not already consumption goods, will, in the more or less near future, after a certain addition of finishing labour, ripen into consumption goods, and will consequently cover, for a more or less lengthy time to come, the people's demand for consumption. Of course this must not be understood as if there were some sharp line of division separating the period which is covered by the wealth already on hand from that later period which is not yet covered, and for which, consequently, provision must be made through the current productive powers. What I mean is that the stock of wealth projects itself into the future, as provision for the consumption of the future, as it were by stages, and not all at once.

It does so in two respects: in respect of the number of classes of goods for which provision is made, and in respect of the degree of maturity at which the work of production stands in the present. As regards the first; it is to be noted that, for technical reasons, in many classes of goods (e.g. in various foods) provision is limited to the near future, perhaps to a couple of months, while, simultaneously, in other classes of goods, provision may be made for a couple of years. In others, again, where permanence is aimed at, or goods must be got ready long in advance (e.g. in dwelling-houses, mining products, machinery, and the like), the means of provision must be prepared perhaps twenty or fifty or even a hundred years before. Thus, then, it is in the nature of things that goods required in the in future must now be ready or almost ready; for goods needed later, it is enough if, at the moment, they have gone through, perhaps, half of the production process; while, for goods required still later, it may be enough if their production should have just begun. If a commodity, for instance, requires five years to make, then, in the year 1888, the goods of this class destined to be used in the year 1889 must be ready, perhaps to the extent of four-fifths; those to be used in 1890 to the extent of three-fifths; those to be used in 1891 to the extent of two-fifths; while, as regards goods destined for the service of the year 1892, it is enough if, at the moment, they have gone through the first fifth of their total production process.

Thus it comes that the stock of wealth existing at the moment makes provision for the future in a doubly decreasing ratio: in proportion as the time of consumption is remote there are fewer classes, and the goods in these classes are less advanced or mature. To get an adequate representation of the circumstances of provision, then, we should have to suppose that the stock of wealth existing on 1st January 188828 contains 9/10 of the goods required during 1888 and those goods are, on the average, 9/10 finished, so that, on the whole, the labour required for the needs of 1888 is already finished and incorporated in the existing wealth to the extent of 81/100: that, further, it contains 8/10 of the goods required during the year 1889 7/10 finished, thus incorporating 56/100 of the labour required for 1889: that it contains 6/10 of the goods wanted for 1890 4/10 finished, thus incorporating 24/100 of the labour required for 1890, and so on for 1891, 1892, 1893, incorporating respectively 12/100, 6/100, and 4/100 of the total labour required for the service of these years. Adding up these amounts we come to the result which I wished to elucidate by this illustration; viz., that the entire existing stock of wealth provides in advance for something like two years'29 demand of the population, with this peculiarity that the stock of wealth, instead of covering the exigencies of two continuous years, covers successively a decreasing portion of the exigencies of a greater number of calendar years.

Now the way in which this provision is made by the existing wealth, and the extent to which it is made, exercise a very suggestive and important influence on the employment of the original productive powers, labour and uses of land, coming into operation in the current year. For simplicity's sake we shall consider the former only in detail. If the stock of wealth in existence in 1888 covers the want of the current year to the extent of 8/10, it is clear that from the labour of this year the other 2/10 will first be covered. But it is as certain that the remainder of the current labour will not be devoted to the service of the year 1888, and that for two reasons: (1) that any return in the year 1888 could only be obtained by an unremunerative hand-to-mouth method of production, and (2) that the few products thus obtained would come upon a market already stocked and find poor sale and poor prices. The other 8/10 of the labour of the year will, therefore, be directed to the service of later years. And here, again, the following is clear: the fewer the wants of 1889 covered by the existing stock of wealth, the greater will be the amount of the current year's labour directed to the service of the year 1889—if there is not to be a gap in the provision from year to year—and the smaller will be the amount of labour directed to the service of the years that come after it. Conversely if the wants of 1889 are already (relatively speaking) amply covered by the stock of wealth, only a small fraction of the current labour will go to the service of 1889, and a proportionally greater amount can be reserved for remoter periods.30 The current labour thus adapts itself naturally to the existing stock of wealth. The one begins where the other ends. If it were to begin sooner, and so duplicate the provision already existent, it would come under the double disadvantage, already mentioned, of overstocked markets and less productive methods of production; and if it were to begin later, there would be a gap in the provision which would immediately cause scarcity prices, and thus call out speedy assistance from the productive powers.

Thus it is—and here we come to the last part of our threefold proposition—that, in reasonable economic speculation, the current productive powers will and must, on the average, be directed to remote productive purposes (or, in other words, invested in longer production periods), in proportion to the length of time for which the existing stock of wealth is able to provide. If the accumulated wealth is so small that it only provides subsistence for one year, it is perfectly clear that it is impossible to invest the current productive powers in processes that average three years, since, in the interval that must elapse between the consumption of the old wealth and the production of the new, the people would starve. And it is equally clear that it would be, in the highest degree, foolish and uneconomic to make the production period shorter than the existing wealth allows. The average period of production in a community is in exact correspondence with the amount of its stock of wealth, and is entirely conditioned by it.

The principle is clear, but one not unimportant question of figures still remains to be considered: What is the numerical ratio between the amount of a nation's wealth and the average production period which that wealth limits?

At the first glance one would be inclined to answer;—the average production period may be just so many months or years as there is months' or years' provision in the accumulated wealth. If, for instance, the year's wants of a nation are five hundred millions, and the nation's wealth contains goods to the value of a thousand millions, we should be inclined to say that the average production period would be two years.

This answer, however, would be incorrect: or, to put it more exactly, it would only be correct under conditions which do not actually occur in practical life. It would only be correct, that is to say, if the work of production was not carried on by stages. If production were so arranged that all the workers co-operating generally in the manufacture of a finished product were employed simultaneously in the same stage—I mean if all the workers were to begin with the first and preliminary processes simultaneously; were then to pass on simultaneously, as it were in line, to the second, third, fourth stage, till, in the end, they simultaneously turned out the total product finished and completed,—then, of course, the community's wealth must contain, in the form of finished goods, enough to supply the wants of just as many years as there are years in the production period. Suppose, for instance, that the manufacture of clothing were so arranged that all the workers employed in it prepared the wool in the first year, built machinery in the second, spun yarn in the third, wove it in the fourth, and made up the cloth in the fifth, the stock of wealth would require to contain finished provision for the entire demand of all the workers during five years. For, under a division of labour of this kind, during all the five years there would be no addition of finished goods to the original finished stock.

It is quite different if production is arranged in stages, as it actually is in modern industry. Of the workers occupied in the production of clothing— to continue our illustration—various groups are employed simultaneously at various stages of it. In each year a fifth part of them, perhaps, will produce wool, another fifth make machinery, another spin, another weave, and another do the making up.31 The result is that, during the five years that elapse between the growing of the wool and the making of the coat, additions are successively made to the fruits of labour which constituted the stock of wealth at the beginning of the period: that is to say, other fruits of labour, the results of labour expended at later periods, are arriving at the stage of finished goods. Say, for instance, that on 1st January 1888 a group of labourers begin the manufacture of woollen clothing. Nothing of the fruits of this labour will be ready before 1st January 1893. On the other hand, besides the wholly or partially finished products contained in the inventory of 1st January 1888, the following goods will arrive at maturity before 1st January 1893;—viz. the fruits of one year's labour of those workers who are busy with the final stage in 1888; of two years' labour of those busy with the second last stage in 1888 and with the last stage in 1889; of three years' labour of those who in 1888 reach the third last and in 1890 the last stage of production; and, finally, the fruits of four years' labour of those who, in 1888, are occupied with the second stage, and will reach the final stage in 1891. Now since these goods, thus successively maturing, would provide for a very considerable portion of the subsistence needed for the five years 1888-92, it is evidently not necessary that the community, before entering on a five years' production period, should have a stock of wealth equal to the entire five years' needs. Or, if there is such a stock, a longer process than five years can be entered on.

If we look at the same thing from another side, and one perhaps better suited to illustration, it is clear that, where workers are employed in stages, subsistence need be provided five years in advance only for those who work on the lowest or earliest stage of the production. The workers on the second stage, the fruit of whose labour matures after four years, require subsistence advanced them only for four years. The workers on the third and fourth stage require subsistence only for three and two years respectively. The workers on the last stage, those whose products will be finished in a year, require advances only for a year. Striking the average, we may say that, to allow the entire body of labourers to embark on a five years' production process, all that is required is subsistence for (5 + 4 + 3 + 2 + 1)/5 = 3 years, or a little more than half the period of production.

What is true of a five years' process is true for all periods. If we take the trouble of calculating a number of concrete examples,32 we very easily come to an exact statement of the law relating to it as follows. The stock of wealth must be sufficient for half the production period, plus half the usual stage period. If, for example, the work of production is carried on only by yearly stages—that is to say, if finished products are turned out by the process in question only at intervals of one year—then, in a five years' production period such as we have been discussing, the stock of wealth must last for half the production period (i.e. for 2½ years), and, beyond that, for half what we have called the "stage period" (i.e. for half a year); in all, three years. If again the stages of production are monthly, so that every month there is an output of finished products, the stock of wealth need only be such as will last 2½ years + ½ month. To put it in general terms we may say: If the production period embraces x stage periods the stock of wealth must always be sufficient for (x + 1)/2 stage periods.

