The Common Sense of Political Economy
MARKETS (Continued). INTEREST. TOOLS. LAND
Summary.—The market in advances follows the law of other markets. One man could administer his resources for a given period more economically if he could quicken their flow for the first part of the period at the expense of slackening it in the last; and the case is reversed to another. Or both may be in the same case, but to one the advantage of anticipation may be relatively greater than to the other. Between these two the conditions of exchange exist; and if, when equilibrium is reached, there is a premium on anticipation, that constitutes one source of the phenomenon of interest. Current savings of perishable things may be paid by one man to another who is accumulating wealth in more permanent forms, that may afterwards be paid back in compensation. Hence each individual may transform perishable present into more permanent future possessions, or permanent present into more perishable future possessions; or may transmute more into less perishable commodities, or vice versa. Effort may also be diverted from the immediate production of desired things into the production of tools, or the acquiring of skill that, when obtained, will make effort more fertile; and out of that increased fertility a premium may be paid to one who advances tools or apparatus. Land may be regarded as yielding either a revenue of commodities or a revenue of directly enjoyable services, and in either case it may be regarded as partly given by nature and partly manufactured. A man may desire to hire it (i.e. to have it without buying it) for the same reasons for which he may desire to hire a house or a tool, viz. either in order to distribute his resources more to his advantage or in order to increase them. Both these advantages of anticipation obey the general law of declining significance as the margin advances; and they both, together with the mere prodigal's desire to anticipate future resources, constitute a claim on the total resources at present available, and find their place of equilibrium amongst other claims. The resultant premium on advances constitutes interest. Some cannot help saving; but it is not always wise to save for a distant future. Saving beyond a certain point is never wise. The existence of interest as a normal phenomenon reacts upon the distribution of personal resources, and also has its analogues in things not in the circle of exchange. The rate at which a society accumulates exchangeable things depends upon its wealth, upon the distribution of its wealth, upon the providence of its members, and upon the wisdom and honesty of those that direct its industries. Hire and rent contain elements in common with interest, and hire deals with a problem of fractional purchase analogous to that with which insurance is concerned.
There still remains for examination a special class of transactions which, although they come under the general law of the market, have been found so perplexing, and have given rise to so many strange speculations, that I have reserved them for special treatment.
The phenomenon of interest has engaged the attention of theologians and moralists, as well as economists. Calvin has the reputation of being the first great theologian who frankly defended the receipt of interest. Possibly (but not probably) Ruskin will be recorded as the last great moralist and social reformer who ever succeeded in catching the ear of a wide public for a denunciation of it. But be that as it may, in spite of all that has been written on the subject, the true nature of interest, its relation to other economic phenomena, and the play of forces of which it is the manifestation, still seem to be very imperfectly understood, and some attempt must now be made to elucidate them.
We have already seen that a man's expenditure must be distributed between what may be called short-service and long-service commodities; that is to say, between commodities which are used up and perish and have to be renewed, and commodities that last for longer or shorter periods in continuous or intermittent use. It follows that the man who is to provide himself with a suit of clothes that will last him six or twelve months must, at the beginning of the period, be in possession of his whole provision for six months' wear; whereas at the beginning of the same six months he only needs to be in possession of bread that will last him a few hours, and will find it inconvenient to have provision for more than a few days. We see from this that if a man should start with little or nothing in hand—that is to say, with no provision of anything he requires that will last him more than a few hours—and during the next six months expects to come into command of a certain defined amount of things in the circle of exchange, it would not be a matter of indifference to him whether this command came in an even stream, day by day, or week by week, or in a stream of changing volume, broad at first, and narrower afterwards. It may be a matter of vital importance to him to bring the rate at which his command of commodities accrues into some kind of correspondence with the irregular way in which the necessity for providing for his wants asserts itself. If instead of £1 a week for twenty-six weeks a man could receive, say, £5:1:3 for the first week, and 16s. 9d. each of the other twenty-five weeks, he would only receive £26 altogether during the twenty-six weeks, but he would be far better off, for he could provide himself with a due proportion of long-service commodities, and yet keep his expenditure on short-service commodities even throughout the period. It follows, therefore, that he will be willing (if that is the only alternative) to accept something less than £26 distributed over the time in a way that will suit him, instead of £26 distributed evenly over the whole six months.
