CHAPTER VIII

CAPITAL

§1. _A Reference to Marx_. Interest is the price paid simply for the use of capital. But what is capital, and in what does its use consist? What claim has it to be regarded as an independent factor of production? Our very familiarity with the term, our habit of employing it with the rich looseness of every-day life is an obstacle to the clearness of thought, which is again essential. We recognize, most of us, clearly enough that capital, although we reckon it in terms of money, consists, like income, of real things; factories, machinery, materials and the like. It is quite obvious that these things are of use, are, indeed, indispensable for production; what more natural than that capital should command a price? It almost seems as though we might pass, without further ado, to a detailed discussion of the forces which determine the amount of this price.

But this account does not bring out the essential point as brief reference to a very famous controversy will show. Some ingenious writers in the last century, the most notable of whom was Karl Marx, set out to prove that, in our modern society, workpeople are "exploited," robbed of the "whole produce of their labor," to the full extent of the return which accrues to capital. The argument was exceedingly complex in detail; but it boils down to this: The factories and machinery which are admittedly essential to production were themselves produced in exactly the same way as consumable goods. They were produced by labor, working with the assistance of nature, and, again, if you choose, of capital in the form of further factories, machinery, etc. But these further capital goods can in their turn be regarded as the product of labor, nature and capital; and so we can proceed until it seems as though the element of capital must disappear in the last analysis, as though labor and nature were the sole ultimate agents of production, and the reward of capital represented no more than the exercise of the exploiter's power. In one form or another this argument still dominates the minds of a large proportion of the so-called "rebels" against the existing social order.

If we are to meet this argument, if, which is perhaps more important, we are to understand the true nature of capital, we cannot rest content with saying that it consists of factories and machinery, and that these are essential to the worker. Just as it was well to get behind the money terms, in which we often think of capital, to the real goods; so we have now to get behind the real goods to something else. What this something else is, the first chapter may have already done something to reveal.

§2. _Waiting for Production_. Between production and consumption there is an interval of time. All productive processes take time to accomplish. The farmer must plow the soil and sow the seed months before he can reap the harvest which will reward him for his efforts. Meanwhile, he must live, and in order that he may live he must consume. If he employs laborers he must pay them wages, that they too may consume and live. For both purposes he requires purchasing power, which represents of course command over real things; and if he has not sufficient purchasing power of his own, he must borrow from someone else who has. In either case it is not enough that the farmer and his laborers should work; no less essential is it that someone should _wait_. The farmer must wait till he has sold his crops, both for the reward of his own labor and for the repayment of the wages he advances in the meantime to his laborers. Or, if he cannot afford to wait, and borrows in anticipation of the harvest, then the lender must wait, until the farmer, having sold his crop, is able to repay him. Thus the period of time involved in all production gives rise to a demand for _waiting_, which someone or other must supply, if the production is to take place. It is this waiting which is the essential reality underlying the phenomena of capital and interest. It is really this which constitutes an independent factor of production, distinct from labor and nature, and equally necessary.

§3. _Waiting for Consumption_. But let us carry the argument a step further. After the farmer has sold his crops, there are many stages through which they must pass, at each of which more waiting is required, before they reach the ultimate consumer. But then the waiting is at an end.

This, however, is by no means the case with a great number of commodities. Let us take the case of a speculative builder. While he is building a house he, like the farmer, must wait (or find someone to wait on his behalf), for his own reward, and for the repayment of his expenditure on wages and materials. But, after the house is built, if he lets it to a tenant for an annual rent, his waiting is far from over. Not until many years have passed will the rent payments add up to a sum which equals or exceeds his outlay. He may, of course, sell the house, and thus bring his waiting to an end. But then the purchaser must wait, no matter whether or not he is the occupier. For no one would consider the use of a house for a day, a month, or a year as an adequate return for the price it cost to buy. The occupier-owner pays for the prospect of its use for a long and perhaps indefinite number of years ahead, and he must wait to enjoy the benefits for which he pays now in full. Waiting is as inherent in the consumption of durable things as it is in all production.

Now most industries are consumers of durable things of a very expensive kind. Here we come back to the factories and machinery which ordinarily spring to our mind at the mention of the word capital. Not merely does the construction of these things involve waiting; their consumption involves waiting on a vastly larger scale. Just as with a house, many years must elapse before their derived utility can even approximate to their purchase price. It is mainly to supply the waiting involved in the consumption of such durable goods, that a typical joint-stock company issues shares for public subscription. The waiting required to cover the period of time, which its own productive process requires, is largely supplied by means of bank overdrafts or other forms of short-period borrowing. More strictly, fixed capital represents the waiting involved in the consumption of durable things; circulating capital the waiting involved in current production.

