The Positive Theory of Capital

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
(1851-1914)
CEE
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Editor/Trans.
William A. Smart, trans.
First Pub. Date
1888
Publisher/Edition
London: Macmillan and Co.
Pub. Date
1891
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Book VI, Chapter V

The Profit of Capitalist Undertaking. The General Subsistence Market.

VI.V.1

At the outset we must enunciate a proposition, as simple as it is fundamental, but one on the proper understanding of which everything depends: In any economical community the supply of subsistence, available for advances of subsistence, is—with one trifling exception—represented by the total sum of its wealth (exclusive of land). The function of this wealth (Vermögen) is to maintain the community from the time that their original productive powers are put in motion till these powers obtain their final and mature fruits—in other words, to maintain the community during the average social period of production. The greater the total stock of wealth in the community the longer may be this social period of production.

VI.V.2

Here we really have three propositions, but they are so intimately connected that they may be conveniently grouped into one, and explained and proved by one and the same argument.

VI.V.3

If we look at the uses to which a country's accumulated wealth is destined and put—leaving land out of account—we get something like the following picture. Some few owners of wealth, whether from necessity or from prodigality, themselves consume it. Others who produce on a moderate scale for their own account spend their wealth in furnishing themselves with the necessary maintenance during their production period. But all other wealth—and that is by far the greater amount—is, in some form or other, brought to the great market for Advances of Subsistence as Supply. The owner either puts it into some undertaking carried on by himself, or he lends it to other people. If he puts it into his own business it is, directly or indirectly, employed in giving advances of subsistence to labourers. I say directly or indirectly, for the division of labour, splitting up, as it does, the one united work of production into a series of apparently independent stages, causes an important distinction in form, although it does not affect the essence of the matter. If the different stages of one and the same production process were united in the hand of one and the same undertaker, he would not buy any previous product: all previous and intermediate products needed would be made, from the beginning, by the workers in his employment. Here, therefore, his entire "business capital" would evidently be directly devoted to advancing subsistence to labourers. As it is, under the division of labour, he gets his previous products made by other undertakers, and buys them from these other undertakers. This amounts to saying that, by this purchase, he takes upon himself the burden of the advances hitherto borne by the other undertakers, and thus puts them again in a position to take upon themselves the burden of advancing subsistence for the following period of production. These previous and intermediate products, then, thus purchased, he gets worked up by labourers who are directly in his pay. In this way, therefore, by his wage payments he advances subsistence directly to one set of workers, and indirectly by his "outlays" to a number of other sets (employed in the preceding stages).*26

VI.V.4

If, again, the owner lend his wealth to others, it may be either for consumption or for production. If the former, the sum lent is a direct advance of subsistence to the borrower: if the latter, it passes, as already described, from the borrowing employer to the labourers, as advance of subsistence. Thus the entire accumulated wealth of society—with the very trifling exception of that portion which the owners themselves consume*27—is really brought into the market as supply of advances of subsistence.

VI.V.5

But the objection may be raised: How can the entire stock of wealth be offered as advances of subsistence when that stock consists only partially, and, indeed, to a very small extent, of actual means of subsistence, such as food, clothing, dwelling-houses, etc., while the great bulk of wealth is represented by goods that are not adapted for immediate consumption, such as tools, machines, raw materials, factory buildings, and the like?

VI.V.6

The seeming inconsistency is, however, easily explained; it is simply that men never need their subsistence for the entire production period all at once. If, in any community, ten millions of men invest their original productive powers, Labour and Uses of Land, in an average production period or two years, it is quite unnecessary—indeed undesirable—that at any one moment the means of subsisting the ten millions for the whole two years should be accumulated in finished form. It is sufficient if there is enough in finished form for, say, one month, and if, in the meantime, the means of subsistence for the following month are ripening into finished goods. In other words, all that is needed is that previous labour should have provided so many goods—partly ready for consumption, partly in the intermediate form of products ripening successively into consumption goods—as will cover the subsistence needs of two years, and thereby make it possible for the workers to invest their current labour in methods of production that will turn out the finished product in two years.

VI.V.7

Here we come to the second part of our threefold proposition. The entire wealth of the economical community serves as subsistence fund, or advances fund, and, from this, society draws its subsistence during the period of production customary in the community. All goods which appear to-day as the stock or parent wealth of society, so far as they are not already consumption goods, will, in the more or less near future, after a certain addition of finishing labour, ripen into consumption goods, and will consequently cover, for a more or less lengthy time to come, the people's demand for consumption. Of course this must not be understood as if there were some sharp line of division separating the period which is covered by the wealth already on hand from that later period which is not yet covered, and for which, consequently, provision must be made through the current productive powers. What I mean is that the stock of wealth projects itself into the future, as provision for the consumption of the future, as it were by stages, and not all at once.

