The Positive Theory of Capital
Book VII, Chapter IV
The Market for Capital in Its Full Development
Up till this point we have assumed that the annual product of each worker, and also the annual wage, is the same in all branches of employment. Of course, in actual life this is not the case. But that does not in the least disturb the normal connections and relations we have laid down, otherwise than by acting as if there were a somewhat different number of unskilled labourers with ordinary wages and ordinary productivity. For even if the absolute amount of the return to labour on the one hand, and that of the wage of labour on the other, be ever so various in the various branches of employment, still the ratio between these two amounts will, in virtue of the familiar law of equalisation of profits, remain the same all over, and this is the essential matter in the question of Interest. If, for instance, in one branch of production, the wage of unskilled labour be £50, and the product of a year's labour £65, in another branch, carried on mostly by skilled labour, the worker's annual product may, perhaps, be double, say £130. But then the wage of such a worker will also rise to double, say to £100. For, if it did not rise, the undertakers in this branch of business would obtain an abnormal surplus; this would attract stronger competition; and competition would either raise wages by creating an active demand for workers, or press down the price of products by increasing supply. But if the wage of the skilled labourer were to rise higher than £100, the undertakers in question would again obtain too small a profit, and the consequent limitation of that branch of production would undoubtedly either press down the wage of workers, who would now have become partly superfluous, or raise the price of the restricted product, till such time as wage and product, here as everywhere, stand in the ratio of £50 to £65, or £100 to £l30. But if this ratio between wages and product holds, all the ratios relating to the formation of interest are exactly as they have been assumed to be in our earlier tabular statement, with the single qualification already mentioned, that the existence of better paid skilled labour has exactly the same effect as a somewhat greater number of normally paid unskilled labourers. For, obviously, it is all the same as regards the resultant arrived at in the subsistence market, whether two labourers produce £65 each, and claim £50 each of subsistence, or one labourer produces £130 and claims £100.
Further, we have assumed up till now that, in all branches of business, the increment of annual return that accompanies the increasing extension of the production period, moves in the same rate of progression. This also is not the case in real life. On the contrary, each branch of production, in virtue of its technical circumstances, has a different and often, indeed, a very different scale of productivity. It is, for instance, quite possible that three different branches of production—call them A, B, and C—which were each turning out in a one year's process an annual product of £50, might show an exceedingly divergent return (or surplus return) if the process were extended for two to five years more. We might have, something like the following:—
Naturally this has its practical consequences. It is the producers' interest to obtain the greatest returns or surplus returns. They will, therefore, invest the available capital where they are tempted by the greatest returns. If there is capital over, or if new capital is added, they will look out for the next best paying employments, and so on, in such a way that they will only take a less paying employment when all the more paying chances have been utilised.
Now if, as we have hitherto assumed, the progression of surplus returns obtainable from similar extensions of production were the same in all branches of employment, then, in all branches of employment, the same surplus would be reached by the same length of process, and, consequently, an equally long production period would prevail simultaneously over all employments. As capital increased it would press on, with one united front, from one to two, from two to three years' production, and so on. But, as we have said, owing to different technical circumstances in the various branches of production, we actually meet the same surplus return in productive periods of different lengths. While, then, in the investing of capital we pursue an isohypse—to borrow a geographical term—of surplus returns, we must diverge from an isohypse of extensions of production. Production in its various branches must be carried on in unequally long processes; and, indeed, in those branches where the surplus return sinks rapidly, it must be carried on in shorter periods.
The above scheme will illustrate this. First of all production is carried on, in all three branches, in a one year's process with a return of £50 per labour-year. If the subsistence fund increases so much that at least a partial extension over the one year's period is possible, people will pass first to a two years' process in branch C, which bears a surplus return of £10 for a half-year's payment.*27 Then the production period will be extended in the same branch C to three years (with a surplus return of £5), and to four years (with a surplus of £2:10s.), while the other two branches of production are all the time persisting in the comparatively unremunerative one year's process. Only where the subsistence fund increases still further will they pass in branch B to two years' production (with a surplus return of £2). But in branch A they will not be able to extend the period of their production (which only gives a surplus return of £1), until all opportunities of production have been utilised up to the isohypse of £1. This will only be the case when in branch C the production period has been extended to five years, and in branch B to three years. Production, then, will and must be carried on simultaneously in the three different branches in two, three, and five years' periods—a conclusion which we see verified in economic practice in the familiar fact that different products are produced with very different degrees of capitalism. Food, for instance, is a much less capitalistic product than metallic goods, or clothing stuffs, or manufacturing products generally.*28
How, then, is our law of the rate of interest affected by this complexity of actual circumstances?—It is not disturbed in the least. For all the essential circumstances on which it rests remain unchanged. It is still the case that the existent capital is employed in gradually extending processes till it is fully occupied. It is still the case that there is a certain level of these extensions, yielding a certain surplus return, which is the last economically permissible, and a succeeding level yielding a somewhat less surplus return which is economically not permissible. And, finally, it is still the case that the surplus returns of these "marginal employments" also form the marginal limits of the interest rate. The single difference—and that not an essential one—is that the isohypse of the surplus returns, and with it the line of the last permissible extensions of production, is not a straight line, but runs in an undulatory or zigzag fashion through the different branches of production, according as the same surplus return is reached by them in longer or shorter processes. But this modification gives our law a still sharper power of definition. For as, in consequence of the complexity of actual life, the scale of productivity is much more finely graduated than was our simple typical scheme, the two marginal limits, as a rule, stand much nearer each other, and consequently narrow the zone within which price is determined very much more closely than is shown in our abstract illustration.*29
To proceed. Hitherto we have assumed that the demand for present goods comes simply from the wage-earners (either directly or through the mediation of undertakers). But this, again, in actual life is not correct: there are a few other competitors in the market.
