The Positive Theory of Capital

Present goods are, as a rule, worth more than future goods of like kind and number. This proposition is the kernel and centre of the interest theory which I have to present. All the lines of explanation, by which I hope to elucidate the phenomena of interest, run through this fact; and round it, both essentially and superficially, is grouped the whole of the theoretical work we have to do. The first part of our explanation will try to prove the truth of the proposition; the second will then show that, out of the fact, spring, naturally and necessarily, all the manifold forms which the phenomena of interest take. In the present book we have to take up the first part, and I shall try to go into it with that minuteness which is due to the cardinal importance of such a proposition. To this end we shall, first of all, make a general survey of the relations between present and future in human economy—a subject, obviously, of the highest importance, but one which, strangely enough, has up till now attracted but scanty scientific attention.
*1

In the present we live and move, but our future is not a matter of indifference to us, and our desires are, with reason, directed towards a wellbeing not limited by the present. It is only as the logical carrying out of this general principle that we set before us, in our economical arrangements, the larger object of providing for our future as well as for our present wellbeing. As a fact, the future has a great place in our economical provision; a greater, indeed, than people usually think. It is, of course, a commonplace, but, all the same, it is a truth seldom seen in all its bearings, that our economical conduct has exceedingly little reference to the present, but is, almost entirely, taken up with the future.

Let us clearly understand what this latter statement means. It means that our anxiety in the present is to have at our disposal, in the future, means for the satisfaction of wants that will not emerge till the future. In other words, it means that pleasures or pains, which we will only experience in the future, determine as now to provide goods or services, which, again, will only assert their use in the future. But how is it possible that feelings which are not yet felt, and therefore feelings which, essentially, do not exist, can be motives to will and deed?

Now, as a suggestive writer has said, we do not indeed possess the gift of feeling future sensations, but we possess the other gift of anticipating them in imagination,
*2 Either it is that we have already in the past, once or many times, experienced the same want as we expect in the future, and retain a picture of it in our memory; or, at least, we have already experienced wants or feelings that bear a certain resemblance to the feelings we are expecting, and can, from such analogous reminiscences, construct for ourselves an imaginative picture which is more or less true. On such pictures of memory and imagination we base our economical calculations and our economical decisions. Certainly, as many a one will be apt to object, it is an unsafe and deceptive foundation, but, all the same, it is almost the only one that we have. It is the rarest possible thing for us to base a valuation of goods, or an economical decision, on a pain that we are feeling at the very moment. It is, indeed, one of the characteristics of a civilised community that it anticipates want by providing for it, and does not allow the pain of emptiness, which the unsatisfied want would involve, to get to its full height. We do not begin to prepare our meals when hunger has reached its highest point of torment: we do not wait till the flood has overwhelmed house and home before we think of putting up the dam: we do not delay building the fire-engine till the flames have broken over us. At the moment when we decide on an economical action, the wants which cause us to make the decision are, almost always, in the future, and so, however near that future may be, they are acting on us, not as actual feelings, but as simple anticipations. How many a man has never, even in the past, fully felt the want which makes him value the goods he daily uses! How many rich people know only from hearsay what real hunger is!

Hence it is obvious that, however deceitful and unsafe this gift of anticipation may be, and however far astray it may lead us in individual cases, we still have every cause to be heartily thankful that we have it. Otherwise, neither actually feeling the future wants, nor yet forewarned of them by anticipation, we could not, of course, provide for them in advance; once want had made itself felt, any measures we could take would be miserably inadequate to provide for it; and, poorer than the poorest savages, we should drag out a hazardous hand-to-mouth existence.

But economical action means something more than thinking generally about the wants which are to be provided for. As, indeed, all economising arises from the quantitative insufficiency of the means of satisfaction as compared with the wants requiring satisfaction, so it demands a constant selection, a constant choosing between those wants which can and should be provided for, and those others which cannot be provided for. The selection naturally proceeds on a comparison of the importance and urgency—or, as we may say, the intensity—of the feelings of pleasure and pain which are associated with individual wants and their satisfaction. Now, if it is seldom that, in the moment of an economical decision, we actually feel that
one want to which it refers, it is much more seldom that, on the moment of our choice, we experience, as actual feelings,
all those sensations of pleasure and pain between which we have to choose. Our comparisons must, almost invariably, be, partially and very often completely, made on imaginative anticipations which we make of future feelings. And this leads us to a fact which I should like to emphasise: The future feelings we imagine are commensurable. They are commensurable with present actually-felt sensations, and they are commensurable with one another, and that too without reference to whether they belong to the same or to different levels of time. It is as easy for me to choose between a pleasure which seems desirable at the moment and another pleasure which I can obtain in eight days, as between two different pleasures which are both obtainable in eight days, or, again, as between two pleasures of which the one is obtainable in eight days, the other in eight months, or eight years.

