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The Positive Theory of Capital; Böhm-Bawerk, Eugen v.
42 paragraphs found.
Translators Preface
TP.29

This explanation will be found if we turn from the question as between labourers and employers, and consider the larger question as between owners of present goods on the one side, and labourers and employers alike on the other. And here we come to Böhm-Bawerk's enunciation of a proposition which seems to me one of the most important in modern economics. It is that the supply of present goods, available in any community either as means of production to labourers or as subsistence to mere borrowers for consumption, is the sum of that community's existing wealth exclusive of land. No one nowadays hoards wealth, drawing on it as needed. Thanks to banking systems and facilities for investment, nearly all wealth that is not actually being consumed by the owners is made available to supply this double demand. Disregarding as before the demand for consumption, the effect of which is merely to lessen the amount of wealth available for productive borrowers—and remembering in passing that the agio on present goods is the joint result of these two collateral demands, we find this wealth confronting the demand of labour, transmitted through the employers for the means of subsistence during the production period. Now, thanks to well-known motives, wealth in normal circumstances increases faster than population. As it accumulates it becomes possible for the labourers to extend their processes. Seed-time and harvest become separated, not by months but by years, and the amount of wealth in a community, as enabling labour to bridge over the long time of growth, becomes visibly the condition of its average production period, and so of its average productiveness. Thus to him that hath much much is given: the rich nation is the heir of the economic promises.

TP.30

From this it is not difficult to see that the value of means of production must always lag behind that of finished products. There is always a demand for ampler means of living, and the condition of obtaining ampler means is—time to extend the production process. So long, then, as the wants of spiritual beings call for fuller and finer satisfactions, and so long as the working life rises to higher levels, so long will there be a premium put on the present wealth which makes more ample wealth possible. Thus we are justified in saying that the demand for means of production will always be greater than the supply, and interest, as the agio on such, will appear in the price of products.

TP.39

Now the immediate point of connection between the theory of value and the theory of interest is that the problem of interest, in all its manifestations, is nothing more than a problem of price, the commodity bought and sold being—Present Goods. When, then, we go on to the final question, the Amount or Rate of Interest, what we have to remember is that here, as in price transactions generally, we have a resultant of subjective valuations, and that the determining elements we have to deal with are the extent and intensity of the subjective valuations of buyers and sellers. We have already seen what is the extent of this supply, and we know the motives which weigh with the owners and determine its intensity. The demand, again, comes from those who borrow to consume, and those who borrow to produce. Of these two co-ordinate demands we shall, as before, confine ourselves to the more important and more difficult, and to its most important section, the Wage-Earners, referring the reader to Böhm-Bawerk's last two chapters for the other sections. One way of looking at this demand would be to consider it, not as a direct demand from the wage-earners, but as interpreted and in certain definite ways modified by the undertakers. But it is perhaps better to consider the undertaker as the owner of capital, and take the question simply as one between Wage-Earners and Capitalists. In the following argument, then, we assume that the demand comes exclusively from labour, that the entire supply and demand meet in one single market embracing the whole community, and that all branches of production show the same scale of surplus returns.

Book II,Ch.V
II.V.15

Somewhat more complicated, but still easy to grasp in principle, is the procedure in the individualistic organisation of society as we find it in the present day. Here, in the first instance, it is the undertakers who decide how the productive powers, as they come forward annually, shall be employed, and they thus decide the direction which the national production takes. But they do not decide it at their pleasure; they follow impulses given by the prices of products. Where lively demand promises a profitable price they extend their production, and curtail it in those kinds of goods where failing demand can no longer take off the supply, and the prices fall below a paying level. Extension and contraction of supply continue till such time as production has adapted itself to the desire for the particular commodities. In the last resort, therefore, it is not the undertakers who decide the direction of national production, but the consumers, the "public." All depends on the effective desire they exert by means of their income. The income of a people is, in the long-run, identical with the return of its production. The circle that represents a year's income coincides, roughly, *35 with the circle that represents a year's return of its productive powers. If every individual in the community were to consume exactly his year's income in the form of consumption goods, there would arise a demand for consumption goods which, through the agency of prices, would induce the undertakers so to regulate production that, in each year, the return of a whole year's circle of productive powers would take the form of consumption goods. If ten million labour-years (and the corresponding uses of land) form the annual endowment of a people, and this people wishes to consume, and does consume, the whole of its income in the form of consumption goods, it is a necessity that the produce of the whole ten million labour-years (together with the corresponding uses of land) be changed each year into the form of consumption goods. In this case there is no productive power left to dispose of in increasing capital, and capital only remains as it was.