There are, first, the suitors for Consumption credit. Their demand is graduated and stratified according to the urgency of their need for present goods.*30 One class will be in such pressing need that, in the worst case, they will be glad to offer an agio of 100%: another class will only go the length of 80%: a third will offer 60%: others 50%, and so on down the scale, perhaps, to 2%. Now these suitors join their claims to the demand which comes from the wage-earners and each class or layer of them is satisfied concurrently with that layer of productive employments yielding a surplus return that represents the same percentage. If, for instance, the investing of capital reaches the isohypse of a surplus of £4 on £21, all those suitors for loans will be satisfied simultaneously who, in the worst circumstances, are able to offer 19.048% or more: if it reaches the isohypse of a surplus of £2:10s. on £25 all suitors will be served who are willing to offer at least 10%, and so on.
It would be quite erroneous to understand this as meaning that the rate of loan interest is determined simply by the rate of interest obtained in production. It contributes just as much to determine the latter, as it is determined by it. Both classes of demand work in entire co-ordination. The fact that here is a certain class of suitors for consumption loans, and that this class takes a portion of the existent means of subsistence out of the market, involves that there are fewer means at the disposal of productive investors; investment must call a halt at a higher isohypse of surplus returns; and this again involves a higher rate of interest in the sphere of production. Conversely the presence of the productive demand results in a considerable portion of the means of subsistence being claimed for productive purposes, and this again has the result that the wants of consumption credit are not satisfied at such low levels as would otherwise have been the case. In the present day, of course, the productive demand is so much the more important of the two that one is apt to suppose that it alone rules the rate of interest. But this false impression is now and then sensibly corrected by experience when some great state-loan for consumption purposes—say for a war—makes the general interest rate fly up. But even when the demand for consumption credit is quite insignificant, it does not fail to exert some influence on the rate; it may always be contended that, if it were to disappear, the interest rate would be at least a fraction lower than it is now.
Another competitor in the market for capital is the Landowner. If owners work their own lands, and are content to maintain themselves by the fruits of their labour (whereby they lay past their rent as saving), they are no burden on the subsistence fund of the community. If, however, they live wholly or partially on their rents, their subsistence also must be advanced out of the community's fund, for a length of time proportional to the production periods in which their land is laid down. Suppose, for instance, that the wealthy cotton planter lives in idleness on his rents, and that the total production process of textiles, including the various stages of spinning, weaving, etc., down to the manufacture of the finished cotton stuffs, takes five years, the maintenance of the planter, just as much as that of his fieldworker, must be advanced out of the subsistence fund over five years. The advance will then, of course, be refunded out of that quota of product which—according to the law of complementary goods—is due to the co-operation of the uses of land; but, in the meantime, the landowner lives at the expense of the subsistence fund.
What kind of effect has this on the rate of interest?—Its effect is entirely similar to that of consumption credit. The competition of landowners takes a certain amount of subsistence out of the market; it thus curtails the investment of capital in production, and makes it call a halt at a higher isohypse of surplus returns; and this, finally, keeps up the rate of interest. In doing so, however, the claim of the landowner on subsistence comes under a reflex influence from the height of the interest rate. This, of course, has no reference to the height of the annual rents—for this is fixed by those circumstances which influence the economic value of uses of land, and need not be mentioned here—but to the number of annual rents for which advances of subsistence are demanded. That is to say: if interest is high, lengthy periods of production are not profitable;*31 the uses of land will be invested in comparatively short processes; and, as consequence, the advances made to landowners will only be for short periods. If, whenever, the interest rate is low, then, concurrently with the increase in production and consumption credit, increases the subsistence advanced to the landowners; it now extends over greater number of annual rents according as the uses of their land can now be invested in much longer processes.