And if we take a longer period, and include articles of greater permanence than clothes, such as furniture, standard books, or even houses, the same principle applies still more obviously. These things must exist in the mass before they can be used continuously or in fragments. And unless a man has something in hand—that is to say, unless he has saved something, or has come into possession of what others have saved or otherwise command—he will be very willing, if he can, to make some kind of bargain in virtue of which he can get possession of things at the start, and pay for them gradually as he uses them and as his resources continuously accrue. That is, given the prices of the several commodities, he will be willing to contract the whole range of his options if thereby he can get leave to anticipate the exercise of some of them. His future command of commodities will then suffer a double contraction, partly due to the anticipation he has been allowed to make, and partly owing to the price he has paid for this privilege.
But the opposite case is equally conceivable. We have taken the case of a man whose command of resources is expected to flow in at the rate of £1 a week, so that in twenty years he will have had roughly £1040. But suppose a man has not any prospect of earning, or otherwise receiving, any continuous command of things in the circle of exchange for the next ten or fifteen years, but has present command of £1000. If he were required there and then to exercise his privilege and call out of the circle of exchange the actual things that he will require for the next ten years, what would he do? He would ask, say, for a house, for furniture, for books, for clothes, and so forth. But moth and rust corrupt. He will require larger premises than he would have needed had he been able to get these things as he wanted them; and a constant deflection of energies from other channels will be needed to keep them from deteriorating. When it comes to providing many years' stock of food, the man will be at a terrible additional disadvantage, for he will be confined to kinds of food that will keep indefinitely; and finally, it will be absolutely impossible for him to lay in a stock of direct "services"—that is to say, of the output of human effort to meet the recurrent requirements of his life.
Thus the man who is to receive his resources in a regular stream may find it difficult to provide himself with certain things, and impossible to provide himself with others, which his total resources could easily command if he could distribute them in time according to his taste, taking more now and less afterwards. And the man who should be required to exercise at once the whole power of calling things out of the circle of exchange which will accrue to him during a series of years, would be severely restricted as to some things and would have to go altogether without others which his resources would command if he were able to distribute over future years some of the options which he is required to exercise at once. The same difficulties would arise if he were expecting to receive a given income for a certain period, after which it was to decline or cease. He could not during one term of years gradually store all the things that he would need during a subsequent term. We shall soon arrive at a clearer conception of the process by which saving and accumulation are actually conducted, and shall understand why, as a matter of fact, no man is ever called upon thus to store up in times of prosperity the actual concrete things that he will want in future years. But the point that I am emphasising at the moment is that if he were called upon to do this he would be placed at a terrible disadvantage.
We see, then, that two men situated as we have supposed would both of them wish to redistribute their resources in time, but would wish to do so in contrary senses. The one would prefer present to future command of a part of the wealth that is to accrue to him in a given period, and the other would prefer future to present exercise of a portion of the options which have already accrued to him. Now since each of these men has relatively too much of that of which the other has relatively too little, it is manifest that the conditions for a profitable exchange are present. The man who has present command of things in the circle of exchange, and would willingly forgo a part of it for the sake of future command, meets the one who anticipates a stream of future command and would gladly contract it if he might exercise a certain measure of present command as a compensation. Each of them therefore can give what he values less, and receive what he values more. And the preferences of each alike are subject to the law of declining marginal significance. For it is obvious that as each of the two men is better supplied with that of which he is in relative lack and worse supplied with that in which he relatively abounds, there is a gradual approach to equilibrium.