Obviously, the greater x is, the smaller is the difference between this exact formula and the rough expression of "half the production period"; while x again increases with the length of the production period and the subdivision of the stages. In a two years' process where goods are turned out once a year, the production period embraces two stages: the value of the exact expression is, therefore, (2 + 1)/2 = 1½ years—that is, fully 50% higher than the rough expression. If, again, the process takes five years, and the goods come forward by monthly stages, x = 60, and the exact expression has the value 61/2 = 30½ months, which shows very little difference from "half the production period" of 2½ years. And if the production period be ten years, and the output be a weekly one, x will equal 520, and the exact expression will have the value of 260½ weeks, which practically coincides with the rough expression of "half the production period." Now since, in any organised industrial community, the average process is pretty long, and the subdivision into stages very minute—for not a day passes but finished products are turned out of some workshop or other—it may be assumed without much error that a community may, on the average, engage in production processes which are twice as long as the period for which the accumulated stock of wealth would provide subsistence.33

Book VI, Chapter VI

The Profit of Capitalist Undertaking. The General Subsistence Market—(continued)

It may be thought that in the disquisition of last chapter we have wandered entirely from our subject, the subsistence market. This, however, is not the case. We are here, indeed, at the very centre of the question, for we are speaking directly of those things which form and regulate the supply and demand on the subsistence market. Who are the people that require to get subsistence advanced them? The answer is: Every one who wishes to produce in capitalist methods.34 How much is required?—An amount proportioned to the length of the production process. And in what form is it required?—By instalments. Again, who are the people that have subsistence to give?—All owners of wealth who do not consume but "save" it. How much can they give?—As much as their stock of wealth contains. And in what form can they give it?—Similarly, in instalments—in the proportion that the unfinished goods contained in their inventory successively mature. This is the true nature of what occurs in our market for means of production and in our market for credit—over which, I admit, the division of labour and the use of money throw a veil very difficult to penetrate.

Now at what price will finished present goods be exchanged for future goods on the subsistence market? This is the question in which our whole interest peculiarly centres. To answer it we must describe, with more care than hitherto, both the extent and, in particular, the intensity of supply and demand. To begin with Supply.35

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

As to the intensity of supply, it may be assumed from what was said on p. 315 as regards modern economic circumstances, that, to the capitalists, the subjective use value of present goods is not greater than that of future goods. In the most unfavourable case, then, they would be willing to give almost 20s. present money for 20s. obtainable in two years, or, what is the same thing, for one week of labour which would bring them in 20s. in two years.36

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

1. An enormous number of wage-earners who cannot employ their labour remuneratively by working on their own account, and are accordingly, as a body, inclined and ready to sell the future product of their labour for a considerably less amount of present goods. Recurring to the figures of our illustration on p. 313 we may assume that, for the future product of 20s. value—the product turned out complete as the result of a week's work, and valued after two years at 20s.—one class of the labourers will, in the most unfavourable circumstances, accept a price or wage of 10s., while another class will accept as low a sum as 5s. in present money.
2. A number of independent producers, themselves working, who by an advance of present goods are put in a position to prolong their process, and thus increase the productiveness of their personal labour, say, from 20s. to 24s. per week. Since these persons, obviously, get an advantage from this advance so long as it enables them to obtain anything over 20s. a week, they will be prepared, where necessary, to give up a portion of the surplus product of 4s. a week, as agio on the present goods to which they owe this surplus product. I purposely here mention only those undertakers who demand productive credit for the assistance of their own labour, and not those who demand it for the employment of workers auxiliary to themselves. The demand of these latter forms only a passing stage: they take some part of the supply, provided by the owners of wealth, out of the market, but only to offer it again, on a different part-market, to the auxiliary workers.
3. A small number of persons who, on account of urgent personal wants, seek credit for purposes of consumption, and are also ready to pay an agio for present goods.37

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

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

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

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

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

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

And this result, as regards the normal and really economic provision of society, is no less healthy than it is necessary. The possibility of obtaining means of subsistence free of agio would be certain to tempt undertakers into immoderate extension of the production period. If this were to occur only partially and in a few branches of production, naturally the limited stocks of subsistence would leave so much less for the other branches of production; these latter would have to curtail their processes unnaturally; and there would ensue a deficiency in the social provision which would outweigh the increased return got from the favoured branches through the immoderate extension of their processes.38 But if the excessive extension were to be introduced all over, the community's stock of subsistence would come to an end sooner than the fruits of processes thus unduly extended could mature; there would be deficiency in provision, want, and distress; famine prices would recall the misdirected natural powers, and put them, with difficulty, to supply provision for the moment. All this could not happen without serious disturbance, expense, and loss.

Now the constant presence of the agio on present goods is like a self-acting drag on the tendency to extend the production period; without checking it all at once it makes it more difficult, and more difficult in proportion to the projected length of the process. Extensions which would be harmful as regards social provision are thus made economically impossible. Moderate extensions over the average process, however, are not absolutely prevented, but are limited to those branches where, from peculiar economic or technical circumstances, the productiveness that goes with the extension of the period is so great that they can bear the progressive burden of the agio. Branches, again, where longer processes are somewhat, but only a little, more productive, are tempted to escape the burden of agio by recurring to periods under the average. Thus, finally, under the influence of the agio, the total fund of subsistence is divided out automatically among the individual branches of production, in such amounts that each branch adopts that length of process which—in the given condition of the fund—is most favourable to the total provision.39

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

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

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

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

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

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

And, finally, the fact that the price of labour is relatively low, is not the naked result of an exploitation in which want forces the labourers to acquiesce. To some extent, although, probably, to a less extent, the same would be the case without any compulsion, if wealth were divided almost equally among all. To prove this let us recur for a moment to the consideration of those primitive circumstances which I hurried over as not immediately appropriate to modern economy.40 Suppose a society where all are owners of wealth, and all independent producers. Their labour, embodied in, say, a two years' process, is moderatively productive. Suppose that, in this society—which is not a poor one—a certain producer possesses means enough to make it possible for him, either to maintain himself for six years, or to maintain himself and one worker for three years. The product of a year's labour, we shall suppose, is as follows:—in a two years' production period £52 (at 20s. per week), in a three years' process £60, in a six years', £65.41 If this man employs his wealth in lengthening the period of his production without employing an assistant, he obtains by his six years' labour 6 × 65 = £390. If he employs an assistant, and works along with him in a three years' process, he reaps from his own labour in six years 6 × 60 = £360, while the same amount is produced by the labor of his employé. How much can he pay this employé in wages?

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

Book VI, Chapter VII

Interest From Durable Goods

Material goods are of use to mankind through the action of the natural powers that reside in them, or, as I have expressed it in another place, through the rendering of their material services. On the nature and importance of these material services I have said enough in my former work,42 and I shall repeat only a few considerations which seem necessary to connect what was then said with the subject now before us.

Many goods are so constituted technically as to be capable of rendering one single service, and in that service to exhaust the whole of their useful content. These are what we call Perishable goods. In them the good and the service coincide. Many other goods, again, are able to render several successive services. We call these Durable goods: tools, dwellings, clothes, land are instances of such. Here the single service forms a smaller economical unit clearly distinguished from the good itself, and is capable of obtaining a certain economical independence. To afford a single and limited act of satisfaction, a single service may be detached from the useful content of the good. Various services of the same good may be independently and differently disposed of. Single services, or groups of services, may be independently transferred, gifted, or sold to different people, as we see every day in the familiar legal contracts of Lease and Hire. Such services may obtain an independent price, and, as this of course presupposes, an independent value.43 It is the value of these material services that now claims our attention.

This value cannot be subject to any other laws than those which regulate the value of goods in general. A service obtains value exactly as a good does—that is, by the satisfaction of some want being dependent upon it—and the amount of its value is measured by the importance of the dependent want—that is, by the amount of the marginal utility which may be obtained from a service of such kind and such extent.

Thus there is, naturally, an intimate relation between the value possessed by the material good itself, and the value possessed by its services. The nature of this relation scarcely requires explanation;—a material good obviously has the same value as the sum of all its services. If a good is capable of rendering ten services, and if the satisfaction of a certain want depends on each of these services, it is obvious that what depends on the possession of the good is the receiving of these satisfactions, and, indeed, of all the ten satisfactions from which the services get their value.

Naturally the case of perishable goods is the simplest. Here the value of the single service coincides purely and simply with the value of the good itself. The value of the service rendered me by a cartridge is identical with the value of the cartridge. The case of durable goods is more complicated. We have always to think of the value of a durable good as a compound amount; as made up of the importance of more or less numerous wants to which it ministers by its successive services; or—to put it another way—as made up of the individual values of the services on which those satisfactions depend. If a farmer is calculating the use value of a threshing-machine with a view to buying it, he will take into account the time the machine will last and the work it is capable of doing, and will calculate from that how many services it will render, and how much each service will be worth to him.44

In this, however, there may be another complication. If the services of the durable good be exhausted in a short space of time, the individual services, provided they are of the same quality—which, for simplicity's sake, we assume—are, as a rule, equal in value, and the value of the material good itself is obtained by multiplying the value of one service by the number of services of which the good is capable. But in the case of many durable goods, such as ships, machinery, furniture, land, the services rendered extend over long periods, and the result is that the later services cannot be rendered, or at least cannot be rendered in a normal economic way, before a long time has expired.