This distinction loses its sharpness when we consider not the affairs of a particular business, but the industrial system as a whole. Then the period of time involved in the consumption of durable instruments falls into place as part of the time required for the production of the ultimate consumers' goods. We can even, perhaps, conceive of an "average period of production" for industry and commerce as a whole; and this conception is not without its uses. For it serves to bring out the fact that the period of consumption, and the period of production in the narrower sense, are only two aspects of the same fundamental thing, the interval of time which elapses between work and the utility, which is its ultimate purpose. It serves, moreover, to make clear that anything which lengthens this interval of time increases the demand for waiting, or in other words, the demand for capital; and, conversely, that anything which shortens this interval diminishes the demand for capital.

§4. _Capital not a Stock of Consumable Goods_. But the distinction between the two forms of waiting, though not fundamental, is none the less worth noting. It enables us to keep our theory in conformity with fact, to look at the phenomenon of capital the right way up; and it is easy, if we are not careful, to slip into the habit of looking at it upside down. People sometimes speak as though the commodities which constitute our capital, instead of being mainly, as our plain sense tells us that they are, factories, machinery and other durable instruments, were rather a _store_ or _stock_ of immediately consumable goods. The argument takes the following form. It is consumers' goods, things like food and clothes, which the farmer, the builder and their workpeople consume while they are working. To enable them to work, therefore, it is vital that such things should not in the past have been consumed as soon as they were made; part of them must have been saved, and carried forward for future use. Furthermore, the longer the time that the work on which people are now engaged takes to yield its product, the larger must be this store of consumers' goods. For these products, when they are completed, will serve (taking society as a whole) to replace the store which in the meantime is being used up, so that the longer this replacement takes, the larger must be the initial store. Conversely, the larger the store of consumers' goods available, the more distant is the future for which we can afford to work. It is thus the store or stock of consumers' goods which represents our real capital; for it is the magnitude of this store which determines how far we can devote our energies to purposes which are remote in time.

Now this is pure mysticism. Regarded literally, it is in direct conflict with the facts. The processes of industry are fairly regular and continuous. At any moment, large quantities of consumers' goods of almost every kind are on the point of completion; at the same moment equally large quantities are consumed. The things which we buy were finished, very likely, only recently; or, if in fact they have lain idle for some time in stock, there is nothing essential or at all helpful in that fact. It represents rather a defect--a maladjustment which should be rectified. Even many kinds of agricultural produce do not need to be carried forward from one year to another, for they are produced in many parts of the world, where the seasons come at different periods of the year. It is conceivable, therefore, that we might consume all non-durable things the moment they were ready, and the degree to which we approximate to this ideal is a mark of the efficiency of our economic system. A large store of consumable goods is thus _not_ a fundamental necessity of a prosperous society.

What _is_ necessary is plainly the power to produce these things in large quantities as they are required. And this power is furnished by the durable instruments of production, which we thus rightly regard as the true representatives of modern capital. If it is argued that this power to produce consumable goods may be regarded as being _in effect_ a store of consumable goods, it must be sternly replied that this is the language of symbolism, not of science, and that symbolism is highly dangerous in this connection. The false conception of capital as essentially a store of consumers' goods has led and still leads to many serious fallacies. It was this that gave rise to the notorious doctrine of the Wages Fund; the notion that the sum which can at any time be paid in wages is equal to the quantity of capital, _alias_ consumable goods, which happens to exist. To this day it blocks, with an undergrowth of obscurantist controversies, the way to a straightforward account of the problem of trade cycles.