There is one other competing party in the market, the capitalists themselves. So far as they live, entirely or partially on their interest, their maintenance also will be defrayed from the subsistence fund, and, in so far as the fund available for other purposes is thereby contracted, will the interest rate tend to rise. There is, however, one important difference between the claims of the capitalist on subsistence, and those of the wage-earners, the suitors for loans, and the landowners. The claims of the latter are the cause of the agio on present goods: the claims of the former are simply its effect. If the claims on subsistence presented by the wage-earners, borrowers, and landowners did not by themselves alone exceed the existent subsistence fund, there would be no agio on present goods, and, as consequence, the capitalists, as such, could make no valid claim for subsistence on the funds of the community: in default of an income from interest they would have to support themselves by work. It is only because there is an agio, as effect of the other classes of demand, that the capitalists can claim a quota of the product as interest, and claim it indeed in advance. Reflexly, of course, this claim of the capitalists influences the rate of interest. It is exactly as, for instance, in electrical induction. The chief current first calls out the induction current, and then the latter reflexly influences, and indeed strengthens, the chief current. Just in the same way does the demand of the other competing parties in the market, by creating an agio, first call out the claims of the capitalists on subsistence: but, so soon as the agio is a fact, it diverts a portion of the subsistence fund into the income of the capitalists; it thus contracts the disposable remainder; determines the "saturation point;" in the remaining branches, at a higher marginal utility; and so, in the last resort, causes a rise of the agio.
Suppose we try now to unite the scattered features into one picture. In its collective stock of wealth every people possesses a greater or less fund of subsistence. This is consumed definitively by uneconomic persons who waste their parent wealth,*32 and by the suitors for consumption credit: it is consumed as an advance by landowners, capitalists, and wage-earners during the social period of production.*33 The greater the subsistence fund, the longer can the social period of production be extended, and the more completely can the demands for consumption credit be satisfied. The return of the last extensions of production still possible, and, concurrently, the valuation of the last suitors who obtain loans, determine the height of the agio on present goods.
Consequently, on the basis of our completed inquiries, the following factors emerge as the most important concrete circumstances or "determinants" which influence the rate of interest.
First come the same three factors which from our inquiry into the circumstances of the labour market in its most abstract form we were forced to recognise as decisive:—
1. The amount of the National Subsistence Fund.
After these come:—
4. The extent and the intensity of the desire for consumption loans.
If we pursue this line of thought a little further we shall repair an omission in our former analysis. Hitherto we have considered subsistence fund and subsistence claims as something actually existing and present: we must now consider them in the act of becoming. Hitherto we have looked at the subsistence fund as standing over against, and disputing the claims which the open market made on it: we have still to consider the noiseless but never-ceasing war waged on wealth in each individual economy by the desire of enjoyment. What follows will form both continuation and conclusion of another line of thought on the subject of the formation of capital begun on p. 124.
Notes for this chapter
See above, p. 392.
See what was said above on p. 334: the two passages mutually supplement each other.
See above, p. 394.
See above,p. 376.
Which can be quite easily calculated from our tabular examples. See, too, close connection of what was said on p. 382.
See above, p. 319.
Members of the community not here mentioned, as women, children, persons who occupy themselves with the performance of personal services, as artists, officials, domestics; must also, of course, get part of the subsistence fund. But they are not to be counted separately, for the reason that they are not a direct charge on the social subsistence fund, but on the portions secured by the economical classes already mentioned in the text. Violin-players, e.g., receive a portion of the subsistence obtained by concert-goers; the establishment of a rich landowner is supported and paid out of his rent, and so on
I must guard myself against a misunderstanding very apt to occur. What I maintain is that the position of land rent as a form of income—the absorption of a portion of the national product by landowners who live without working,—tends to raise the rate of interest. On the other hand, I do not say that the causes which call forth land rent, and raise it, raise also the rate of interest. On the contrary, the well-known law of Diminishing Returns, according to which (in the absence of technical discoveries or improvements) new additions of capital and labour in agriculture lead to a decreasing surplus return, while it exerts an upward influence on land rent, certainly exerts a depressing influence on interest (see point 3 in the text). The full bearing of my contention is best expressed in this;—that in event of the taking away of private right to land, or heavy and confiscatory taxation of land rent, interest in that community would stand lower than it would otherwise. The causes of land rent, in themselves, would depress interest, but land rent, as one of the shares in the division, through its effects on the division, makes up for a portion of these influences.
It may, perhaps, have been noticed that the often-mentioned factor of Insurance or Risk, which plays so great a part in practical life, especially in determining the rate of interest on loans, is missed out in my enumeration. This factor, however, has no place here. For the surplus return which this gives the capitalist, if to all appearance it raises the rate of interest, is in truth no real interest,—no net income accruing from the possession of capital,—but only a replacement for a loss of parent stock which shows itself as unavoidable over a great average of cases.—Finally, from the whole course of my research, it will be self-evident that it was not my intention to introduce exhaustively all the secondary determinants of the rate of interest. I have contented myself intentionally with enumerating the most important of those determinants which come into view as typical if the economical interests of the market are followed without let and hindrance. On the other hand, the influence of motives such as generosity, national prejudice, vanity, etc. (see Conrad's Jahrbücher, vol. xiii. p. 486) I have purposely left out of account here. See also below.
End of Notes
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