As consequence, the value of the more distant material services suffers the same fate as the value of future goods. A material service, which, technically, is exactly the same as a service of this year, but which cannot be rendered before next year, is worth a little less than this year's service; another similar service, but obtainable only after two years, is, again, a little less valuable, and so on; the value of the remote services decreasing with the remoteness of the period at which they can be rendered. Say that this year's service is worth 100, then next year's service—assuming a difference of 5% per annum—is worth in to-day's valuation only 95.23; the third year's service is worth only 90.70; the fourth year's service, 86.38; the fifth, sixth, seventh year's services, respectively, worth 82.27, 78.35, 74.62 of present money. The value of the durable good in this case is not found by multiplying the value of the current service by the total number of services, but is represented by a sum of services decreasing in value. If the current year's use of a machine is worth 100, and the machine is capable of doing work of equal quality for five years more, the machine is not worth 6 × 100 = 600, but 100 + 95.23 + 90.70 + 86.38 + 82.27 + 78.35 = 532.93.45 Now what happens during the working life of this machine?—In the first year of its use the owner realises the "current" service with its value of 100. Naturally this service, thus consumed or rendered, comes off the value of the machine (which we may call the "bearer of the use"), and the good suffers a loss of value. But this loss of value cannot be quite so great as the value of the service rendered and deducted. It is partly compensated by the increased value of the services that still remain embodied in the machine. That particular service which, at the beginning of the year of use, figured as "next year's," and had a value of only 95.23 in present money, figures by the end of the year as "this year's use"; it has advanced one year nearer maturity and grown into the full present value of 100. Similarly the former third year's service has now become next year's, and its value has grown from 90.70 to 95.23: the fourth, fifth, and sixth year's services have passed into the rank and value of third, fourth, and fifth year's services. Behind each of these latter services there remains another service ready to take its place, and entirely supply it. It is only the last, the sixth year's service, that is not replaced by any succeeding one. And thus we find that the loss of value which the durable good suffers during the year's use turns out exactly equal to the initial value of the most remote service inherent in the good. This value, of course, is less than the value of the present service, the service known as the "current return": and thus it happens again that, to the owner of the durable good, something of the current return always remains over as net profit or net interest, after deducting the loss of value which the good suffers during its year of use (that loss of value familiarly known as "wear and tear"). This "something" amounts exactly to the customary percentage of the total value (the "capital value") of the parent good, the bearer of the utility—a coincidence which it is the easiest thing in the world to explain. For this "something" is got from the increasing value of the total services of the goods as these services come nearer to the present. Now, naturally, each service increases in value as it comes nearer the time of its realisation in the same ratio as it was underestimated formerly by reason of its remoteness: that is to say, it increases in value by the usual market percentage on its individual value. But since, as we saw, the sum of the individual values of all the services inherent in a good constitutes the value of that good, the increment of value of all the services added together must be exactly equal to the usual market percentage on the total value of the good.

To put all this into figures. At the beginning of the first year of its use the good, as bearer of six annual services, was worth in present value 100 + 95.23 + 90.70 + 86.38 + 82.27 + 78.35; that is, 532.93. At the end of the first year, as now capable of five annual services of the present value of 100 + 95.23 + 90.70 + 86.88 + 82.27, it is worth 454.58. The loss in value is, therefore, 78.35, which is exactly the same as the former most remote service was. But since the sum received from the current year's service—the value of the service sold and now deducted—amounted to 100, there remains a net gain of 21.65, which is exactly 5% of 432.93, the sum which the good became worth immediately on deduction of the first service realised, as one might say, to account.46

Similarly, in the second year's use, the owner again realises the service now become present and worth 100. This comes off the value of the parent good. But the succeeding service, which before had become worth 95.23, now arrives at the full value of 100: that succeeding it, becomes worth 95.23, and so on. Only the last service, that originally worth 82.27, finds nothing to replace it. At the end of the second year's use, then, the good, as capable of four remaining annual services of the individual values of 100 + 95.23 + 90.70 + 86.38, is worth 372.31. As against the value of 454.58 which it had at the beginning of the year, it has suffered a loss of value of 82.27 which is equal to the value of what was the last service; and as against the receipt of 100, it returns 17.53 net, the interest on the somewhat reduced capital47 that remains. And thus it goes on from year to year, the gross return always remaining the same (because by hypothesis the amounts of service remain unchanged in technical quality), the quota for wear and tear always increasing (because the marginal service, that which determines the loss of value, stands nearer to the present, and so to the full present value), and the net interest always decreasing (in correspondence with the decrease of the capital, owing to wear and tear, on which interest has to be paid), till finally the good has entirely given up its useful content and is, as we say, consumed.

Put in general terms, then, we get the following very simple explanation of the phenomenon of interest on durable goods. The owner of a durable good can always realise the full (higher) value of the then present utility, and this represents the "gross return" of the good, its "gross interest." He loses, on the other hand, on account of the steady advance of the more remote services towards the present, only the smaller value of the last service then inherent in the good. This smaller value determines the amount of the "wear and tear," and thus there is always a difference between gross interest and the amount of wear and tear, which difference forms his net profit or net interest. The cause, then, to which net interest owes its existence, is nothing else than an increase of value of the future services—services which were previously of less value, but during the period of the good's use have pressed forward into or towards the present.48

Thus our theory traces back the profit which durable goods yield their owner to the selfsame causes as explain interest on loans and undertakers' profit on production. I think I am justified in claiming this as the peculiar merit of the theory, and, at the same time, as a strong proof of its correctness. For it was just this interest on durable goods (Nutzungsgüter) that formed the stone of stumbling to all earlier interest theories, and stood, as it were, a standing contradiction of them. Supposing that the other kinds of interest could be explained by the productivity of capital, obviously this was no explanation of the interest yielded by a durable consumption good which produced nothing, such as a dwelling-house, household furniture, a hired piano, the books of a lending library. Or, if undertakers' profit was traced, with more or less appearance of justification, to an exploitation of the labourers, the question remained: What labourers are exploited by the owner of a house? Suppose he has paid away the whole £2000, the worth of his house, in wages to the labourers who built it, so that in the origin of the house there is not a particle of profit from exploitation: still, the house, year after year, yields him £100 of interest on capital. Where shall we find the worker from whom the £100 could have been taken either by fraud or force?

The "Use theory" appears, at first sight at least, better able to account for this form of interest, since it borrows its special foundation directly from the phenomenon of the durable use of nonperishable goods.49 But neither does it get beyond the mere semblance of an explanation. It gets entangled in subtleties of a "wider" and a "narrower" use, of a "gross" and a "net" utility,—terms, by the way, which may be quite proper as convenient expressions to indicate certain phenomena, but represent anything but clear and definite conceptions—and leaves entirely unexplained the nature of the relations existing between the value of the net and the value of the gross use, between the value of the parent good and the amount of its wear and tear. Whether net interest is high because the value of the capital is high, or whether capital value is high because net interest is high; whether the amount of gross interest is cause or effect of the value of the other two amounts—on these questions we should seek in vain, in the writings of Hermann, Knies, or Schäffle, for anything approaching to clearness of inquiry and for anything like a real explanation. To all these questions our theory gives one concise answer. The value of material services (Gross Use) forms the first link in the causal chain. The value of the "bearer of the use," the parent good, is the sum of the individual values of its material services. Wear and tear is a result of the diminution of the services which still reside in the good, and is, on account of the progression in time of the later services, neither equal to the value of the material service detached during the year of use, nor yet corresponding to the degree of physical wear and tear50 (which, if the good last six years, would amount yearly to one-sixth of the whole useful content), but is equal only to the value of that service which is the last, the most remote, at the time of calculation. And it is this same progression in time which causes the increase in value of the later services and from which comes a net gain, the interest on capital.

The same considerations that have elucidated the cause of interest from durable goods throw a strong light on another phenomenon, equally familiar and equally misunderstood,—that of Capitalisation. It is a well-known circumstance that, to such goods as yield us a more or less permanent return, we ascribe a certain "capital value" in consideration of this return. We estimate them as equal to a money capital which, at the ruling rate of interest in the particular country, would yield a similar amount of return for the same period. Thus a house which returns £500 a year, we value at £10,000 if the usual rate of interest is 5%, or at £12,500 if the rate is 4%; or we value a machine which, for six years, throws off annually a gross amount of £100 and certain net decreasing amounts, at something over £500.

Why do we attach just this value to them? The common explanation is: Because these goods yield a certain net return we must hold them equal in value to a sum of money which yields just the same net return. This, however, is incorrect, or rather it is not an explanation at all but a reasoning in a circle. The existence of a net return is not the primary fact which can be given as cause of the parent good having a definite value, but, conversely, a definite value must already be put on the good if this net return as such is to appear. If, in our example, the machine, which in six years returns in all £600, had been valued at £600, its whole return evidently would have been absorbed by the "wear and tear," and there would have been nothing left over as net return. It is simply because it was valued at less, at something only a little over £500, that there remains a net interest after deducting the quota for wear and tear. And it is exactly the same, as I shall show farther on in another connection, as regards the return and capital value of houses, lands, etc.

The only correct conception, and the only conception which really gives an explanation of the phenomenon, is the one now stated. The true primary fact is the lower value of future goods and future services: next we have the parent good, as capable of containing future services, estimated at a less amount than the total value which the services successively given off will represent as they are given off: and finally, as consequence, comes the fact that the capitalised sum is less than the sum of the amounts realised by the services in the course of time, and that there is a net surplus from the current return. That, on the one hand, the value of the bearer of the use, and, on the other, its net return, are represented by such figures that the former may be held equivalent to a money capital yielding, at the current rate of interest, exactly the same net return, is a coincidence which I have already explained.51 And, in virtue of this coincidence, it is, finally, as intelligible as it is justifiable that, in practical economic life which finds and adopts, as facts ready to its hand, the things which we try to explain, the net return of goods should be taken as foundation for acts of valuation. It is an abbreviated method which, practically, is quite appropriate, although it turns the relation of cause and effect exactly the other way.52

Book VI, Chapter VIII

Interest From Durable Goods—(continued)

To proceed. The phenomenon of interest just explained is characteristic of all durable goods, consumption and production goods alike. But, in the case of production goods, there comes in one circumstance the influence of which has to be investigated. In goods which are to serve as instruments of production, not only are the future services remote from the present, but both the present and the future services are remote from that economical goal which is first to be reached through production. The final destination from which, according to principles with which we are now familiar, they derive their value, is the product obtainable from them53 in the future. But from the attainment of this goal the current service—even that service in the very act of realisation—is distant by the whole production period which must intervene between its incorporation in the process and the turning out of the finished product. If this period, for instance, amounts to two years, the current service is two years away from attaining its goal, and at the same time from attaining its full present value: the next year's service is three years away, the next again four years, and so on; while, in the case of durable consumption goods, every service attains its full present value in the year, or in the moment it is rendered. Now this has a twofold result: first, the services of productive goods undergo a greater reduction as compared with their full final value, and, second, the growth of their value lasts longer on that account. After they are produced and set to work, they bear interest during the whole period of the production process on which they enter; only, in practice, this interest is ascribed, not to the durable good that forms an integral part of the "outlay "—from which, indeed, it is now separated—but to the "business" or "circulating" capital into which it is transferred at the moment of its separation.

