SUMMARY OF EXPLANATION 265 of Ex considerations lead may be summarized as follows: Capitalists Summary receive a share of the price paid for the products which their Statement capital (embodied in concrete capital goods) helps to produce, planation. because the amount of capital is limited, because through its aid the amount produced and, therefore, the amount to be divided is increased, and because enterprisers, knowing the important part which capital plays in the branches of production with which they are concerned, are willing to pay for its use and are compelled by the competition of other enterprisers so to pay or to go without. The determination of just what rate they shall pay, that is, of the current rate of interest, is a complex matter depending on comparisons between the contributions to production of units of capital and units of labor under the given conditions of supply of these factors as explained in later sections (Sections 155-159). As suggested in this explanation, it is not the concrete cap- Interest ital goods-tools, machines, etc.-that are the objects of bor- Paid for Use rowing and lending in the business world, but rather capital, of Capital. the price of these capital goods in terms of money or purchasing power. It is for this rather than for any particular forms of capital goods that enterprisers, as borrowers, compete. Having obtained a loan of some part of the limited purchasing power that is available, the enterpriser himself converts it into the concrete capital goods he requires. From his point of view it is these goods that he borrows and for the use of which he pays interest: from the capitalist's point of view general purchasing power is the thing loaned and for the use of which interest is paid. By retaining the capital goods which he purchases and using them in his business, the enterpriser secures the interest which they are capable of earning as an addition to his gross money returns. Out of the added return due to the capital goods he pays the promised interest on the borrowed capital. The replacement fund, which in time substitutes a new fund of purchasing power for each worn-out capital good, enables him to repay the principal of the loan or, if it is continued, to add new capital goods to his productive equipment. If, instead of borrowing capital, the enterpriser uses wealth that he himself has accumulated, the same results follow except that under these cir Points Special cumstances he retains for his own benefit all of the interest that the capital goods earn in his business. There are two points in this explanation that require special Requiring emphasis. First, it is not mere temporary ownership of capital goods that entitles the owner to claim interest, but continuous ownership over a longer or shorter period of time. The capitalist must continuously refrain from spending his wealth on his own gratification or it cannot perform its function as capital. This is the point which socialists overlook when they contend that those who produce capital goods ought to receive the interest which these subsequently afford. Those who produce capital goods may secure this interest if they save these products for use in further production. Ordinarily, however, they are paid for what they produce as they produce it and spend their pay on immediate gratifications. They thus have no claim on the interest that capital goods afford, because it is not through anything that they do that these goods are made available for further production. The second point is that it is only because the available supply of capital goods is limited that they command interest. If ability and willingness to save were universal, capital might be accumulated in such large volume that enterprisers could secure more of it than they could profitably convert into capital goods in connection with their businesses. In such a situation interest might entirely disappear. The circumstances which limit the amount of capital that is accumulated, which are discussed in Sections 40 and 175, are thus the ultimate reasons for the payment of interest. The Re Fund Gives § 151. Differences in rates of interest, the second part of placement the interest problem, require explanation because it is the tendency of competition to equalize the earnings of all kinds Capital Em- of capital goods within the same market for capital. This bodied in is accomplished largely through the agency of the replaceCapital Mobility to Goods. ment fund. As already explained (Section 79), some capital goods are highly mobile and may be assigned readily to the particular branch of production in which they are in greatest demand. Most capital goods, however, are more or less specialized and seem to lack the plasticity necessary to free movement and free competition. This is the situation as it presents ROLE OF REPLACEMENT FUND 267 itself to the observer taking an instantaneous photograph of capitalistic production. But instantaneous photographs of shifting, changing objects are seldom very lifelike. They fail to represent their essential characteristic, which is movement. To be understood, capitalistic production must be studied not as it appears at any particular moment, but as it appears over a considerable period of time. It is not an instantaneous photograph, but a "moving picture," or a series of successive impressions, that is required. Every capital good has its distinct life history. By itself it has little mobility, but through the fact that it comes into being, wears out and is replaced, it allows considerable mobility to the capital transiently embodied in it. No capital good is ever called into being unless the investor or enterpriser responsible for its creation believes that it will earn not only the current rate of interest on the sum invested in it until it is worn out, but in addition a fund for its own replacement. In the bookkeeping of the industrial world a part of the earnings of capital goods is regularly set aside to