The Positive Theory of Capital

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.

POSSIBILITIES OF EMPLOYING 100 PIECES
Amount of utility per piece		In immediate consumption.	In a five years’ process.	In a ten years’ process.
		6	7.05	9.82
		5	6.26	7.37
		4	5.48	4.91

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.