VI.V.8

It does so in two respects: in respect of the number of classes of goods for which provision is made, and in respect of the degree of maturity at which the work of production stands in the present. As regards the first; it is to be noted that, for technical reasons, in many classes of goods (e.g. in various foods) provision is limited to the near future, perhaps to a couple of months, while, simultaneously, in other classes of goods, provision may be made for a couple of years. In others, again, where permanence is aimed at, or goods must be got ready long in advance (e.g. in dwelling-houses, mining products, machinery, and the like), the means of provision must be prepared perhaps twenty or fifty or even a hundred years before. Thus, then, it is in the nature of things that goods required in the in future must now be ready or almost ready; for goods needed later, it is enough if, at the moment, they have gone through, perhaps, half of the production process; while, for goods required still later, it may be enough if their production should have just begun. If a commodity, for instance, requires five years to make, then, in the year 1888, the goods of this class destined to be used in the year 1889 must be ready, perhaps to the extent of four-fifths; those to be used in 1890 to the extent of three-fifths; those to be used in 1891 to the extent of two-fifths; while, as regards goods destined for the service of the year 1892, it is enough if, at the moment, they have gone through the first fifth of their total production process.

VI.V.9

Thus it comes that the stock of wealth existing at the moment makes provision for the future in a doubly decreasing ratio: in proportion as the time of consumption is remote there are fewer classes, and the goods in these classes are less advanced or mature. To get an adequate representation of the circumstances of provision, then, we should have to suppose that the stock of wealth existing on 1st January 1888*28 contains 9/10 of the goods required during 1888 and those goods are, on the average, 9/10 finished, so that, on the whole, the labour required for the needs of 1888 is already finished and incorporated in the existing wealth to the extent of 81/100: that, further, it contains 8/10 of the goods required during the year 1889 7/10 finished, thus incorporating 56/100 of the labour required for 1889: that it contains 6/10 of the goods wanted for 1890 4/10 finished, thus incorporating 24/100 of the labour required for 1890, and so on for 1891, 1892, 1893, incorporating respectively 12/100, 6/100, and 4/100 of the total labour required for the service of these years. Adding up these amounts we come to the result which I wished to elucidate by this illustration; viz., that the entire existing stock of wealth provides in advance for something like two years'*29 demand of the population, with this peculiarity that the stock of wealth, instead of covering the exigencies of two continuous years, covers successively a decreasing portion of the exigencies of a greater number of calendar years.


VI.V.10

Now the way in which this provision is made by the existing wealth, and the extent to which it is made, exercise a very suggestive and important influence on the employment of the original productive powers, labour and uses of land, coming into operation in the current year. For simplicity's sake we shall consider the former only in detail. If the stock of wealth in existence in 1888 covers the want of the current year to the extent of 8/10, it is clear that from the labour of this year the other 2/10 will first be covered. But it is as certain that the remainder of the current labour will not be devoted to the service of the year 1888, and that for two reasons: (1) that any return in the year 1888 could only be obtained by an unremunerative hand-to-mouth method of production, and (2) that the few products thus obtained would come upon a market already stocked and find poor sale and poor prices. The other 8/10 of the labour of the year will, therefore, be directed to the service of later years. And here, again, the following is clear: the fewer the wants of 1889 covered by the existing stock of wealth, the greater will be the amount of the current year's labour directed to the service of the year 1889—if there is not to be a gap in the provision from year to year—and the smaller will be the amount of labour directed to the service of the years that come after it. Conversely if the wants of 1889 are already (relatively speaking) amply covered by the stock of wealth, only a small fraction of the current labour will go to the service of 1889, and a proportionally greater amount can be reserved for remoter periods.*30 The current labour thus adapts itself naturally to the existing stock of wealth. The one begins where the other ends. If it were to begin sooner, and so duplicate the provision already existent, it would come under the double disadvantage, already mentioned, of overstocked markets and less productive methods of production; and if it were to begin later, there would be a gap in the provision which would immediately cause scarcity prices, and thus call out speedy assistance from the productive powers.

VI.V.11

Thus it is—and here we come to the last part of our threefold proposition—that, in reasonable economic speculation, the current productive powers will and must, on the average, be directed to remote productive purposes (or, in other words, invested in longer production periods), in proportion to the length of time for which the existing stock of wealth is able to provide. If the accumulated wealth is so small that it only provides subsistence for one year, it is perfectly clear that it is impossible to invest the current productive powers in processes that average three years, since, in the interval that must elapse between the consumption of the old wealth and the production of the new, the people would starve. And it is equally clear that it would be, in the highest degree, foolish and uneconomic to make the production period shorter than the existing wealth allows. The average period of production in a community is in exact correspondence with the amount of its stock of wealth, and is entirely conditioned by it.

VI.V.12

The principle is clear, but one not unimportant question of figures still remains to be considered: What is the numerical ratio between the amount of a nation's wealth and the average production period which that wealth limits?

VI.V.13

At the first glance one would be inclined to answer;—the average production period may be just so many months or years as there is months' or years' provision in the accumulated wealth. If, for instance, the year's wants of a nation are five hundred millions, and the nation's wealth contains goods to the value of a thousand millions, we should be inclined to say that the average production period would be two years.

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.