We have supposed that to one of the exchanging parties an extra £1 down would actually have more value than an extra £1 distributed over a stretch of the future, and that to the other an extra £1 distributed over the same period would actually have more value than £1 down; but exchange might take place even though both preferred £1 down to £1 distributed evenly over a given period of the future, if the preference were greater in one case than in the other, and if the man whose preference was the lower possessed £1. For in this case the advantage of present over future command would stand relatively higher on one man's scale than on the other's, and it would be possible to fix on a premium so high that the one man would accept it and yet so low that the other would pay it. This is exactly what lies at the basis of the ordinary law of the market. In order for an exchange to take place some commodity must stand relatively higher with respect to another commodity on one man's scale than it does on another's, though it may be valued by both; and the man on whose scale it stands relatively lower must possess a supply of it. In the case in hand the things exchanged and to which the parties attach different relative values are a defined command of things in the circle of exchange now, and the same command in the future; or, to put it in another way, the thing offered for sale is the privilege (valued by both men, but not equally) of anticipating future resources.
The extreme suppositions with which we began this investigation may now be modified. We need not necessarily assume that there are some who have little or nothing in hand but have prospects of incomings in the future, and others that have no prospects of incomings in the future (or after a certain period of the future) but have something in hand. All we need suppose is that there are certain persons whose wealth in hand and wealth in prospect are so proportioned as to give the present a higher relative place on their scales of preference than it occupies on that of certain other persons.
Here, as in any other market, the individual scales might be combined into a communal scale. The possessors of accumulations in relative excess would cede present command of things in the circle of exchange to those who anticipated a relative excess in the continuous stream of their future command of them. On the scales of these latter such future command would stand relatively low, until they had ceded so much of it that equilibrium was reached. If, when the equilibrium point was reached, there was a premium on present command of accumulated wealth, what would this mean? It would mean that those persons who had surrendered a portion of their present wealth, but had also retained a portion, valued the present more than the future, at the existing margins, in a ratio at (or just above) that represented by the premium. They would be in the position of the stall-keeper who has a reserve price and refuses to sell any more of her wares at the current market price. In many cases the exact parallel would be that of a stall-keeper who at first has wares in such abundance that they are a discommodity to her (that is to say, in such abundance that she would, if necessary, be at pains to get rid of some of them), but at the same time desires to have some, though not so much as she has. She would pay the market price for some, if she had not got any; and having a stock, she will retain some of it, and refuse to sell it at the market price. But she gets the same price for that which, if necessary, she would have paid some one to take away, and for that which she is only just willing to part with at the price, that price being fixed by the equilibrium valuation on the communal scale. So, too, in the market we have now imagined. It is but natural that amongst those who offer present command in exchange for future command of commodities there should be some who, to begin with, have so large a relative excess of the power of present command that they would, if necessary, pay any one who would enable them to defer exercising it till some future date; and who at the same time so highly value some of this command, that if a certain part of their stock has already been transmuted they would decline to transmute more except on increasingly exacting terms. How much of it they will actually transmute depends on the market price they can realise. When one man transmutes present command of wealth-in-volume to future command of wealth-in-stream, his correspondent effects the reverse transmutation; and therefore the price he pays, which will be the market price of the commodity, is the equilibrating value, on the collective scale, of leave to transmute a stream of wealth that is about to accrue into a volume of wealth that has accrued. This price the seller receives for those portions of his own counter transmutation which he would have paid for being allowed to make, no less than for those portions of it which the premium he receives is only just enough to induce him to make; just as the stall-keeper receives the market price for that portion of her wares which she would, if necessary, have paid some one to remove from the market-place for her, no less than for that portion which she would have taken back home for her own use had the price realisable been a halfpenny a pound less than it actually was.
And, in like manner, just as the consumer of tea or of any other commodity pays the same price for the increments which satisfy his keenest wants and those which satisfy a want only just keen enough to make the price worth paying, so the man who buys the privilege of transmuting the stream of wealth that will accrue to him in future into a present volume of wealth gets those portions of this privilege which are necessary to make any kind of civilised life possible to him, and those which merely provide him with some relatively slight convenience, at the same price. And that price corresponds to the significance of the least valued exercises of the privilege.