II.V.16

If, on the other hand, each individual consumes, on the average, only three-quarters of his income, and saves the rest, obviously the wish to buy, and the demand for, consumption goods will fall. Only three-fourths of the former consumption goods will find demand and sale. If the undertakers, however, were for some time to continue the old dispositions of production, and bring to market consumption goods to the amount of ten million labour-years, the over-supply would very soon press down the price, business would become unremunerative, and the pressure of loss would compel the undertakers to adapt their production to the changed circumstances of demand. They will now provide that, in one year, only the produce of seven and a half million labour-years is transformed into consumption goods (whether it be by the maturing of the first class, or by adding to "present-time production" *36), and the two and a half millions which remain of the current year's endowment may and will be spent in the increasing of capital. I say "will be spent," for an economically advanced people does not hoard, but puts out what it saves—in the purchase of valuable paper, in deposits in a bank or savings-bank, in loan securities, etc. In these ways the amount saved becomes part of productive credit; it increases the purchasing power of producers for productive purposes; it is thus the cause of an extra demand for means of production or intermediate products; and this, in the last resort, induces those who have the regulation of undertakings to invest the productive powers at their disposal in these intermediate products.

Book III,Ch.IV
III.IV.14

Transfer, now, the field of illustration from the solitary in the primeval forest to the bustle of a highly organised economic community. Here we encounter, in an altogether dominating position, the empirical proposition that quantity of goods stands in inverse ratio to value of goods. The more goods of one kind there are in the market, the smaller, ceteris paribus, is the value of the single commodity, and vice versâ. Every one knows that economic theory has made use of this empirical proposition—the most elementary proposition in the doctrine of price—to establish the law of "Supply and Demand." But this proposition maintains its validity quite apart from exchange and price. For instance, how much more value does a collector put upon the single specimen, which represents a class in his collection, than upon one of a dozen of such specimens? It is easy to show that well-authenticated facts of experience like these follow, as a natural consequence, from our theory of marginal utility. The more individual goods there are available in any class, the more completely can the wants to which they relate be satisfied, and the less important are the wants which are last satisfied—those whose satisfaction is imperilled by the failure of one of the goods. In other words, the more individual goods there are available in any class, the smaller is the marginal utility which determines the value. If, again, there are available so many individual goods of one class that, after all the wants to which they are relative are completely satisfied, there still remains a number of goods for which no further useful employment can be found, then the marginal utility is equal to zero, and a commodity of that particular class is valueless.

Book IV,Ch.I
Note:
It will be observed that our author does not confine the word Price to Money price, but applies it to the equivalent good or goods obtained in exchange for what is, pre-eminently, the good—the object of demand from buyers, and of supply from sellers. The convenient word Preisgut I render by "price equivalent," or simply "equivalent."—W. S.
Book IV,Ch.V
IV.V.1

The Law of Supply and Demand

Book IV, Chapter V

The zone within the limits of which the struggle of competition forces the formation of price is, as we have seen, characterised as lying between the subjective valuations of the marginal pairs, and on this characteristic feature we have formulated our law of price. But this zone has a second characteristic feature: it is that in which exactly as many commodities are offered for sale as are wanted to purchase; *19 or, to use the common expressions, in which supply and demand are quantitatively in equilibrium. In our scheme, at a price which did not rise to £21 more horses were demanded than were offered; at a price which rose above £21:10s. more horses were offered than were demanded; while in the zone indicated by our law of marginal pairs—that between £21 and £21:10s.—the position requisite to end the competition was reached, and at that price exactly as many horses were asked as were offered.

IV.V.2

Now, if it should be thought preferable, the formulation of the law of price may be based on this second characteristic feature, and it will then take the following shape: The market price is found in that zone in which supply and demand quantitatively balance each other. This formula is as correct as the other. It indicates the same zone in another way. But it is less expressive (1) in so far as it only points to the level of the determining zone in a roundabout way, while, by our formula, the limits of this zone are directly and positively indicated; (2) as it has to contend to some extent with the difficulty of having to use the expressions Supply and Demand,—for the protean ambiguity of these terms is sure to bring innumerable errors and misconceptions in their train, just as it has brought the terms themselves into thoroughly bad repute with many, *20 Still, these drawbacks may very well be overcome by critical attention; and there is no objection, in my opinion, to treat the theory of price under the good old catchwords Supply and Demand, if care is only taken to avoid the errors and misunderstandings which so plentifully surround them, and to inform the old forms and formulas with new and clear knowledge. *21

IV.V.3

In one special case this second formulation of our law of price is even the more exact of the two. In the vast majority of cases, the zone within which supply and demand just balance each other exactly coincides with the zone whose limits are marked out by the valuations of the marginal pairs. But there is one quite definite coincidence of circumstances in which it may happen that the equilibrium between supply and demand does not make its appearance within the whole of the last-mentioned zone, but only within a distinctly narrower part of that zone; and, in such cases, the price is always fixed within these narrower limits. The very peculiar coincidence of circumstances which produces this result occurs very rarely indeed in economic life, but, among the cases where it does occur, there is one that is very important for the theoretical explanation of interest, and for that reason, in spite of its somewhat "exotic" character, I must devote a few words to it.