§5. _The Essence of Waiting_. But it is with positive conclusions that we must here concern ourselves. What is the essence of this waiting, as we have called it? What are its results from the point of view of the community? The individual, who saves and lends, waits in the obvious sense that he postpones consumption. He foregoes his right to purchase now a quantity of consumers' goods in consideration of the prospect of purchasing a larger quantity of such things in the future. From the standpoint of the whole community, there is a similar postponement of consumption, though it need not commence so soon. The store of consumable goods is what it is: the quantity of goods in _process_ of manufacture, which will shortly be coming forward, is also what it is. For some time, therefore, a sudden access of saving cannot affect the quantity of goods available for consumption; and if, in fact, they should be consumed less rapidly, that will represent an unfortunate defect, not an essential condition of a smoothly working system. The _necessary_ consequence comes later. The increased saving will cause labor, materials, land, agents of production generally, to be devoted to distant purposes. Men will be set to work producing durable goods, largely durable instruments of production like ships or railways or factories or plant. If the increased saving is considerable, the labor, materials, etc., required for these purposes will be withdrawn even under our present system, as under a smoothly working system they clearly must be, from the production of other and more immediately consumable things. Hence, some time later, the supplies of consumable things will be diminished, while at a later period still they will be more than correspondingly increased as the result of the assistance of the new durable instruments. That is the essence of saving from the social standpoint. An early future is sacrificed to a more remote future. The aggregate consumable income of the present is unaffected; the aggregate consumable income of the near future is actually diminished; it is not until at least some years later that the aggregate consumable income is increased.

§6. _Individual and Social Saving_. This conclusion is important: but there is an obvious misinterpretation against which it will be well to guard. It is customary for social moralists to preach thrift and saving as a public duty, and to impart to their appeals a special note of urgency in times like the present, when, as the result of the havoc of the war, destitution is widespread over Europe. Now obviously these advisers do not mean to recommend something which will impoverish the world next year and the year after and the benefit of which will accrue only in a distant future: it is the immediate urgency of the world's needs which is rather the substance of their case. Nor would it be right to conclude that these wise men are the victims of a delusion, and advocate a course, the consequence of which they do not understand. The explanation of the paradox is simple. The more the community as a whole saves now, the less in the near future will be the aggregate consumable income of the whole community: but not of the _remainder_ of the community, exclusive of the savers. It is the saver who must wait, whose consumption must be postponed to perhaps a distant future; but _at no time_ does his saving result in a smaller income of consumable goods for other people. The aggregate consumable income of the near future will be diminished, but it may be better distributed, and it may consist of things of a different _kind_. For consumers' goods, we must remember, comprise champagne and motor cars as well as food and clothes; and, if a rich man saves, it may be purely articles of luxury, the production of which will shortly be diminished. Moreover, if his saving has the effect of transferring purchasing power to impoverished people, like those in Central Europe, it will not be devoted to a distant future; it will very likely be devoted to quite immediate ends. In other words, it may not result in any "creation of capital"; it may not represent any saving on the part of the community as a whole. A relatively rich man waits, and a relatively poor man _anticipates_ his income to a corresponding extent; and it is precisely this that is so urgently desirable in a time of widespread poverty and chaos.

This is no matter of hair-splitting, and making plain things obscure. While it is always better for the _rest_ of us that an individual, who can afford to save, should save rather than spend (though it might be better for us still if we could have his money to spend ourselves) and while this is the more important the greater is the poverty which generally prevails; yet, as a community we cannot save so much, we _ought_ not to save so much, when we are impoverished as when we are prosperous. It is vital to appreciate this truth, because, as we shall see, by no means all the saving of the world is done by individuals. There are many forms of "collective saving," which take place in actual fact; still more which we are often urged to undertake. And it is of practical importance to realize that the very considerations, which call most urgently for individual thrift, forbid a great indulgence in such projects. A time of national poverty is not a time when it is suitable for the State to embark on large schemes of capital development: we require our resources for more immediate ends. Faced with such problems, our practical sense may no doubt suffice to keep us straight; but it is apt to do so at the expense of a complete inversion of the real issues. If, for instance, we call for Governmental retrenchment on what we deem extravagant policies of housing and education, we usually speak as though they represented the profligacy of a spendthrift as contrasted with the saving that is indispensable. The truth is rather that these policies represent a saving, an investment for future purposes, which may conceivably be greater (this must not be taken as representing my personal opinion) than the community can properly afford. This is another instance of what I mean by looking at the problem of capital the right way up.

§7. _The Necessity of Interest_. It is only now that we are in a position to appreciate the true functions of a rate of interest, and the nature of its claims to be regarded as a "real cost." Interest, it is sometimes said, is necessary to provide for the future. It is far more certain that interest is necessary to provide for the present. It is a matter of legitimate doubt how far it is necessary to _pay_ interest to secure a supply of capital; there is no doubt at all that it is necessary to _charge_ interest to limit the demand for it. As we saw in