To illustrate this. A durable consumption good which lasts six years, and yields at the end of each year a use54 of 100, is worth, as we have seen, 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55.55 A durable productive good, on the other band, which lasts six years, and whose year's use affords a final utility of 100 after a further production period of two years, has the following value. Its "current" year's use, which is first obtained by the end of the year, and then brings in the amount of 100 after two years more (that is, after three years in all), is only worth in present valuation 86.38. Its next year's use, which will bring 100 in four years, is to-day worth 82.27. Similarly the third year's use has a present value of 78.35, the fourth year's, a value of 74.62, the fifth, a value of 71.06, and, finally, the sixth has a value of 67.68. The whole productive good, accordingly, has a value of 460.36.

At the end of the first year's use the first service is detached; this, meanwhile, has come nearer to its final goal by a year, and accordingly advances in value from 86.38 to 90.70; the other services follow suit in the usual way. Thus the good, as still bearer of five prospective services of the individual values of 86.38 + 82.27 + 78.35 + 74.62 + 71.06, is now worth in all 392.68. It has therefore lost 67.68 in the course of the year's use, and, as against the return of 90.70 represented by the service detached, has borne 23.02 of interest—exactly 5% on the initial value of 460.36. So far everything runs as before. But the service which was separated off, with the value of 90.70, neither remains in its former shape nor retains its former value. It is detached from the fixed capital, and has passed over into the circulating capital, where it remains incorporated in some or other of the intermediate products, say, in the yarn spun by the machines. In this new shape it is the object of the further production process, and is by it brought step by step nearer to full maturity, and so to its future value of 100. This it attains in the following—the second—year of use.

At the end of the second year's use again, the service, which is now the current one, is detached from the parent good with a value of 90.70: the parent good, now valued at 321.62, has lost 71.06, and, as against the return of 90.70, has borne 19.64 as interest. But during this same year, the service detached in the previous year and incorporated in the circulating capital, has risen from 90.70 to 95.23 in value, and bears another 4.53 of interest. And, again, in the same way at the end of the third year of use, a service of the then value of 90.70 is detached, by which the parent good loses 74.62 in value, and interest gains 16.08. But since simultaneously the service detached two years before, and incorporated in the circulating capital, increases from 95.23 to its full value of 100, and that detached one year before, from 90.70 to 95.23, there is a further gain in interest of 4.77 + 4.53; that is, of 9.30.

In this way the peculiar combination of circumstances in durable productive goods gives occasion to a twofold interest relation. The services already detached bear interest after the manner, and as integral part, of the circulating capital; that is, their claim or title to interest is based on their transformation into finished and final product. The services still contained in the good bear interest after the manner of durable consumption goods; that is, their claim is based simply on their approximation to the present. But, of these two elements of the interest return, only the second is formally ascribed to the parent good from which it springs: for it the calculation is concluded at the moment in which the individual service is detached, and with the value which it then has. What further happens with it is ascribed to the circulating capital into which it passes at the moment of its separation.56 And thus we come to the final result: All interest borne by durable productive goods is borne by them simply in their character of durable goods, while their second property, that of being productive, only comes into play in the interest borne by the services already detached and transferred to circulating capital. In this lies the complete explanation of a developed interest phenomenon, which I before suggested but had to delay going fully into until now.57

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

In goods capable of only a moderate number of services the contraction of value, even in the case of the last services, is but small. The result of this is, on the one hand, that the value of the parent good is only a little behind the gradually developing value of its collective services—in our first example the value of the machine lasting six years was not quite 600, but still it was over 500; and, on the other hand, that the amount of wear and tear, even in the first year,58 is relatively high, and almost equal to the entire value of the current service—in our illustration the value of the current service was 100, the value of the last service, that which decides the wear and tear, about 78.

In goods, again, capable of a very long series of services, both the value of the parent good and the amount of wear and tear fall proportionately. A good capable of rendering services of the annual value of 100 for 100 years, is very far from being valued at 100 × 100 = 10,000. At most (where the usual under-valuation of future goods is at the rate of 5%) it is worth 2000; and the loss of value in the course of the first year's use—although a service worth 100 has been consumed and detached from the use-content of the good—is, not 100 but .76, that and no more being the present value (at a discount rate of 5% per annum) of a sum of 100 falling due in 100 years!59

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

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

The theoretical explanation of rent from land, then, coincides ultimately with the explanation of interest obtained from durable concrete capital, and land rent is nothing but a special case of interest obtained from durable goods. That the two explanations do not entirely coincide, and that, on the contrary, the current rent theories are substantially so very different from the interest theories, is only traceable to the fact that, in the course of the explanation of rent, an intercalation had to be made which did not require to be made in the case of interest on durable capital; and that, at the same time, from a faulty conception of the rent problem, economists exhausted the whole content of the rent theories in making this special intercalation. In the case of all products of labour, and, consequently, in all goods that constitute capital, it needs no explanation that they and their material services have economic value: were it not so they would not be produced. In the case of the services of land, on the other hand, this is not self-evident. And, therefore, the economist must first exert himself to show why and under what circumstances the use of land receives a value and a price. With a correct value theory, a few strokes of a pen will supply this proof; by means of the doctrines of marginal utility and of complementary goods. Wanting the guidance of such a theory, and entangled in the fetters of the labour value theory, economists gave it a shape which was unnecessarily circumstantial and clumsy, and was, at the same time, not very satisfactory in principle. Of Ricardo's rent theory, which in essence has remained the ruling one up till the present day—the theories of his opponents Carey and Rodbertus being quite exploded—it must be said that it contains an abundance of truth put in a formula essentially false. It is a brilliant piece of casuistry, which is out of connection with the central fire of correct principles; it lights up a bit of the road, but leaves the rest in obscurity and error. Hence the peculiar fate of the Ricardian theory. It does not quite satisfy anybody. Even its friends are fain to discover a number of weak points in it, and its most universal propositions are, for the most part, its weakest. But there remains in it an indestructible core of truth, which lives on under the most varied metamorphoses, and, even to-day, constitutes the better part of its substance.60

But how far does the Ricardian, or any other rent theory, take us, even if it were correct in every point where it is disputable? It takes us no further than we get in the question of interest, when it has been shown that a threshing-machine, after deducting all other costs, yields an annual gross interest, and why it does so. Where Ricardo ends his rent theory, there in truth ends the intercalation, which, because of its obviousness, did not require to be made in the case of movable capital. But it is just then that the chief question of the problem suggests itself: why there is a net interest within that gross interest which is yielded by the year's use or service of the threshing-machine or the field, after deduction of all other costs. And to this question—which the rent theory up till now has entirely omitted to put—no answer can be given, either as regards the field or the machine, but to point to the under-valuation of future goods and future services.61

Book VI, Chapter IX

Results

We have traced all kinds and methods of acquiring interest to one identical source—the increasing value of future goods as they ripen into present goods. Thus it is with the profit of the undertakers, who transform labour—the future good which they purchase—into products for consumption. Thus it is with landlords, property-owners, and owners of durable goods generally, who allow the later services of the goods they possess to gradually mature, and pluck them when they have ripened into full value. Thus, finally, it is with the loan. Even here it is not the case, as one might easily think at first sight, that the enrichment of the capitalist comes from the creditor receiving more articles than he gives—for at first, indeed, the articles concerned are less in value—but from the fact that the loaned objects, at first lower in value, gradually increase in value, and on the moment of fruition enter into their complete higher present value.

What, then, are the capitalists as regards the community?—In a word, they are merchants who have present goods to sell. They are the fortunate possessors of a stock of goods which they do not require for the personal needs of the moment. They exchange this stock, therefore, into future goods of some form or another, and allow these to ripen in their hands again into present goods possessing full value. Many capitalists make this exchange once for all. One who builds a house with his capital, or buys a piece of land, or acquires a bond, or gives a loan at interest for fifty years, exchanges his present goods, wholly or in part, for goods or services which belong to a remote period of time, and consequently creates, as it were at a blow, the opportunity or condition of a permanent increment of value, and an income called interest which will last over this long period. One, again, who discounts a three months' bill, or enters on a one year's production, must frequently repeat the exchange. In three months or in one year the future goods thus acquired become full-valued present goods. With these present goods the business begins over again; new bills are bought, new raw material, new labour; these in their turn ripen into present goods, and so on again and again.

In the circumstances, then, it is very easily explained why capital bears an "everlasting" interest. We may dismiss any idea of an inexhaustible "productive power" in capital, assuring it eternal fruitfulness,—any idea of an eternal "Use" given off; year out year in, to the end of time by a good perhaps long perished.62 It is because the stock of present goods is always too low that the conjuncture for their exchange against future goods is always favourable. And it is because time always stretches forward that the prudently purchased future commodity steadily becomes a present commodity, grows accordingly into the full value of the present, and permits its owner again and again to utilise the always favourable conjuncture.