The fact that we borrow from future sensations the motive for our present actions, is one side of our connection with the future. Another side is that, by our present actions, we prepare goods or material services
*3 for the benefit of the future. If we analyse the totality of goods which constitutes our wealth we shall find that by far the greater part has the character of what, for want of a better name, we may call “future goods”
(Zukunftsgüter). All productive goods, without exception, are destined altogether to the service of the future. Durable consumption goods give off only a fraction of their material services in the present, and all the remainder in the future. If a dwelling-house, for instance, remains occupied for a hundred years, and affords shelter and comfort all that time, only an infinitesimal fraction of these services is rendered today; a still very small fraction is rendered in the present year; the great bulk of the service is spread over remote future periods. Even in the case of those perishable goods, such as meat and drink, wood and candles, which we keep ready for immediate consumption in our domestic economy, only one portion of their use is, strictly speaking, devoted to the service of the moment; the greater part is carried over into the future, although it may be the immediate future. As, among our motives, future feelings are the dominant ones, so, among the goods we possess and use, “future goods” occupy the larger place.

And there is yet another important analogy. As future feelings, whether they belong to the near or to the far future, are commensurable, alike with one another and with present feelings, so are future goods commensurable, alike with one another and with present goods. We can compare the value of a camellia which fades in an hour, with that of a ticket for a next week’s concert, or with that of a bunch of next year’s roses; or we can give one of these goods for the other. It makes no difference to the matter whether the “future good,” which we compare or barter, is at hand and ready for delivery now, or whether it is represented in bodily shape by nothing more than the means of production out of which it will come, or whether, at the moment, it is neither itself ready nor is capable of being palpably represented—is, that is to say, a “future good,” in the narrowest and strictest sense of that word. Thus we give present money in exchange, not only for the present consumption good Bread, but also for the present productive good Meal, in which the future good, bread, lies concealed. But just as easily can we buy from a farmer, for money down, his next year’s harvest. In “reserved seats” we buy the future services of actors and singers. In buying Consols we give our present money for a series of future payments. Future goods and services are to us—I have cause to emphasise this—entirely familiar objects of economic dealing, just as future feelings are entirely familiar economic motives. Both have their ultimate ground in the continuity of our personal life. What we shall experience in a week or a year hence affects us not less than what we experience to-day, and has, therefore, equal claims to be considered in our economic arrangements. Both arrangements have for their end our wellbeing.

Whether this theoretically similar claim of future and present is always fully recognised in practical life, is another question which will require much consideration.

Provision for the future makes no inconsiderable demands on our intellectual strength; makes some demands, even, on our moral strength; and these demands are not equally met by men at all stages of civilisation. The present always gets its rights. It forces itself upon us through our senses. To cry for food when hungry occurs even to a baby. But the future we must anticipate and picture. Indeed, to have any effect in the future, we must form a double series of anticipations. We must be able to form a mental picture of what will be the state of our wants, needs, feelings, at any particular point of time. And we must be able to form another set of anticipations as to the fate of those measures which we take at the moment with a view to the future. Our knowledge of causal processes must enable us beforehand to form an adequate picture of the forms which goods will take, of the quantity of them, and of the time when they will come to maturity as result of those productive or commercial activities which we are now commencing. To make this double work of anticipating a comparatively remote future clear and true to fact, is not possible to the infant, and not much more than possible to the child and the savage. Civilisation of course teaches us this difficult art gradually. But, even among the most advanced peoples, the art is still very far from being perfect, and the practical economic provision for the future is correspondingly inadequate. But, be the degree of anticipation and provision for the future what it may, wherever it exists in the most general way—and that is even among the most barbarous tribes—future goods and future services are as much actual objects of economical dealing as present goods. We strive to get them; we produce them; we value them; we buy and sell them.

I say, we value them; and this is a point that must be looked more closely into. On what principles do we estimate the value of future goods? The answer is: On the same principles as we estimate the value of goods in general: that is, according to the marginal utility which they will bring us in the circumstances, of Want and Provision for want. But here, naturally, we have not to deal with the relations of want and provision that obtain at the moment, but with the want and provision of that future period when the goods in question will be at our disposal. To the inhabitants of a besieged town, threatened with starvation, grain that was promised for delivery a year after the raising of the siege would certainly not be valued and paid according to the standard of the moment’s need; while, on the contrary, a brewer who, in January, concludes a purchase for a hundred cubic feet of ice to be delivered in July of the coming summer, will, just as certainly, not measure the value of the ice according to the over-supply that obtains at the moment when the bargain is concluded, but according to the scarcity which is likely to come with the summer.
*4