IV.V.4

The casuistical conditions of this case are the following. First, there must be considerable latitude between the valuations of the marginal pairs. This condition is most thoroughly fulfilled where all the competing exchangers come to terms (there being, therefore, no excluded competitors), and when, at the same time, the buyers, as a body, value the commodity considerably higher than the sellers do. If there are, for instance, ten buyers who each value the commodity at £10, and ten sellers who each value it, subjectively, at £1, obviously all the ten pairs can come to terms, and the zone which lies between the valuations of the last buyer and the last seller represents the wide latitude between £1 and £10. Secondly, that this latitude should be narrowed down, the further circumstance must be present, that the desire of the buyers is directed to an unlimited number of goods, while, at the same time, the total amount of means of purchase must be strictly limited, and the buyers must be determined to spend the whole of this sum in purchase of the commodities in question—in the purchase of fewer goods if the price be high, in the purchase of a proportionately larger number of goods if the price be low. To put it in terms of our illustration. Say that each of the ten buyers is resolved to spend the sum of £100 in buying cotton goods; that is to say, at any price under £10 he will buy as many pieces as he can obtain for £100. And suppose that against this total competing demand of £1000 there is a supply of 200 goods, which their owners are inclined to let go at any price above £l. It is easy to see that the price must be fixed at £5 the piece. For if the price were to be less, say £4, the 200 pieces offered would be purchased for £800, and £200 of the available means of purchase would remain unemployed. Here the owners, acting on the motto "rather a small gain than no exchange," will continue bidding up against each other, and so raise the price to £5, at which figure the whole capital of £1000 finds employment. If, on the other hand, the price were to be put still higher, say £8, only 125 pieces of cotton goods could be bought with the £1000 available, and 75 would remain unsold. Now, obviously, no seller (considering that the price remains profitable to him till it is brought down as low as £1) would willingly forego taking part in the exchange, and thus the sellers, in fear of being shut out, would offer below each other, and the price would be pressed down to the equilibrium point of £5. Inside the wider zone, then, of £1 to £10—that determined by the valuations of the marginal pairs—the necessity for equilibrium between supply and demand determines the price with much more exactitude, and fixes it at £5, that being the point at which, if the competitors follow their own interests without let or hindrance, the market price must be fixed.

Note:
On the relation of the above theory of price to the old doctrine of Supply and Demand, as well as on the truth and error contained in that doctrine, I have already written at length in my Grundzüge, pp. 524-534; here it is sufficient to refer to that work.
Book IV,Ch.VII
IV.VII.1

The Law of Costs

Book IV, Chapter VII

In the sphere of price, as in the theory of subjective value, we find a law firmly rooted in economic literature and accredited by common experience. It tells us that the market price of goods reproducible at will tends to equalise itself, in the long-run, with Costs of Production. The following perfectly valid line of argument is usually adduced in proof of this. The market price of goods reproducible at will cannot, in the long-run, be maintained either much above or much below their cost. If at any time the price of an article rises appreciably above the cost, its production will be particularly profitable to the undertakers. This will not only induce the latter to extend their already flourishing businesses, but will encourage new undertakers to enter the same remunerative branch of industry. Thus the amount of product brought to market will be increased, and finally—according to the law of supply and demand—a fall in price will ensue. If, conversely, at any time the market price falls below costs, continued production will show a loss; many undertakers will reduce their output; the supply of the commodities will be reduced; and this, finally, in virtue of the law of supply and demand, must lead to a raising of the market price.

IV.VII.5

The formation of value and price takes its start from the subjective valuations put upon finished products by their consumers. These valuations determine the demand for those products. As supply, over against this demand, stand, in the first instance, the stocks of finished commodities held by producers. The point of intersection of the two-sided valuations, the valuation of the marginal pairs, determines, as we know, the price, and, of course, determines the price of each kind of product separately. Thus, for instance, the price of iron rails is determined by the relation of supply and demand for rails; the price of nails, by the relation of supply and demand for nails; and, similarly, the price of every other product made out of the productive good iron—such as spades, ploughshares, hammers, sheet-iron, boilers, machines, etc.—is determined by the relation between the supply and demand which obtains for these special kinds of products. To make this perfectly clear, let us assume that the relations between requirements and stocks of the various iron products—and, accordingly, their prices to begin with—are very various; that the price of a quantum of commodity which can be made out of one and the same unit of productive material *28—for instance, from a cwt. of iron—varies from 2s. for the cheapest to 20s. for the dearest class of products. These prices are the result of the position of the market at the moment, and we have first assumed that the stocks of products (the supply) are a given quantity. But they are only for the moment a given quantity. As time goes on, they are always getting supplemented from production, and this makes them a variable quantity. Let us follow the circumstances of this production. For the manufacture of iron fabrics producers, of course, require iron. *29 Under the system of division of labour they must buy this in the iron market. The manufacturers represent this demand for iron. As regards the extent of the demand, it is clear that every producer will buy as much iron as he requires to produce that amount of the commodity which he may expect to sell among his customers. But how will it be as regards the intensity of the demand? Obviously no producer will give more for the cwt. of iron than he can get for it *30 from his own customers in the shape of price; but, up to this point, even in the worst case, he can and will compete rather than let his production come to a standstill for want of raw material. The manufacturer, therefore, who can profitably employ the cwt. of iron if he gets 20s. from his customers will be a buyer in the iron market up to the price of 20s. as maximum; he who can profitably employ the cwt. of iron at 16s. will, naturally, not buy at a price over 16s., and so on. In this way the market price which each producer of iron wares gets for his particular wares (or the share of the market price which falls to iron according to the law of complementary goods) furnishes him with the concrete valuation which he has in his mind when joining in the demand for iron.