I do not see that there is anything objectionable in this. For natural reasons, present goods are certainly more valuable commodities than future goods. If the owner of the more valuable commodity exchange it for a greater quantity of the less valuable, there is nothing more objectionable in this than that the owner of wheat should exchange a peck of wheat for more than a peck of oats or barley, or that a holder of gold should exchange a pound of gold for more than a pound of iron or copper. For the owner not to realise the higher value of his commodity would be an act of unselfishness and charity which could not possibly be translated into a general duty, and as a fact would not be so translated in regard to any other commodity.

In the essence of interest, then, there is nothing which should make it appear in itself unreasonable or unjust. But the essence of an institution is one thing, and the circumstances which may accidentally accompany it in its practical working out are another. That the community has a power of choosing representatives is good; but if at every election there are broken heads, and pot-house agitation and brute force instead of patriotic deliberation decide the majority, it is not good. And, like every other human institution, interest is exposed to the danger of exaggeration, degeneration, abuse; and, perhaps, to a greater extent than most institutions.

It is undeniable that, in this exchange of present commodities against future, the circumstances are of such a nature as to threaten the poor with exploitation of monopolists. Present goods are absolutely needed by everybody if people are to live. He who has not got them must try to obtain them at any price. To produce them on his own account is proscribed the poor man by circumstances; the only kind of production he could take up would be one yielding an immediate return, and this is not only unremunerative but almost impracticable under modern economic conditions. He must, then, buy his present goods from those who have them, either in the form of a loan, or, more usually, by selling his labour. But in this bargain he is doubly handicapped; first, by the position of compulsion under which he finds himself, and, second, by the numerical relation existing between buyers and sellers of present goods. The capitalists who have present goods for sale are relatively few; the proletarians who must buy them are innumerable. In the market for present goods, then, a majority of buyers, who find themselves compelled to bay, stands opposite a minority of sellers, and this is a relation which obviously is profoundly favourable to the sellers and unfavourable to the buyers.

Now, of course, the circumstances unfavourable to buyers may be corrected by active competition among sellers. The fewer the sellers, the greater are the amounts of present goods they have to dispose of. To find purchasers for them all, competition must bring down the price from extreme heights to a moderate level that leaves no room for exploitation of poor men.63 Fortunately, in actual life this is the rule, not the exception. But, every now and then, something will suspend the capitalists' competition, and then those unfortunates, whom fate has thrown on a local market ruled by monopoly, are delivered over to the discretion of the adversary. Hence direct usury, of which the poor borrower is only too often the victim; and hence the low wages forcibly exploited from the workers—sometimes the workers of individual factories, sometimes of individual branches of production, sometimes—though happily not often, and only under peculiarly unfavourable circumstances—of whole nations.

It is not my business to put excesses like these, where there actually is exploitation, under the ægis of that favourable opinion I pronounced above as to the essence of interest. But, on the other hand, I must say with all emphasis, that what we might stigmatise as "usury" does not consist in the obtaining of a gain out of the loan, or out of the buying of labour, but in the immoderate extent of that gain. If exchanges are to take place between present and future commodities, the existence of some gain is an entirely normal phenomenon; is, indeed, an economic necessity. Some gain or profit on capital there would be if there were no compulsion on the poor, and no monopolising of property; and some gain there must be. It is only the height of this gain where, in particular cases, it reaches an excess, that is open to criticism, and, of course, the very unequal conditions of wealth in our modern communities bring us unpleasantly near the danger of exploitation and of usurious rates of interest.

As little, again, will the unbiassed spectator deny that, in the circumstances accompanying the receipt of interest, it is frequently the case that one's sense of fairness is offended by the contrast between gain and desert. Where capital has once been obtained by personal exertion and ability no one would grudge its owner the further profit he makes, without exertion, by exchanging his hard-won present goods into future goods. But often it is just the greatest fortune that falls into the lap of its owner without any personal desert on his part, simply by the happy chance of a legal enactment giving him the preference, and in this case also the lucrative exchange, of present goods for future goods which steadily ripen into more valuable present goods, is made without exertion and without personal deserving. In all other branches of exchange clever speculation is needed, timely seizing of opportunities, favourable conjunctures, if a gain is to be made by the exchange. But the merchant of present goods finds the conjuncture always favourable. He need only put out his hand to dispose of his goods, with a profit, to any one among the thousands of eager buyers, while, by his side, the poor labourer drags out a painful existence of heavy toil, at a sacrifice of personal strength and personal happiness.

But what is the conclusion from all this? Surely that, owing to accessory circumstances, interest may be associated with a usurious exploitation and with bad social conditions; not that, in its innermost essence, it is rotten. And the logical conclusion is that the axe should be laid to the decayed branches, and not to the sound stem,—just as it would be foolish to take away the right of self-representation instead of simply putting down the riots at election time. But what if these abuses are so inseparably connected with interest that they cannot be eradicated, or cannot be quite eradicated? Even then it is by no means certain that the institution should be abolished. Arrangements absolutely free from drawback are never allotted to us in human affairs. Instead of the absolute good, which is beyond reach, we must choose what, on the whole, is the relative best, where the balance, between attainable advantage and the drawbacks that must be taken into the bargain, is the most favourable possible for us. Living in a great city has certainly many disadvantages; so has living in a small city; and so has living in the country. But we must live somewhere, and so we make our choice of the place where, after wise consideration of all the circumstances, the unavoidable evils seem to be most outweighed by the advantages. And in the same way, before we abolish interest as such, we must first draw out a balance-sheet to show whether human wellbeing is better promoted in a society which permits gain from capital and recognises it, or in one which permits only income from labour.

In making this calculation it will not be overlooked that the institution of interest has its manifold uses; particularly as the prospect of interest induces saving and accumulation of capital, and thus, by making possible the adoption of more fruitful methods of production, becomes the cause of a more abundant provision for the whole people. In this connection the much-used and much-abused expression, "Reward of Abstinence," is in its proper place. The existence of interest cannot be theoretically explained by it: one cannot hope in using it to say anything about the essential nature of interest: every one knows how much interest is simply pocketed without any "abstinence" that deserves reward.64 But, just as interest sometimes has its injurious accompaniments, so in its train it brings others, fortunately, that are beneficent and useful; and to these it is due that interest, which has its origin in quite different causes, acts, among other things, as a wage and as an inducement to save. I know very well that private saving is not the only possible way to the accumulation of capital, and that, even in the Socialist state, capital may be accumulated and added to.65 But the fact remains that private accumulation of capital is a proved fact, while socialist accumulation is not;—and there are, besides, some very serious a priori doubts whether it can be.

Still it is neither my purpose nor my duty to inquire what organisation of society on the whole is best,—the present or the Socialist. I have only here to answer what comes up for answer in an inquiry as to the nature and origin of interest. And the answer here runs: There is no inherent blot in the essential nature of interest. Those, then, who demand its abolition may base their demand on certain considerations of expediency, but not, as the Socialists do at present, on the assertion that this kind of income is essentially unjustifiable.

Is the abolition of interest, then, possible? It may, I think, not be unprofitable to many of my readers to follow the fate of interest in the Socialist state.

Book VI, Chapter X

Interest Under Socialism

Let us imagine the Socialist state perfectly realised; all private property in land and capital abolished; all instruments of production vested in the hands of the community; all citizens working as labourers in the service of the commonweal; and the national product distributed to all according to work done. How is it now with the action of those causes which produced interest under the individualist economy?

First of all, it must be made clear that the causes are still there. There is always a natural difference of value between present and future goods; and since under Socialism time does not stand still, future goods gradually become present ones, and bring a surplus value with theirs. The difference of value between present goods and future, I say, is always there. For its peculiar causes continue to exist;—the difference between the circumstances of provision in present and future, the partial underestimate of the future which is characteristic of man, the uncertainty and shortness of life. In the Socialist state no one will be allowed to be an undertaker on his own account, and, of course, the consideration of the greater technical productiveness of present goods employed as productive instruments ceases to be a motive for individuals: all the more strongly does this motive obtain as regards the great economic commonwealth which now conducts and guides the total national production.

Thus, even for the Socialist state, it is absolutely inconceivable that economic subjects, whether as individuals or as the powerful economic commonweal, should, in their economic judgment and their economic practice, treat present and future goods as on the same footing. How, for instance, could it be all the same to the Socialist worker whether he received his hard-earned wage by instalments of £1 a week, or in £52 at the end of a year, or in the shape, perhaps, of £52 five or ten or fifty years later? Or how is it conceivable that, under Socialism, a young oak sapling which will be an oak tree, with the value of an oak tree, in two hundred years, can be made equal in value to an oak full-grown now? The central authority directing the national production must base its entire arrangements and dispositions on a calculation of present and future goods having different values, if its dispositions are not to be quite inept and monstrous. If it do not put a less value on future goods it must find that a process which promises a greater number of products in the far future is more remunerative than a process which yields a small number in the present or near future, and it must, accordingly, always turn its productive powers to remote productive ends, however remote they are, as being, technically; the most fruitful. The natural consequence would be very much as we have already pictured it66 —misery and want in the present: and those in charge of the national economy would have no more pressing duty than to overturn this inept disposition, give the less amount of present goods the preference over the greater amount of future ones, and so prove that the difference in value between present goods and future is an elementary economic phenomenon independent of any human arrangements.

If it is now clear that, even in the Socialist state, present goods will, universally, be valued more highly, it goes without saying that, if there is an exchange between the two, it cannot be effected at par. Exactly as under the present economic organisation, present goods, as more valuable, will claim and will receive an agio. The emergence of this agio—and with it the emergence of interest in its most legitimate form—could only be repressed if every opportunity for it were repressed; in other words, if the exchange, or barter of present goods for future were removed out of the world altogether.