VI.V.15

It is quite different if production is arranged in stages, as it actually is in modern industry. Of the workers occupied in the production of clothing— to continue our illustration—various groups are employed simultaneously at various stages of it. In each year a fifth part of them, perhaps, will produce wool, another fifth make machinery, another spin, another weave, and another do the making up.*31 The result is that, during the five years that elapse between the growing of the wool and the making of the coat, additions are successively made to the fruits of labour which constituted the stock of wealth at the beginning of the period: that is to say, other fruits of labour, the results of labour expended at later periods, are arriving at the stage of finished goods. Say, for instance, that on 1st January 1888 a group of labourers begin the manufacture of woollen clothing. Nothing of the fruits of this labour will be ready before 1st January 1893. On the other hand, besides the wholly or partially finished products contained in the inventory of 1st January 1888, the following goods will arrive at maturity before 1st January 1893;—viz. the fruits of one year's labour of those workers who are busy with the final stage in 1888; of two years' labour of those busy with the second last stage in 1888 and with the last stage in 1889; of three years' labour of those who in 1888 reach the third last and in 1890 the last stage of production; and, finally, the fruits of four years' labour of those who, in 1888, are occupied with the second stage, and will reach the final stage in 1891. Now since these goods, thus successively maturing, would provide for a very considerable portion of the subsistence needed for the five years 1888-92, it is evidently not necessary that the community, before entering on a five years' production period, should have a stock of wealth equal to the entire five years' needs. Or, if there is such a stock, a longer process than five years can be entered on.

VI.V.16

If we look at the same thing from another side, and one perhaps better suited to illustration, it is clear that, where workers are employed in stages, subsistence need be provided five years in advance only for those who work on the lowest or earliest stage of the production. The workers on the second stage, the fruit of whose labour matures after four years, require subsistence advanced them only for four years. The workers on the third and fourth stage require subsistence only for three and two years respectively. The workers on the last stage, those whose products will be finished in a year, require advances only for a year. Striking the average, we may say that, to allow the entire body of labourers to embark on a five years' production process, all that is required is subsistence for (5 + 4 + 3 + 2 + 1)/5 = 3 years, or a little more than half the period of production.

VI.V.17

What is true of a five years' process is true for all periods. If we take the trouble of calculating a number of concrete examples,*32 we very easily come to an exact statement of the law relating to it as follows. The stock of wealth must be sufficient for half the production period, plus half the usual stage period. If, for example, the work of production is carried on only by yearly stages—that is to say, if finished products are turned out by the process in question only at intervals of one year—then, in a five years' production period such as we have been discussing, the stock of wealth must last for half the production period (i.e. for 2½ years), and, beyond that, for half what we have called the "stage period" (i.e. for half a year); in all, three years. If again the stages of production are monthly, so that every month there is an output of finished products, the stock of wealth need only be such as will last 2½ years + ½ month. To put it in general terms we may say: If the production period embraces x stage periods the stock of wealth must always be sufficient for (x + 1)/2 stage periods.

VI.V.18

Obviously, the greater x is, the smaller is the difference between this exact formula and the rough expression of "half the production period"; while x again increases with the length of the production period and the subdivision of the stages. In a two years' process where goods are turned out once a year, the production period embraces two stages: the value of the exact expression is, therefore, (2 + 1)/2 = 1½ years—that is, fully 50% higher than the rough expression. If, again, the process takes five years, and the goods come forward by monthly stages, x = 60, and the exact expression has the value 61/2 = 30½ months, which shows very little difference from "half the production period" of 2½ years. And if the production period be ten years, and the output be a weekly one, x will equal 520, and the exact expression will have the value of 260½ weeks, which practically coincides with the rough expression of "half the production period." Now since, in any organised industrial community, the average process is pretty long, and the subdivision into stages very minute—for not a day passes but finished products are turned out of some workshop or other—it may be assumed without much error that a community may, on the average, engage in production processes which are twice as long as the period for which the accumulated stock of wealth would provide subsistence.*33


Notes for this chapter


26.
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.
27.
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.
28.
The figures are, of course, only chosen for illustration.
29.
0.81 + 0.56 + 0.24 + 0.12 + 0.06 + 0.04 + ...
30.
It would be erroneous to assume that, after the demand of the current year is covered, the current labour must be directed to the demand of the next annual period till such time as this is fully covered; that, e.g., if 5/10 of the demand of 1889 is covered by existing wealth, the labour of 1888 must, or even might, immediately prepare the remaining 5/10. But in 1888 the maturing of finished products is carried forward only one stage, and is itself fully terminated only in the year 1889 by an addition of the labour of 1889.
31.
It is all the same as regards the effect whether the same persons perform the labour of all stages of production successively, or whether—as is the case under the division of labour—certain persons remain constantly occupied in one and the same stage.
32.
Not to cumber the text I have done this in Appendix. [This appendix is titled in the original the "Appendix to page 327."—Econlib Editor.]
33.
Of course many productions are, for technical reasons, very little divided up into stages; agriculture, e.g., yielding its harvests only from year to year. All the same the above formula will be found to give an approximately correct presentation of the case, and we may be the better pleased with it that I do not intend to draw a single deduction in which anything depends on definite figures. What I have to do with is rather the mere negative recognition, that the period of time, for which the accumulated subsistence fund must contain provision, need not be so great as the average economical production period.

End of Notes


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