IV.VII.6

The supply, which stands over against this demand, consists of the stocks of iron held by the mine-owners and ironmasters. These stocks will pass, in methods familiar to us, into the possession of the most capable buyers, and at a price which, approximately, corresponds to the valuation of the last buyer. *31 Suppose the stocks of iron are sufficient to meet the demand of all those buyers who value iron from 20s. down to 6s. per cwt., the valuation of the last buyer, and thus the market price of the iron, will stand at 6s.

IV.VII.9

But connected with this is a series of subsequent phenomena, which, obviously, have given rise to the opinion that costs exert a causal influence on the price of products. So long as the price of various products made from iron varies between 20s. and 2s., while the price of the unit of iron stands at 6s., it is an evidence that the economical principle which should guide the stocks of iron into the most remunerative employments is not fully carried out. Iron is being used in employments where the products fetch only 2s. or 3s., where, accordingly, the use is less than the "last" economically permissible; and, on the other hand, there are still numerous employments unprovided for, where the products would obtain a greater value than 6s. If, for instance, the market price of an iron product stands at 20s., it is a proof that only those consumers of that product who value it at 20s. and upwards are actually purchasing, while other consumers, whose valuations range from 18s. down to 6s., are not supplied in the market. Similarly with products whose market price stands at 16s.; there will be an unsatisfied layer of demand, with a use for the product corresponding to the prices 14s. down to 6s., and so on. Now this must be corrected—and the enterprise of undertakers will usually not be long in supplying the needed correction. The production of those iron wares, the price of which still stands above 6s., will, under the inducement of the premium offered by the difference between price and cost, be increased till all those employments where the utility is greater than the amount of 6s. are supplied. Of course this increase of supply has the effect of always reducing the level in which the "last" buyer is found, and thus the market price sinks, till such time as the money valuation of the last buyer, and with it the market price, comes to the normal level of 6s. Conversely, where iron has been put to employments whose products fetch less than 6s., the loss that ensues will prevent more iron being thus employed. This will be brought about by a temporary suspension or limitation of the production of those iron wares, the market price of which is under 6s. This limitation of supply will soon have the effect of raising the price to 6s., and now, as the state of the case demands, the commodity, iron, will only be attainable by those buyers who can use it to make products that will fetch at least 6s. Thus, from above and from below, all iron products come together at the price of 6s., the amount of their costs; but, quite evidently, the cause of this is not that the cost good, iron, can force its own arbitrary fixed price on its products, but that all the products involved, including the cost good, iron, conform to the law of marginal utility, find their way successively into the most remunerative employments, and together receive their price as regulated by the last of these. *33

IV.VII.10

Empirical proofs of this may be had in abundance. It is a very well known fact that active building of railways raises the price of rails, and, through this, the price of iron; that the present strong demand for copper wire in electric lighting puts up the price of copper. In these cases it is evident that the upward movement of price takes its start from the final products, and is transferred from these to the cost goods. But the objection will probably suggest itself to many readers, that there are also cases where the movement of price is from costs to products. The stocks of iron, for instance, of which we have been speaking in our illustration, are not a fixed amount, but are smaller or greater according to the circumstances of iron production. Now if there is an extension of this production, and the supply of iron increases, its price will certainly fall, and that from causes peculiar to the iron; and this fall in prices will drag down the price of iron wares. Does the causal connection here not run from costs to price of products?

IV.VII.14

The simile extends still further. Such wants as demand personal services for their satisfaction, attract labour quite directly, according to the payment which they can and will give for them. Such wants, again, as demand material goods for their satisfaction, get these supplied, first, by payment of a market price which is remunerative in itself, and then the remunerative price of the products must attract the productive powers to their manufacture. Sometimes this is done through one or two, sometimes through twenty or thirty, members. In our illustration, human demand asked and paid for iron wares: the market price of iron wares attracted people to the purchase of iron: the price of iron, finally, attracted the original productive powers to the production of iron. In the case of other consumption goods, the number of intermediate members, or, to keep to the terms of our comparison, the number of intermediate lengths in the suction pipe, may be double or twenty times as great. But the principle of the movement, and what chiefly interests us, the result, is always the same. Whether there are many or few intermediate members may hasten or hinder the result, but it cannot weaken or strengthen it; in the end every want, according to the power expressed by its money valuation, draws to itself, mediately or immediately, the productive powers required for its supply. To supply the wants of the rich innumerable productive powers are always active, even if, simultaneously, at other points of the economy, there is want both of men and goods. The reason of this is that the high figures, which the rich are able to offer for the satisfaction of their wants, never fail to exert and continue their attractive force through all the stages of production, right down to the reservoir of the original productive powers.