Now, of course, this would be attempted to a considerable extent in the Socialist state. All private ownership in the means of production being banished, all production on private account would be banished also, and all opportunity of buying the future commodities, Labour, Uses of Land, and Capital, would be taken away from private individuals. Since, then, in any case the loan at interest would also be forbidden, the two chief springs, from which interest flows to private persons in the present day, would be happily stopped up. But certain opportunities would still remain open if exchange transactions between individuals were not entirely forbidden. Suppose, for instance, that free exchange were allowed in durable goods, agio and interest would immediately slip in, as it were, by a back door. Say that a good lasts one hundred years, and that its (present) year's service is worth £100, £10,000 must be the price of the good if the hundredth year's service—rendered perhaps to some grandchild or great-grandchild—is to be paid full £100. No man would be willing to pay this price. But the moment that the purchase price is calculated at less than £10,000, the owner receives, in course of time, an income greater than the purchase price, and harvests the excess as true interest.

But much more important than any such sporadic obtaining of interest by private individuals is the fact that, in the Socialist state, the commonwealth itself, as against the citizens, would make use of the principle of interest which to-day it reviles as "exploitation" and deduction from the product of labour. The Socialist state, as possessing all means of production, gets all the citizens to work in its factories, and pays them a wage. It conducts, therefore, on the largest scale the buying—forbidden to private individuals—of the future good Labour. Now, on technical grounds, various portions of the labour it buys it necessarily sets to work simultaneously towards various productive ends widely removed in point of time. One group of labourers, for instance, it sets to baking; another it sets to sink mining shafts, which, perhaps, assist in turning out consumption goods only twenty years later; another it sets to replant a forest. The labour directed to distant ends, for reasons with which we are now familiar, obtains a greater technical product, and that product when ripe will possess also a greater value. While, for instance, the product that a baker turns out in a day is worth, perhaps, 4s., a labourer engaged in forestry may plant one hundred oak saplings in a day, and these saplings, without added labour, may mature in a hundred years' time to strong oak trees worth 20s. apiece.

Now how much can and should the Socialist state pay as wage to those workers whose labour it directs to these far-away but productive ends? Will it pay the foresters the whole value of their future product, say, £100 a day?—Impossible. That would be a glaring injustice to the workers of other departments. If the entrance to individual branches of employment were left free to all comers, everybody would be a forester and nobody would bake bread; the country would relapse to primeval forest; and the present, with its pressing needs, would remain unprovided for.67 If, on the other hand, the entrance was not free, and a very favoured minority were to be paid £100 a day, while the others received 4s. or 6s., a plutology would emerge again in optima forma; only that it would not be based, as now on property, but, more fatally, on favour and protection!

But if foresters are paid exactly like bakers at 4s. per day, they are exploited just as they are by the capitalist undertakers under the present system. In buying the future commodity, labour, an agio is put on present goods, and the labourer, instead of his future product of £100, is put off with a present wage of 4s., which represents the present value of the planted saplings. But the surplus value which these saplings take on as they grow into oak trees ready for cutting, the Socialist commonwealth puts into its pocket as real interest. Perhaps,—probably, it is to be hoped,—not to keep it in its pocket, but to employ it in a general bettering of the wages of its workers. But any such supplementary common purse distribution of the interest thus pocketed does not make any difference in the fact that interest, as interest, has been received. In this the Socialist state only acts like a capitalist in the present day, who accumulates a fortune from his surplus values, and then disposes of it for purposes of the general good. A wage earned can be disposed of egoistically or altruistically, and interest received can be disposed of egoistically or altruistically, but it would be as rash to assert that a wage becomes an interest by being egoistically spent, as to assert that an interest changes its nature, and turns into wage, when it is altruistically spent!

It is, too, well worthy of remark that an equal distribution of the interest obtained by the Socialist state does not establish the same economic conditions as if the interest had not been taken at all. In this distribution it is not the persons to whose labour and product the interest was due that get the interest, but entirely different people. The forester has an amount of £99: 16s. deducted from the value of his future product as interest. If, now, through the distribution of all the interests thus obtained, the average day's wage is raised from 4s. to 6s. per day, the forester gets a couple of shillings returned him of the £99:16s. taken from him; the remaining £99:14s. other people get, and get, indeed, just as at present, not by the title of wage, but by the title of property,—or rather of joint-property. The people who are employed in immediately remunerative production, such as baking, and create a day's product of 4s., could, as labourers, ask and receive a wage of only 4s. The other 2s. they receive only because they are at the same time joint owners in the national wealth, and because the Socialist state, which administers the common national wealth, as proprietor of this wealth, brings its entire right of property to bear on those workers whose labours are directed to more remote productive ends. In the Socialist state, therefore, exactly as in a capitalist society, interest is deserved by the proprietor of present goods as against those labourers who create only a future product by their labour. The only difference is that in the capitalist society property is unequally divided, and interest falls to a few proprietors in great amounts, while in the Socialist society all are joint owners to an equal amount, and all obtain an equally small quota of the total interest.

In the above analyses I have taken my illustration from forestry because it illustrates the circumstances in question in the most striking and unambiguous way. In the most striking way, because the difference of time between the forth-putting of labour and the receiving of the mature product, and, with it, the difference in value between labour and future product, is at its maximum: in the most unambiguous way, because here no additional labour of any sort is necessary, and, consequently, the calculation of the final product produced by a definite expenditure of labour is quite simple. But it surely needs no further demonstration that exactly the same relations occur, in more or less weakened degree, in the case of all labour which is directed to more remote goals of production. They are all technically more productive than those which yield their results on the moment. Their abundant future product, too, must always have a greater future value, because it could not, economically, have been produced at all if already its present value, reduced by perspective, were not equal to the otherwise normal value of a similar amount of labour:68 Since, finally, the wage for similar and similarly valuable labour cannot be assessed at different levels according as the Socialist state directs its labour to a near or a remote goal of production, the wage of those labourers who are put to more remote tasks must, necessarily, be measured under the full value of their future product,69 and this secures that, to a greater or less extent, there appears a surplus gain for the community which is the owner of the present goods.70

Nor does it require any demonstration that the phenomenon of interest must emerge to a still greater degree if the Socialist society be organised, not as one united community, but as a system of independent economic groups.71 For in this case, at every exchange between mature and immature commodities, each group would appropriate surplus value, not only as against its own workers employed to remote productive ends, but, in a much greater degree, as against the other groups, and would divide out this surplus value to the shareholders of the wealth belonging to the group, as dividend.

Thus we come to a very remarkable and noteworthy result. Interest, which to-day the Socialists abuse as a gain got by exploitation, a robbery from the products of labour, would not disappear even in the Socialist state, but would remain, in promise and potency, as between the community organised under Socialism and its labourers, and must so remain. The new organisation of society may make some change in the persons who receive it, and in the shares into which it is divided, by altering the relations of ownership; but the fact that the owners of present commodities, in exchanging them for future commodities, obtain an agio, it neither will nor can alter. And here, again, it is shown that interest is not an accidental "historico-legal" category, which makes its appearance only in our individualist and capitalist society, and will vanish with it; but an economic category, which springs from elementary economic causes, and therefore, without distinction of social organisation and legislation, makes its appearance wherever there is an exchange between present and future goods. Indeed, even the lonely economy of a Crusoe would not be without the basis of the interest phenomenon, the increasing value of goods and services preparing for the service of the future; only, of course, that, in the absence of exchange transactions, there would be wanting the chief occasion to put exact figures on the value of goods, and therewith almost the only opportunity of calling attention and giving fixity to the phenomenon.

[1.]See my Capital and Interest, p. 29.

[2.]See Capital and Interest, pp. 214-259.

[3.]See Capital and Interest, p. 239. It goes without saying that I could mean nothing else than an involuntary dialectical confusion in the writer's mind, and nothing was further from my intention than to charge a scholar, so much esteemed by myself and by all the world, with wilfully misleading his readers. I should have thought that the very sincere expressions, in that and other writings, of the respect in which I have always held the person of that past master of our science, and particularly the express recognition of his "thorough and conscientious efforts" with which I introduced this very criticism (p. 239), might have sufficiently protected me against any such misconception. I was therefore more than astonished to learn that Professor Knies had taken my words as conveying an offensive imputation of wilful misleading of his readers. Although I scarcely think that any one of my readers will have understood me in this sense, I do not hesitate to explain here, emphatically and publicly, not only that I had not the slightest intention of any offensive imputation, but that I am exceedingly sorry if my inconsiderate choice of words should unwittingly have made such an interpretation possible.

[4.]P. 229, and pp. 235-239.

[5.]Capital and Interest, pp. 228, 247.

[6.]Ibid. p. 264.

[7.]The criticism which Knies directs against me in the note to page 106 of his second edition is limited unfortunately to a few passing remarks on points which are, for the most part, of secondary importance. Moreover, several errors of fact have slipped into these, and two of them I cannot let pass unchallenged. First, I cannot admit that I have done what Knies ascribes to me, and explained that the replaceableness of goods—that is to say, the fact that one sample of a class can be adequately replaced and represented by another—is simply a legal fiction. I only said that the actual identity of replaceable goods was a legal fiction (Capital and Interest, p. 253); and these are two very different statements. And, further, in my book I do not regard it as certain that, if a person speaks of uses in respect to perishable goods, he ought to point out, and wishes to point out, exactly the same kind of process of use as is to be observed in non-perishable goods. On the contrary, my entire criticism of Say and Schäffle (p. 232), of Hermann and even of Knies himself (p. 233), rests on the idea that it was a matter for the opposed theory to point out the existence of a something otherwise constituted than the usual material services, and that it had not succeeded in this attempt.