It will be well to note at once (inasmuch as no one can actually give to-day a command of commodities which will not accrue till to-morrow) that what is actually received in return for the exercise of present command can only be a promise; and as the value of the promise (that is to say, the assurance that it will be fulfilled) may vary indefinitely, the question of the price at which the exchange between present and future command of wealth is effected may be indefinitely complicated by questions of insurance or covering of risk; but we have seen that, if we were altogether to eliminate this element of uncertainty, the mere fact that some persons can make credible promises to give future command of wealth, and other persons have actual command of wealth at the moment, is enough to constitute a market. And under given conditions as to the quantity of wealth accumulated and the relative wants of members of the community as to short-time and long-time expenditure, it might happen that a man, by handing over to another his immediate power of calling £100 worth of goods out of the circle of exchange, might receive the right to call for £2 worth of goods every week throughout the course of a year. In that case, at the end he would have called altogether for £104 worth of commodities and services; and the extra £4 would be the price or premium he had received for enabling his correspondent to exchange a stream of wealth about to accrue into a volume of wealth that had accrued.
Now suppose that this man saves the £100 and only spends the £4. He may then be in a position to repeat the transaction and spend another £4 in the course of the next year, and still have his £100; and so on for an indefinite series of years. Moreover, the period of one week is clearly arbitrary. The arrangement might be that the instalments should be paid once a fortnight, once a month, or once a quarter. The person who receives the £100 worth of goods may not be sure exactly when he may find it most convenient to pay his instalments. He may expect to earn larger sums one week than another, and he may find it difficult to pay £2 every week, though he might be sure of being able to pay £26 in the thirteen weeks of the quarter, one week taken with another. He might even wish to be allowed the whole year over which to collect, according to his own circumstances or discretion, the total sum due. Or he might pay small sums quarterly, amounting to the premium and the lump sum at the end of the year. All such variations in the bargain would be matters of convenience and arrangement, and the terms for each might vary. But the general rule is obvious. By hypothesis the present possession of £1 stands marginally higher on the collective scale than the promise of £1 to be paid by instalments in the future; and it follows that a promise to pay a sum by instalments, over a given period, stands marginally higher than a promise to pay the same sum in a lump at the end of the period. But each instalment as it is received will, by hypothesis, be worth more than if the payment of it were to be spread over all that remains of the period. In the limit, therefore, instalments over any period, however short, will be worth more than the whole sum paid in a lump at the end of that period. The man who defers his instalments, and concentrates them at certain points, will therefore have to pay a further premium for being allowed to do so. Thus we could imagine that the man who could get £100 in return for a promise to pay £2 a week for a year (£104 in all, £4 premium and £100 returned) might find that if he wished to pay his premium quarterly, and to return the lump sum at the end of the year, he would be required to pay 30s. a quarter premium instead of £1, or £6 in the course of the year, and £100 at the end of it. The lender, on his side, might spend his 30s. a quarter premium as he received it, and when he got his £100 at the end of the year might repeat the arrangement. In that case he will no sooner receive his £100 back than he will exchange it for a promise of £106, to be paid in instalments of 30s. a quarter and £100 at the end of the year. Then why not accept this promise at once instead of the £100? Why insist on first having the £100 and then exchanging it for the promise instead of accepting the promise at once? If this arrangement is made it may go on indefinitely. The one man may always be liable at the end of every year for £100 to the other man, and may always offer him 30s. a quarter for accepting a promise to pay in a year instead of payment now. Or the terms might be such that the whole transaction may be closed at the end of any quarter if the borrower likes to pay up the whole sum of £101:10s., or if the lender chooses to require it.
Such a transaction as we have described, therefore, may be regarded in two lights, either as a hire or as a purchase. If I lend you £100 at 6 per cent, the interest to be paid quarterly, we may either consider that you are paying me 30s. a quarter for the control of £100 worth of goods as long as you retain it (in a word, that you are hiring £100 worth of goods from me), or we may say that at the beginning of the quarter you buy £100 worth of present goods by the promise to pay £101:10s. worth of goods three months hence, and that when the promise becomes due you pay the £1:10s., and substitute for the payment of the other £100 the promise to pay £101:10s. three months hence again; that is to say, the process of borrowing £100 at 6 per cent, the interest to be paid quarterly, may be looked upon either in the light of hiring the command of commodities, or in the light of purchasing present commodities in terms of a promise of future commodities. Some writers have laid stress on the theoretical superiority of one or the other of these views, but on this matter we need not trouble ourselves. There may be special transactions which are more conveniently regarded in the one light than in the other; but, broadly speaking, borrowing at interest may be equally well thought of as a species of generalised hire, or as a constantly renewed exchange of present wealth for promises of future wealth. The essential point is that we should recognise the identity of the underlying principle in either case, and should understand that what is hired or bought is the anticipation of resources which the hirer or purchaser himself does not yet command.