Book V,Ch.V
V.V.16

Developed market exchange, however, brings with it a levelling effect from another side; that is to say, it brings the amount of agio in favour of present goods, as against future goods which fall due at variously remote points of time, into one normal ratio with the length of the elapsing time. It might easily be the case that the causes which tend to the undervaluation of future goods might chance to be quite disproportionately effective on goods belonging to different periods of time. Indeed, in the very nature of several of those causes (for instance, the consideration of the shortness of human life) they would scarcely obtain at all as against goods of the near future, while, as against goods of remote periods, they would obtain strongly and irregularly. In itself, therefore, it might be quite possible that, while 100 present units of goods, as against 100 units of next year's goods, obtained, in the market, an agio of 5 units only, as against goods of the next year they might obtain an agio of more than twice that, say 20, and, as against the third year's goods, perhaps an agio of 40. But such disproportionate prices for goods of different periods of remoteness could not long hold. By a kind of time arbitrage they would very soon be brought into an equal ratio. If, for instance, the various market prices mentioned above were found quoted at one given moment, speculators would immediately appear on the scene, who would sell present goods against two years' goods, cover the purchase by buying present against next year's goods, and arrange for paying the latter a year later by a second purchase of present against next year's goods. The business would work out thus. In 1888 the speculator buys 1000 present units for 1050 units of the year 1889, and sells them at the same time for 1200 of the year 1890. In 1889 be has to deliver 1050 units, and he gets them by buying, again with a agio of 5%, the then present (1889) goods for the then next year's (1890) goods. For the 1050 units he requires to deliver he must thus give 1102½ units of 1890. But, from the first transaction, he then receives 1200 of these very (1890) units. He has thus, on the whole business, a utility of about 100 units. Such arbitrage transactions must evidently bring the prices obtainable for goods of various future years to a level. The speculative demand for the much undervalued two years' goods must raise their price; the supply of next year's goods must depress their price; till such time as the agio is brought directly into proportion with the length of the time. When this happens—say, for example, that the agio has become equalised at 5% per year, it may hold on at that rate undisturbed. For then it is equally remunerative to exchange present goods against next year's goods for three years successively, or to exchange present goods directly against three years' goods, and the arbitrage we have just sketched has no further occasion to interfere in the formation of price.

Book VI,Ch.I
VI.I.24

Lastly, it very seldom occurs, and then never as regards present and future goods in general, but only as regards one particular kind of goods, that the relations of supply and demand are such, that future goods obtain a higher price than present goods of the same kind, and that a premium in present goods must be paid for future goods. It will only happen in cases where, presumably, the relations of supply and demand in the future will be essentially more unfavourable than in the present, and where, at the same time, for personal or technical reasons, it is not possible to preserve the present ample stocks till that future point of time when they are assured of a higher value. *11 Suppose the case of a brewer whose ice-cellars are too small for his requirements. If in January he puts in as much ice as the cellars will hold, and has still two hundred carts of ice over, he may be very willing to exchange these for one hundred carts of ice deliverable in August. *12 But the possibility of such a case seems to me rather to afford a not insignificant proof of my loan theory. For, I should like to ask, how would the Use theorists explain this? As a transfer of use like the loan; only that the use has a negative value, and that the borrower, instead of paying a premium, demands a premium? Or, perhaps, as a storage transaction, the difference between the quantity given and that received being considered a fee for safe deposit?

Book VI,Ch.IV
VI.IV.4

How is it now with the Demand for labour that confronts this supply?

Book VI,Ch.V
VI.V.14

This answer, however, would be incorrect: or, to put it more exactly, it would only be correct under conditions which do not actually occur in practical life. It would only be correct, that is to say, if the work of production was not carried on by stages. If production were so arranged that all the workers co-operating generally in the manufacture of a finished product were employed simultaneously in the same stage—I mean if all the workers were to begin with the first and preliminary processes simultaneously; were then to pass on simultaneously, as it were in line, to the second, third, fourth stage, till, in the end, they simultaneously turned out the total product finished and completed,—then, of course, the community's wealth must contain, in the form of finished goods, enough to supply the wants of just as many years as there are years in the production period. Suppose, for instance, that the manufacture of clothing were so arranged that all the workers employed in it prepared the wool in the first year, built machinery in the second, spun yarn in the third, wove it in the fourth, and made up the cloth in the fifth, the stock of wealth would require to contain finished provision for the entire demand of all the workers during five years. For, under a division of labour of this kind, during all the five years there would be no addition of finished goods to the original finished stock.

Note:
It will perhaps be objected that the purchase amounts which the undertakers of the previous stages receive contain, not only a simple replacement of the advances of subsistence paid by them to workers, but frequently also replacement of the uses of land consumed, and, in any case, some profit on capital. The fact is correct, but it makes no difference in the conclusions which I think are to be drawn from what I have said above. The necessity of paying in advance for uses of land, the return of which will not be obtained till after long methods of production have been completed, has the same effect on the price relation between finished present goods and original productive powers, as the necessity of paying for labour in advance has. The market for uses of land is only a third part-market in addition to the market for credit and the market for labour, where, in similar ways, present goods are sold against future goods (see above, p. 313), and, consequently, as regards its effects on price, the demand of this market for present goods mutually assists, and is assisted by, the demand of the other part-markets. This, however, will be made clearer as we go on. Finally, I must here leave out of consideration the profit of the undertaker, if I would not beg the question. Its existence is the result of a certain market condition in the subsistence market, and therefore cannot be assumed. It is not because the profits of the undertaker absorb a part of the available means of subsistence that the supply of means of subsistence is so weak as to give them an agio as against productive goods. It is because the supply of means of subsistence, even without consideration of profit, is insufficient, that these means of subsistence receive an agio, and the undertakers who advance them receive a profit. Moreover it is easily seen that, by eliminating profit from the argument with which I started in the text, I do not make it any easier to reach the final result, that of giving a reason for the agio on means of subsistence, but make it more difficult. That is to say, if, as I assume, the whole stock of means of subsistence is disposable for the granting of advances to labourers, it will be more difficult in any case for this more ample supply to be exceeded by the demand, than if a portion of the supply appears to be already hypothecated to profit.
Note:
The much more important matter of the consumption of the income from capital does not belong to the present question: as was shown in last note it is only a result of the supply of wealth being insufficient as against the demand.
Book VI,Ch.VI
VI.VI.1