[8.]Der Kredit, part i., Berlin, 1876, p. 10: shortly repeated without new arguments in the second edition of the book Das Geld, p. 106, note 1.

[9.]I may note that it would be easy to multiply examples in which the same state of things occurs. Grain merchants, e.g., may find it to their advantage to exchange stocks held in different stores; bankers, to exchange sums of money disposable at different places, etc.

[10.]"A loan without interest is a gift of the use of so much capital," Roscher, Grundlagen, § 189.

[11.]See above, p. 251.

[12.]Similar cases may perhaps occur after very abundant harvests, where the producers have not enough storage accommodation to secure the surplus.

[13.]Of course it may happen in individual cases, that, outside of the reasons for apparently cheap buying discussed in the text, there may be other reasons for really abnormal cheap buying; as, e.g., skilful utilising of favourable conjunctures, usurious oppression of the seller, and, in particular, of the labourer. The emergence of such factors in this case results in a still further limitation of the purchase price, and in the obtaining of an extra profit. This extra profit is to be distinguished from normal profit on capital in every respect: in its nature—for it is not a true profit on capital but strictly a profit of the undertaker; in its theoretical explanation—for it owes its origin to other and quite special causes: and, finally, in the social and political judgment we must form of it. I need scarcely say in so many words that what is said in the text has only to do with profit on capital pure and simple.

[14.]Not quite exactly: for easier understanding the figures in the text are calculated roughly, and without consideration of compound interest.

[15.]The analysis which follows is devoted to the circumnavigation of one of those hidden rocks which, I suspect, might rise suddenly in the way of those readers who venture on their own account to go further into the circle of ideas here opened up. The digression which it necessitates forms one of the numerous sacrifices of time which I imagine myself compelled to make with a view to the safety of my theory, at the cost of brevity and ease of comprehension.

[16.]In order to remain true to actual cases, so far as possible within the narrow limits of the illustration, I purposely assume that the value of product decreases as production in the same branch increases—the more units the less the value of each unit. The fact that even the most remunerative branch of production ceases to be remunerative when it is over-stocked, is the very thing that makes it possible for means of production to seek different employments simultaneously.

[17.]To be accurate it is 21.65%, or as 100 : 78.35.

[18.]If 200 pieces of the good are produced naturally all the pieces obtain one equal value, and not only the second hundred but the first hundred gets its value according to the lower rate of 8, at which the second hundred can be made remunerative.

[19.]By varying the figures the reader may very easily convince himself that exactly the same result emerges if the marginal utility, which determines the value, lies within the sphere, not of the immediately remunerative, but of the productive employments. The only difference is that, in this case, the chances of a temporary "conjuncture profit" between the individual branches of employment, are somewhat altered. That production which itself yields just the marginal utility bears no conjuncture profit, while such a profit is now possible temporarily in the present employments, and in the other branches of production.

[20.]See above, p. 230.

[21.]Whether it take the form of completing the two years' production process from beginning to end by their own labour, or that of introducing their own labour at a later stage,—e.g. in the fourth half-year of the total production process,—and buying the fruits of the preparatory labour,—raw materials, tools, etc.,—from the others who have performed that previous labour.

[22.]The pleasure of an independent position may indeed very often create a preference for labour on one's own account, even although the labourer might obtain a somewhat greater income by taking a wage. Influences of this kind, however, can alter only the figures, not the principle.

[23.]Of course the possibility open to the labourer in question of realising his labour in other branches of activity, can do little or nothing to alter the position of circumstances assumed in the text. For if the other branches are such as likewise demand a somewhat long production period the matter stands just the same with the labourer of this branch; and the few branches which a man with no capital, or almost no capital, can take up with any result,—such as in particular the performance of personal services, domestic service, and the like,—can, from their nature, afford a remunerative refuge only to a limited number of workers, while any strong pressure would immediately result in overstocking and a corresponding entailment of the advantage.

[24.]See above, p. 250.

[25.]16s. 8d. : 20s. = £104 : £124:16s.

[26.]It will perhaps be objected that the purchase amounts which the undertakers of the previous stages receive contain, not only a simple replacement of the advances of subsistence paid by them to workers, but frequently also replacement of the uses of land consumed, and, in any case, some profit on capital. The fact is correct, but it makes no difference in the conclusions which I think are to be drawn from what I have said above. The necessity of paying in advance for uses of land, the return of which will not be obtained till after long methods of production have been completed, has the same effect on the price relation between finished present goods and original productive powers, as the necessity of paying for labour in advance has. The market for uses of land is only a third part-market in addition to the market for credit and the market for labour, where, in similar ways, present goods are sold against future goods (see above, p. 313), and, consequently, as regards its effects on price, the demand of this market for present goods mutually assists, and is assisted by, the demand of the other part-markets. This, however, will be made clearer as we go on. Finally, I must here leave out of consideration the profit of the undertaker, if I would not beg the question. Its existence is the result of a certain market condition in the subsistence market, and therefore cannot be assumed. It is not because the profits of the undertaker absorb a part of the available means of subsistence that the supply of means of subsistence is so weak as to give them an agio as against productive goods. It is because the supply of means of subsistence, even without consideration of profit, is insufficient, that these means of subsistence receive an agio, and the undertakers who advance them receive a profit. Moreover it is easily seen that, by eliminating profit from the argument with which I started in the text, I do not make it any easier to reach the final result, that of giving a reason for the agio on means of subsistence, but make it more difficult. That is to say, if, as I assume, the whole stock of means of subsistence is disposable for the granting of advances to labourers, it will be more difficult in any case for this more ample supply to be exceeded by the demand, than if a portion of the supply appears to be already hypothecated to profit.

[27.]The much more important matter of the consumption of the income from capital does not belong to the present question: as was shown in last note it is only a result of the supply of wealth being insufficient as against the demand.

[28.]The figures are, of course, only chosen for illustration.

[29.]0.81 + 0.56 + 0.24 + 0.12 + 0.06 + 0.04 + ...

[30.]It would be erroneous to assume that, after the demand of the current year is covered, the current labour must be directed to the demand of the next annual period till such time as this is fully covered; that, e.g., if 5/10 of the demand of 1889 is covered by existing wealth, the labour of 1888 must, or even might, immediately prepare the remaining 5/10. But in 1888 the maturing of finished products is carried forward only one stage, and is itself fully terminated only in the year 1889 by an addition of the labour of 1889.

[31.]It is all the same as regards the effect whether the same persons perform the labour of all stages of production successively, or whether—as is the case under the division of labour—certain persons remain constantly occupied in one and the same stage.

[32.]Not to cumber the text I have done this in Appendix. [This appendix is titled in the original the "Appendix to page 327."—Econlib Editor.]

[33.]Of course many productions are, for technical reasons, very little divided up into stages; agriculture, e.g., yielding its harvests only from year to year. All the same the above formula will be found to give an approximately correct presentation of the case, and we may be the better pleased with it that I do not intend to draw a single deduction in which anything depends on definite figures. What I have to do with is rather the mere negative recognition, that the period of time, for which the accumulated subsistence fund must contain provision, need not be so great as the average economical production period.

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

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

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

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

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

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

[40.]See above, pp. 316, 317.

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

[42.]Capital and Interest, p. 219. Also Rechte und Verhältnisse, p. 57.

[43.]Are Material Services themselves "Goods"?—Many writers will have it so, as Hermann (Staatswirthschaftliche Untersuchungen, second edition, p. 109), or Menger (Grundsätze, p. 132). Other recent writers, like Sax (Grundlegung, p. 209) and R. Meyer (Das Wesen des Einkommens, p. 155, 168), emphatically exclude the services themselves from the conception of Goods. (Sax speaks primarily of personal services, but what is true of them must logically be true of material services.) To my mind the matter appears to stand as follows. First of all, the whole question is not one of scientific knowledge, but simply one of terminology. And provided that the nature and the place of material services in economies were really and properly recognised, in the end it would not much matter whether the name Good was attached to them or not. Those authors who refuse to recognise material services as goods appear to me, however, to have some notions that are not really and properly correct. Thus Meyer (pp. 158, 157, note 4) denies to material services the character of economic means, and explains them rather as "satisfactions of want." Now the material service, as I understand it, is a real mean towards the satisfaction of want, not that satisfaction of want itself. It stands as independent intermediary between the good from which it comes, and the satisfaction of want which it is intended to cause but does not by any means always cause. If, e.g., I hire an oven for the baking of bread—that is to say, buy its use or its material service—what kind of thing is it I really have bought? Have I directly bought the satisfaction of want, the allaying of hunger?—Certainly not. Or the oven itself?—No. Or, perhaps, the bread that is to be made by the oven?—Again, no. But what I have bought is just one material service, or group of services, of the good called Oven; these services are means to the production of bread, and thus, beyond that, to the satisfaction of one of the needs of subsistence. The material services are, therefore, true and—according to the sense indicated in the text—independent economical instruments and objects.—If now, with the view of settling the terminological question, we inquire as to the position of the material services among the other economical instruments, we seem to arrive at the following. There can be no doubt as to the inventory of the causes of wellbeing,—the causes which we summon to the satisfaction of our wants. Our wellbeing is furthered, on the one side, by persons who are useful to us (such as teachers, guardians, clergymen, artists, workers, domestics, etc.), and, on the other side, by useful things. And the use of both comes to us through the exertion of their useful powers,—that is, through useful services. In the sphere of material instruments of wellbeing we treat both the things and their services as economical objects: in the sphere of personal instruments of wellbeing, since the abolition of slavery, we do not treat the useful persons themselves, but only their services, as economical objects. Thus the scheme of our economical means of satisfaction would receive something like the following shape:

Economical Means of Satisfaction
(Useful Persons)		Material Goods
Personal Services		Material Services

And now it is a question of appropriate terminology to which of these categories the name "Good" should be attached. Personally I believe that the science has great need of one short expression which would embrace all kinds of means of satisfaction. Now, since, the word "good" is quite suitable for this purpose, and has already long been used for this purpose, I see no reason why it should now be deposed. Of course there is quite as strong a need to keep the material services in their turn separate from the material goods which bear these services. But this can be done, both simply and sufficiently, by instituting the distinction, inside the universal conception of the "Good," between "Material Goods" and "Material Services."—Things like Rights, Relations, Properties, would, for good reasons, find no room even in the widened conception.