Very frequently, however, there enters into the valuation of future goods an element which causes us to value them a little—or even a great deal—under their future marginal utility, but which—as I shall show presently—has no connection with the phenomenon of interest. This is the element of Uncertainty. To us nothing future is absolutely certain. However closely we may have bound present and future together in economical connection, and however much reason we may have to expect the future to bring certain goods into existence, or put them at our disposal, still the actual fulfilment of our expectations is never, in the strict sense of the word, certain: it is always more or less probable. Of course, the probability is often so great that, practically, it amounts to certainty: as, for instance, the expectation that payment will follow an acceptance by the Rothschilds. In such cases we do neglect the infinitely small amount that is wanting of full certainty, and deduct nothing from the valuation we put upon the acceptance on the ground of uncertainty. But, frequently, the probability falls considerably short of full certainty. The farmer, for instance, may have done everything in his power to obtain a harvest by ploughing, manuring, sowing, and so on: but the harvest may be destroyed, wholly or in part, by hail, frost, flooding, or insect ravages. Sometimes, indeed, the probability sinks to the level of a very faint possibility, as, for example, when a man holds one of a hundred tickets in a lottery where there is only a single prize.

Cases like these cause a certain amount of hesitation to economic men. Are they to value uncertain future sums of goods exactly as if they were certain? Impossible! For then every lottery ticket that carried the chance of winning £100 would be valued at £100, and every claim, even the most doubtful, at its full nominal amount;—a course which, obviously, would land the men who tried to do business on these lines in the bankruptcy court in the shortest possible time. Or are the uncertain future sums of goods not to have any value put upon them? is no importance whatever to be attached to them with respect to our wellbeing? As impossible, and as ruinous! For then no man would give the smallest price for a chance in a lottery, or even for nine hundred and ninety-nine chances out of a thousand; no one would dare to make the slightest sacrifice to sow when harvest was uncertain. From this dilemma there is only one escape: we must ascribe to uncertain future sums of goods an importance as regards our wellbeing, but, at the same time, we must take account of the uncertainty of their acquisition according to the degree of that uncertainty. But, practically, this cannot be done otherwise than by transferring the gradation from where the gradation exists, but cannot be expressed—that is, from the degree of probability,—to where the gradation is not, but where alone it can be expressed—that is, the degree of the expected utility: thus equalising a greater, but less probable utility, to a less, but more probable utility, and this again to a still less but absolutely certain utility. In a word, we reduce all possibilities of utility to certainty, and restore the balance by deducting from this utility or value the amount we must add to the probability of the expected utility to raise it to certainty. Thus we reckon a claim on the Rothschilds at its full nominal value (disregarding for the moment the discount, as belonging to an entirely different sphere of phenomena), while one lottery ticket of a thousand, where the chance is a prize of £100, we value perhaps at 2s., one of a hundred at 20s., and one of ten, perhaps, at £10.

Strictly looked at, this kind of valuation—except where the certainty of the anticipated future utility is practically assured—is always incorrect.
*5 For, to recur to our illustration, the ticket will either draw the prize or it will draw a blank. In the former case it will have been, as the events show, worth a hundred pounds; in the latter, worth nothing at all. In no case will it have been worth 2s., or 20s., or £10. But, however false this method of valuation is in the individual case, it comes at least approximately right, according to the law of averages, over a great many cases; and, in the absence of any better method of valuation—which is denied us by the dulness of our imaginative forethought—it is well justified as a practical make-shift.
*6

I repeat that the element of uncertainty, which is the cause of a lesser value being put upon particular classes of future goods, has no causal connection with the phenomenon of interest. The lesser valuation which is its effect is a special one, and extends to one class of future goods only,
*7 and there it bears the character of a deduction as premium for risk.

With the exception of this peculiarity, the valuation of present and future goods is made on identical principles. But, to conclude from this that the
amount of value of present and future goods must be identical, would be too hasty. On the contrary, since present goods are available at a different time from future ones, and therefore come under different actual circumstances, and are intended for the service of a different set of wants, it is to be argued, from all we know about value, that the value of such goods must, as a rule, be different. And so it is in fact. We arrive thus at a proposition which is a fundamental one in our inquiry: As a rule present goods have a higher subjective value than future goods of like kind and number. And since the resultant of subjective valuations determines objective exchange value, present goods, as a rule, have a higher exchange value and price than future goods of like kind and number.

This phenomenon is the result of the co-operation of a number of causes; causes which, individually, are of very different natures, but which, as it happens, work in the same direction. These causes we shall consider in order.