The Profit of Capitalist Undertaking. The General Subsistence Market— (continued)

Book VI, Chapter VI

It may be thought that in the disquisition of last chapter we have wandered entirely from our subject, the subsistence market. This, however, is not the case. We are here, indeed, at the very centre of the question, for we are speaking directly of those things which form and regulate the supply and demand on the subsistence market. Who are the people that require to get subsistence advanced them? The answer is: Every one who wishes to produce in capitalist methods. *34 How much is required?—An amount proportioned to the length of the production process. And in what form is it required?—By instalments. Again, who are the people that have subsistence to give?—All owners of wealth who do not consume but "save" it. How much can they give?—As much as their stock of wealth contains. And in what form can they give it?—Similarly, in instalments—in the proportion that the unfinished goods contained in their inventory successively mature. This is the true nature of what occurs in our market for means of production and in our market for credit—over which, I admit, the division of labour and the use of money throw a veil very difficult to penetrate.

VI.VI.2

Now at what price will finished present goods be exchanged for future goods on the subsistence market? This is the question in which our whole interest peculiarly centres. To answer it we must describe, with more care than hitherto, both the extent and, in particular, the intensity of supply and demand. To begin with Supply. *35

VI.VI.5

Over and against this supply of present goods stands, as Demand:—

VI.VI.7

2. A number of independent producers, themselves working, who by an advance of present goods are put in a position to prolong their process, and thus increase the productiveness of their personal labour, say, from 20s. to 24s. per week. Since these persons, obviously, get an advantage from this advance so long as it enables them to obtain anything over 20s. a week, they will be prepared, where necessary, to give up a portion of the surplus product of 4s. a week, as agio on the present goods to which they owe this surplus product. I purposely here mention only those undertakers who demand productive credit for the assistance of their own labour, and not those who demand it for the employment of workers auxiliary to themselves. The demand of these latter forms only a passing stage: they take some part of the supply, provided by the owners of wealth, out of the market, but only to offer it again, on a different part-market, to the auxiliary workers.

VI.VI.9

Here then we see that, in these groups constituting the demand, the circumstances are such that those who demand are willing and are able to pay for the present goods they require, where necessary, by a larger sum of future goods; that is to say, by an agio. This being the state of the case, then, that all who own the supply value present and future goods alike, and all who form the demand value present goods higher than future, the determination of the price simply depends on which side has the numerical preponderance. If more present goods are offered than are desired by the united demand there can be no interest. The resultant market price, as we know, must always be lower than the subjective valuation of those would-be sellers who do not effect a sale. Now if the demand is, numerically, too weak, and if, in consequence, all the present goods offered cannot find a sale, and if all capitalists—even those who cannot find a sale for their present goods—value 20s. present money at something like 20s. future money, the market price of twenty present shillings cannot be higher than twenty future shillings, and there is no agio on present goods. If, on the contrary, more present goods are wanted than are offered, all the suitors cannot be supplied. In methods with which we are familiar the weeding-out process of competition now ensues; those who are able to offer the highest agio for present goods succeed in effecting an exchange; while the others, be they few or many, are shut out, even although they may have been ready to offer some (smaller) agio. But since the market price must always be higher than that bid by the excluded buyers, and since this latter contains an agio, it is clear that; in the circumstances, the market price also must contain an agio—great or small—for present goods.

VI.VI.10

Now it can be shown—and with this we come to the goal of our long inquiry—that the supply of present goods must be numerically less than the demand. The supply, even in the richest nation, is limited by the amount of the people's wealth at the moment. The demand, on the other hand, is practically infinite: it continues at least so long as the return to production goes on increasing with the extension of the production process, and that is a limit which, even in the richest nation, lies far beyond the amount of wealth possessed at the moment.

VI.VI.14

On the other hand, it is obvious that something else will make its appearance. However sharp undertaker A may be in borrowing money free of interest, and securing a nice surplus value of 8s. per week of labour, undertakers B, C, D and E will not be far behind. The desire to prolong the production period, and, with that, the demand for increased advances of subsistence, will become general: it will not be possible to supply this increased demand from the limited funds of subsistence: and, finally, the weeding out of competition will begin among the classes who constitute the demand. Here, then, we have the agio again appearing in the universal market price of present goods, from which, by hypothesis, we had for the moment banished it.