[44.]The perception of the above is made very difficult by the usual method of valuation according to "Costs" which, naturally, is always directed to the unit of goods as a whole (see my Rechte und Verhältnisse, p. 64, note 1). The reader, however, who has followed our conception of what the nature of the law of costs is, and has, consequently, recognised that, even where goods seem to get their value from their costs, the utility of the goods always stands in the background as the true source of value, and that, in any case, the "costs" must always be in harmony with the—independently established—marginal utility of the goods, will not be misled by any appearance to the contrary. Even in the consideration, for instance, of whether a durable good in general is worth its cost, and whether, consequently, we should produce or buy it, we must form an opinion to ourselves as to its utility, and I should be puzzled to know how this opinion is to be formed if not on the basis of the value which the material services of the good—singly and taken together—have for us.—On the whole question treated in the text see also my Rechte und Verhältnisse, pp. 61-68.

[45.]These figures are based on the assumption that the whole year's utility is obtained all at once, and, indeed, obtained in anticipation at the beginning of the year; e.g. by hiring the good at a year's interest of 100 payable on each 1st January. If, on the other hand, the year's rise can only be had at the end of the year, a valuation undertaken at the beginning of the year will show figures not inconsiderably lower. That is to say, on 1st January 1888, the present year's use which will be obtained only by 31st December,—that is, practically, a whole year later,—will not be valued at the full 100, but at 95.23 only; and again the "next year's use," that obtainable 31st December 1889,that is, practically, two years later,—will be valued at 90.70, and so on. Now this shows, for the whole good, a sum of value of 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55. If, finally, the utility were always obtainable in the middle of the year, or, what comes to the same thing, were to be spread equally over the whole year, the figures would be—for a valuation taken on the 1st January—97.56 + 92.85 + 88.38 + 84.12 + 80.07 + 76.21 = 519.19.—That the figures should alter according as the date of the valuation stands nearer or farther from the date of obtaining the utility, is an entirely natural thing, and one quite familiar in financial life. The value of paper—which is just a "durable good" with annual uses—always stands a little higher shortly before the interest or dividend terms than some time before. I may note that the above figures are taken as before from Spitzer's Tables, and are based on an interest rate of 5%.

[46.]On the part return of 100, which was separated off from the good on the first day of the year, the good naturally will no longer yield any interest. If, on the other hand, the year's utility is only obtainable at the end of the year, it must naturally pay interest on the full initial value of the bearer of the utility, us will be brought out somewhat more fully later on.

[47.]Of 354.58, because again the 100 taken off at the beginning of the year—which may independently obtain interest—need no longer obtain interest through the good.

[48.]If the year's service can be obtained only at the year's end, the figures of the valuation, and with them the figures of the interest, will be altered, but the principle of the process, and, in particular, the reduction of value by the amount of the then last service, remains unchanged. I shall put together in the following tables the course of the value movement for one such case. The initial value of a good which will last six years, and has an annual utility, obtainable at the end of the year, of 100, is, as stated above (p. 343 in note), equal to 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55.

Year.	Value on 1st Jan.	Value on 31st Dec.	Gross Int.	Wear and Tear.	Net Int.
1888	507.55	432.93	100	74.62	25.38
1889	432.93	354.58	100	78.35	21.65
1890	354.58	272.31	100	82.27	17.73
1891	272.31	185.93	100	86.38	13.62
1892	185.93	95.23	100	90.70	9.30
1893	95.23	—	100	95.23	4.77

[49.]See Capital and Interest, p. 194, and particularly p. 233.

[50.]A very noteworthy fact, which theory up till now has left entirely without notice and entirely without explanation. I have already called attention to it in my book Rechte und Verhältnisse, p. 68, note 6. As to the actual fact that the successive diminution of value, which a good suffers in the course of its wear and tear, does not go parallel with the degree of its physical wear and tear, but is slower at the beginning and quicker as time goes on, there can be no doubt. It may be seen in its purest form, because there it is not confused through subjective inexactnesses or caprice, in the rating of valuable paper which brings in a fixed annual amount for a limited number of years. A bond, e.g., which assures its owner the right of drawing ten years' coupons of £1000, and possesses (on a calculation of 5% compound interest) an initial course value of £7722 (Spitzer's Tables, p. 274), does not lose £772.2 for each of the ten years which make up its lifetime, although in each of these years it loses exactly one-tenth of its content. In the first year it loses £614, in the second £645, in the third £677, and so on successively £710, £747, £783, £823, £864, £907, and, finally, in the tenth year, £952, the sum it was still worth at the beginning of this latter year. But in all other kinds of durable goods the same course of wear and tear may be observed with sufficient accuracy, although, for obvious reasons, we seldom make so exact and mathematical a calculation. Later on I shall have another occasion to mention cases of this kind. Now in all the literature known to me I have found no attempt to give an explanation of this fact,—which is certainly notable enough to deserve explanation. Indeed, such an explanation is simply not to be got from the machinery of previous theories, particularly the "Use theory," while it offers itself unsolicited on the lines of my theory.

[51.]See above, p. 343.

[52.]In Menger's most valuable contribution Zur Theorie des Kapitales (Conrad's Jahrbücher, vol. xvii. p. 47), which appeared while this was passing through the press, the author likewise has urged against the Use theory that, in its conception of capitalisation, it has not solved its problems, but only gone round about them.

[53.]After deducting the share of the co-operating complementary factors.

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

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

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

[57.]See above, p. 305.

[58.]In the later years the "wear and tear" increases progressively, because the last service, which is not replaceable by any one coming after it, gets always nearer to the present, and becomes, therefore, always higher in value. See above, particularly the table on p. 348, note 1.

[59.]Spitzer's Tables, p. 121.

[60.]On the relation of Ricardo's rent theory to the modern value theory, see Dr. James Bonar's suggestive remark; in an article entitled "The Austrian economists and their view of value" in the Quarterly Journal of Economics, October 1888.

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

[62.]The incorrectness of a theory is shown in its not being able to give a satisfactory solution for all given cases. I have already had frequent occasion to point to cases which could not be satisfactorily explained by means of the—to my mind—incorrect "Use theory" (see above, pp. 287, 347). Here I have to add another instance;—the buying of a perpetual interest, e.g. Consols, where the original debt can neither be called up nor paid back. In these annual payments the Use theory would see the price for a "use of capital" perpetually transferred. But what has happened with the capital stock? It has of course been transferred. But it is not simply lent, for it will never be paid back. Nor, in the view of the Use theorists, can it be transferred against payment, for the annual interest is the price of the "use," and there is nothing paid beyond that. Nor, finally, is it transferred without payment,—presented as a gift: the rentiers, the representatives of those who made the loan, have no intention of making any such present, and the government which received the loan certainly does not feel that it has received a gift.—Now what the Use theory could not explain, or explained only in a most artificial way, is explained perfectly simply by our theory: it is just an exchange of present goods (the original capital) against a series of future sums of goods (the annual interest payments).

[63.]See below on the Rate of Interest.

[64.]I gladly embrace this opportunity to repair an omission in my Capital and Interest. At the time when I published that work I unfortunately had not made the acquaintance of Loria's La Rendita Fondiaria (Mailand, 1880). It contains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence theory, of which I can only say that, if the Abstinence theory were tenable—which, of course, I do not believe it to be—Loria's setting of it would be the first to gain recognition.

[65.]See above, p. 114.

[66.]See above, p. 335.

[67.]It may, perhaps, be pointed out in reply that, owing to the increasing supply of wood, its value would be pressed down, and so, by and by, forestry would become only as remunerative as baking and such like. I would, however, suggest that this result would only be reached when the value of hundred-year-old timber had come down to a halfpenny; and to press down the value of wood so low, in the midst of a dense population, an enormous portion of the country would require to be turned into forest again!

[68.]See above, p. 310.

[69.]The levelling up of wages—that is, up to the value of the future product of the most remuneratively employed labour—is, of course, impossible, because the national product would not suffice for that.

[70.]I may remark in passing that the same position holds in the case of land rent. It is obvious that, even in the Socialist state, a labourer working on a peculiarly fruitful piece of land, e.g. in a Rüdesheim vineyard, will produce a greater or more valuable product than one who puts forth the same exertion and skill on a common piece of land or vineyard. But it is as evident that it would be insufferable "protection" to allow the former labourers their entire greater product as wage. To avoid injustice the wage here must be levelled down; that is to say, of the product of the more fruitful lands, the "land rent" must be first of all retained for the common purse, to be divided afterwards to all the citizens in their capacity as joint owners of the national land. Land rent, therefore, even in the Socialist state, would exist, would come into operation as against the labourers cultivating superior land, and would only be divided according to another plan than new, on account of the equal share of all in the nationalised land.

[71.]On these forms of organisation see Anton Menger, Das Recht auf den vollen Arbeitsertrag, Stuttgart, 1888, pp. 104, 112.

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