replace those goods. This constantly accruing replacement fund, which flows back to investors and enterprisers, is completely mobile. It appears as a certain amount of free purchasing power which may be used either to replace the capital goods in process of destruction with exactly similar goods, or to call into being quite different capital goods, as the judgment of the enterpriser may determine. At any given moment the amount of this mobile replacement fund is small. In order that delay and loss may be avoided, its destination must be decided upon even before it arises, and in consequence it seldom accumulates in the hands of investors and enterprisers, but merely flows through their hands on its way to embodiment in new forms of capital goods. Nevertheless the existence of this constant flow of mobile purchasing power makes possible the withdrawal of capital tied-up in highly specialized forms of capital goods and its transformation into other forms of capital goods at a rate which only those familiar with the ups and downs of business can appreciate. How this facilitates the tendency of competition to smooth out differences in rates of interest in the same capital market must now be explained. Competition Tends to § 152. Consider first differences among different firms in the same branch of production. One firm has preceded all others in putting in some superior machine or other form of capital, and this gives it higher earnings until others graduof Interest. ally introduce the superior machines into their plants also.* But competitors are always trying to keep their plants up to the highest point of efficiency. If inventions and improvements in processes were to cease it would take but a short time for the very best equipment to be introduced into all freely competing establishments. Those unable to modernize their processes would be forced into other industries. They could not sell at the normal price and continue to make profits equal even to a fair wages-of-management. Allowing time enough for the process, therefore, it is evident that in the absence of patents, or other monopoly conditions, the earning power of capital goods in different competing establishments would be equalized. Differences Different But among different branches of production differences might still persist. Shoe machinery might, for example, be Branches of earning more than textile machinery. But if this were the Production. case, one or both must be earning less or more than the current rate of interest for capital generally. If shoe machinery were earning more than the current rate, competing shoe manufacturers would tend to enlarge their plants to secure the extra interest on a larger investment. By so doing they would, on the one hand, make drafts on the country's free capital tending to enhance the rates of interest other enterprisers would have to pay to secure the capital needed to keep their plants intact, while, on the other, they would tend to depress the price of shoes by increasing the supply and in this way to lessen the total to be divided among all the shares in distribution in this branch of production. As the result of action and reaction the extra earnings of shoe machinery would disappear. If, on the other hand, the difference was due to the fact that textile machinery was earning less than the current * These higher earnings were called "profits" in Chapter XII. in conformity to business usage. In describing them here as "interest " we simply go a step further back and attach them to the superior capital goods to which they owe their existence. INFLUENCE OF MONOPOLY 269 rate in industries generally, the conditions would be favorable to a reduction in the number of textile plants and the gradual release of capital for other investments. This would tend to raise the price of textiles and give larger returns to textile machinery, while it at the same time reduced the relative earnings of capital goods in other industries by permitting a slight expansion. Thus among different branches of production, as in the same branch, competition is always tending to equalize the earnings of capital goods. As society approached the state of normal equilibrium, differences in interest rates would be less numerous and less extreme in consequence of such changes and adjustments, and when the normal state was reached they would have entirely disappeared. Only on this condition could a permanent equilibrium be established, since any difference in interest rates is itself a reason for change. When the state of equilibrium was reached, capital goods would be so distributed that each branch of production would have just its quota of capital embodied in the best forms of capital goods known to enterprisers, and no more. The earnings of each unit of capital in each capital good would be kept the same so long as the equilibrium continued as those of every other, and the division of the free-flowing replacement fund among different branches of production would be simply the automatic restoration of the wastes of production, accomplished as perfectly as is the restoration of the wastes of the human body through the processes of life. in Rates. § 153. The above analysis of the tendency of competition Causes of helps to explain why in actual practice differences in rates of Differences interest persist. To the extent that the mobile replacement fund fails to multiply forms of capital the moment they are needed, or to withdraw other forms the moment they are superfluous, there is opportunity for differences in the earning power of capital goods. The circumstances which cause such differences to arise will now be briefly indicated. The most familiar ground for differences in the return Monopoly. from different investments is the presence of monopoly. The monopolist deliberately restricts the output of the monopolized product so that the returns to the capital and labor he employs exceed those to be realized in competitive industries. |