Book VII,Ch.II
VII.II.1

The Rate in Market Transactions

Book VII, Chapter II

The character of the market in which present goods are exchanged against future goods has already been described. *6 We now know the people who appear in that market as buyers and sellers. We know that the supply of present goods is represented by the community's current stock of wealth—with certain unimportant exceptions—and that the demand for them comes (1) from the suitors for productive credit who wish to equip themselves for their own work in production, (2) from the suitors for wage-paid labour, and (3) from the suitors for consumption credit. To these three categories we may add, under certain reservations, the maintenance of the landowners. Finally, it will be remembered that the resultant market price must, as a rule, be in favour of present goods, and must lead to an agio on the same. What we have now to do is to group together the causes which determine the height of this agio in one adequate and typical picture.

VII.II.2

If we were to attempt all at once to draw a picture like this, covering, as it does, the whole area of the varied influences that cross and intersect each other on the market, we should meet with great, indeed insuperable difficulties, in the way of statement. I shall, therefore, act on the principle, divide et impera, and first consider how the price is determined under the assumption that, confronting the supply of present goods, there is one single branch of demand, though, in present circumstances, by far the most important branch, viz. the demand of the Wage-Earners. Once we have drawn in broad clear lines the most important and difficult part of the whole picture, it will be relatively easy to define the kind and measure of the share which all the remaining market factors have in forming the resultant, and so gradually to make the picture true to the full complexity of practical life. For good reasons I also retain provisionally the former assumption, that the whole supply and the whole demand for present goods meet in one single market embracing the entire community. And, finally, we shall suppose meanwhile that all branches of production show the same productiveness, and also the same increment of productiveness on each extension of the production period: that is to say, we shall assume an identical scale of surplus returns.

VII.II.4

It is quite certain, as we have already explained, that the agio will settle at that level where supply and demand exactly balance each other, and this lies between the subjective valuations of the last pair who actually exchange. But the fixing of these valuations here encounters a quite exceptional difficulty, and one which does not occur in any other exchange transaction, but has its basis in a special peculiarity of the commodity "labour." Every other commodity, that is to say, has a predetermined subjective value to the one who wishes to buy it. Labour has not, and for this reason. It is valued according to its prospective product, while the prospective product varies according as that labour is invested in a short or in a long production process. We said above that, in the subjective circumstances of the capitalist, a sum of present goods was, as a rule, worth as much as the same sum of future goods. The capitalist will, therefore, count the value of labour equal to just as many present shillings as it will bring him in in the future. But, according as this labour is invested in a short or a roundabout process, it may bring him in £35 or £58 or £70. At which of these figures is the capitalist to value it?

VII.II.21

If therefore—and this is indispensable to equilibrium being reached—the extension of the production period is to halt at the limit of six years, the agio established by the fixing of the price must lie between the rate that represents the valuation of the last buyers (£3 on £25, or 12%) as upper limit, and the rate representing the valuation of the competitors first excluded (8%) as lower limit. And thus our former empirical and circumstantial demonstration of the rate of wage and the rate of interest at which equilibrium may be reached on the market, must point provisionally to the rate of 10%. It must at least point to the zone between 8% and 12%. The fact that, within this zone, the rate of 10% is exactly brought out, is due, of course, not to the limitations indicated by the valuations of the marginal pair, but, as described on p. 215 simply to the quantitative effect of supply and demand. We shall see immediately, however, that the wide latitude (8% to 12%) which our abstract scheme leaves for the narrowing action of supply and demand, looks considerable only on account of the figures accidentally chosen; in practical life the latitude given is almost always vanishingly small.

VII.II.23

The rate of interest—on the assumptions already made—is limited and determined by the productiveness of the last extension of process economically permissible, and of the further extension economically not permissible; in this way that the unit of capital, which makes this extension of process possible, must always bear an amount of interest less than the surplus return of the first-named, and more than the surplus return of the last-named extension. *17 Within these marginal limits the price may be more exactly determined by the quantitative relation between wage fund and number of workers, according to the law of supply and demand.

VII.II.24

In practical life, however, the latter method of determining price is seldom taken. It is true that in our abstract scheme there was an unusually wide latitude to come and go on, because we had assumed a sudden decrease of the surplus return from £3 to £2; that is, a fall of fully one-half. But in practical life sudden differences like this scarcely ever occur. The figures which represent the productiveness of the last permissible, and the first non-permissible extension come usually very close to each other, and, consequently, they are sufficient to limit the variations of the interest rate so strictly and sharply that the theoretically more exact determination by means of the relation of supply and demand is practically unimportant. *18 Indeed, assuming that these two marginal limits are very near each other, one of them may even be left out of account without any serious inaccuracy, *19 and the law be simply formulated thus:—The rate is determined by the surplus return of the last permissible extension of production. This coincides almost to a word with Thünen's celebrated law which makes the rate of interest depend on the productiveness of the "last applied dose of capital." *20

Book VII,Ch.III
Note:
I may call attention to the fact that now we arrive at the figure 19.048 by a quite different way, by quite different lines of thought, and by quite different calculations, than in the above table. There we sought and found empirically the figures of wage and interest at which, under the given assumptions, the equilibrium of Supply and Demand may be established. Now, applying the law of the marginal pair to the concrete case, we have deduced that the interest must lie between the surplus returns of the last extension of production still permissible, and the first excluded, and arrived thereby exactly at the same figure 19.048. In the former case we get our figures immediately by multiplication of the number employed by the gain made per labourer (11.905 × 16 and 9.524 × 20). Here we get the same figure by dividing the dependent last surplus product by half the wage (4 : 21). I may, therefore, take this agreement as a proof that our deductive reasoning correctly expressed the results empirically established.—Here also it may be the most suitable place to point out the error into which Jevons fell as regards this question. Jevons recognises perfectly correctly that the "last surplus return" decides the interest rate; but, owing to an oversight in principle, he makes the mistake of fixing on that other amount to which this surplus return must be put in relation, and deduces the rate of interest, not from the relation of the last surplus return to the sum of subsistence which allows the last extension of production, but from the quite different relation in which that surplus return stands to the value of the whole product which might have been obtained without the last extension of production. "The interest of capital is the rate of increase of the produce divided by the whole produce" (Pol. Econ. second edition, p. 267). The seriousness of this oversight will be best seen from a concrete example, which, for the sake of easier comprehension, I shall take from the case of isolated exchange spoken of above (p. 378). Remembering what was then said, let us suppose the case of an undertaker whose means would allow him to carry through an eight years' production period with a yearly return of £68:10s., and who, by a loan of £30, which would guarantee him subsistence for a ninth year, is put in a position to go on to a nine years' production period with a return of £69:10s., or a surplus return of 20s. According to Jevons this should allow an interest rate of £1 on £68:10s., or 1.46%. But evidently there is no ground whatever why the suitor for the loan should be ready to offer £1 per year and no more as interest for a sum of £68:10s. It is not the amount of £68:10s., but that of £30, whose acquisition makes the extension of production possible, calls forth the surplus return of £1, and, consequently, maybe paid, in the most extreme case, by £l, but, on the assumption noted on p. 378, note 1, by as much as £2 per year. As a fact, then, in the case of this illustration, it is not, as Jevons assumed, an interest of £1 on £68:10s., or 1.46%, that is economically possible, but an interest of £1 on £30, or 3 1/3%, indeed, on the above assumption, a rate of £1 on £15, or 6 2/3%. A certain very modest kernel of truth may be found, all the same, in Jevons's t error; but to point it out I should require to go still further afield into discussions in which I could not assume that the majority of many readers would find sufficient interest.
Book VII,Ch.IV
VII.IV.1

The Market for Capital in Its Full Development

Book VII, Chapter IV

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.

Book VII,Ch.V
VII.V.13

And now we may dispense with one last abstraction which has served us as scaffolding in our work of explanation. Hitherto we have represented the total supply and the total demand for present goods as concentrated in one single great market. Instead of this, the commerce in present and future commodities is split up into innumerable part markets. First it is divided into certain great groups, such as the Loan market, the Labour market, the Land market, the market for Concrete Capital. And each of these markets is divided up again and again, partly according to branches, partly according to districts of business. There is one market for mortgages, another for business credit in connection with large undertakings, and still another for business credit in connection with small. There are different loan markets for the peasant and for the citizen, for men of position and for the poor artisan or factory hand, and so on. And, again, within each of these subdivisions there are as many distinct local markets as there are natural or artificial districts devoted to that particular department of economic life. The Labour market, too, is as much split up as the Loan market; first, there are as many groups as there are branches of labour, and then each group is divided up into as many part markets as there are local districts. And so on through all the chief groups above named.

VII.V.14

What results from this division and subdivision?—As there is not one market only for present goods, neither is there only one price for them, but many and diverging market prices, as these arise directly out of the relation of supply and demand ruling in each of the individual part markets. There are in the community at the same moment perhaps a hundred different agios on present goods, and, accordingly, a hundred different rates of interest. But the hundreds or thousands of part markets are not hermetically sealed against one another. They are all in communication, and constantly engaged in arbitrating each other's prices. If in one part market the agio on present goods is for the time abnormally high, new amounts of capital quickly press into it to get the advantage, and thus reduce the advantage again to zero. If, conversely, in one part market the agio is for the moment abnormally low, the fact is sufficient to prevent any further accession of capital, and even to convey a part of the capital employed in it to other and more favourable part markets, till such time as the unfavourable difference of price again disappears.

VII.V.15

It is, therefore, quite right to say that the price which obtains in each part market is, indeed, first determined by the relation of supply and demand as it exists in the special part market, while this local condition of the market itself, and with it the local price also, is determined indirectly by the immensely more powerful pressure exerted by the totality of supply and demand over the whole community. The vast mass of the national supply, acting under the influence of those tendencies to equalisation with which we are familiar, forces itself into all part markets in proportional amounts. Part markets, where there is not sufficient capital, it hurries from other quarters to supply: from part markets over-supplied it flows off to other communicating part markets. And if there is neither inflowing nor outflowing, and if, therefore, the local market seems to form its local price purely of its own power, it is then that it is really least independent: it does not require to yield to any foreign market influences at the moment just because it has so completely yielded to them already. It is for the moment at rest only because it is supplied, in exactly the proportion which is required and effected, by the pressure coming from the total relation of supply and demand over the community.