We can now perfectly understand that any one who wishes to receive present command of resources in any form, in return for promises to pay a lump sum in the future, on going into the open market and trusting to economic forces to supply his wants, will find that he has to pay a premium in one form or another. He will have to promise more wealth in the future than he receives in the present; and this will be the case whatever the terms of the bargain may be, whether the borrower promises to pay back by instalments, or in a lump sum at the time the lender chooses or at the time he chooses himself.
There are persons, then, who actually control present wealth and desire to increase their control of future wealth, and there are persons who expect to control wealth in the future and desire to increase their control of wealth in the present; and these two sets of people will exchange, on terms, until all their relative estimates of present and future wealth coincide. At that point there will be subjective or vital equilibrium between the marginal value of the unit command of things in the circle of exchange to-day, and the unit command of them at any given period in the future, on each individual's scale; and there will be objective equilibrium between these units on the communal scale. The market in which men buy and sell power to anticipate the command of things in the circle of exchange appears to conform exactly to other markets.
But we have much more to do before we have completed our examination of this market. To begin with, we must give a wider extension to the branch of the subject which we have already examined. We have spoken of wealth in hand as a stock already existing. "Advances" must obviously be made out of this existing store. But we must now consider how a stock can be accumulated. Mere hoarding of precious metals and the like obviously constitutes but a very small part of the process of accumulation. Any one who puts work continuously into the construction of an implement, a house, a suit of clothes, or, briefly, any long-service commodity, is accumulating, though perhaps not for himself. He may be paid, or bought out, day by day or week by week, by short-service commodities, and in that case it is the person who pays him that is accumulating; but in any case the accumulation is going on. But besides long-service commodities that last over a long period, there are slowly maturing commodities that must be secured by efforts spread over long periods. A man may tickle trout and receive an immediate return for his efforts; but he will have to work during many months of the year to secure a crop at harvest-time. We may rightly regard the corn he harvests at last as a short- rather than a long-service commodity, but it can only be secured by a process that is equivalent to accumulation, whether we call it so or not. Commodities of many kinds, then, may be secured by the accumulation of efforts and resources, and some of them, when obtained, may be susceptible of use over a longer period than others. Our attention was first called to the subject of accumulation by the consideration of long- and short-service commodities, but we now see that the process of accumulation is as necessary to secure slowly maturing as it is to secure long-service commodities, and in our further examination of methods of accumulation we must bear this in mind.
In the process of accumulating, as elsewhere, the machinery of exchange and the principle of division of labour come into play. If I accumulate for ten years in order to have a house, I probably neither build it myself by efforts spread over the ten years, as I can spare them from other purposes, nor pay another man for so building it. What happens is in principle something like this:—By such agencies as Savings Banks and the like a number of persons club together, generally unconsciously, so that the tiniest streams and dribbles of savings (that is to say, refrainings from drawing things out of the circle of exchange) are gathered together, and are continuously embodied in long-service commodities, some of them being houses. Thus, when I have been saving a few months, and have diverted from current use say a twentieth part of the resources necessary for the construction of a house, I have unconsciously combined with nineteen others to furnish house-builders with things they want, and from which we have abstained; and they in return have constructed for us, not for themselves, a house which represents our joint accumulations. Now we have seen that under existing conditions we may expect to find a man who wants a house but has not saved up for it; and he will be willing to pay something for the privilege of anticipating the resources which he expects will accrue to him in the future. That is to say, while retaining our collective right to appropriate to ourselves the house which represents our accumulations, we may expect to receive periodical payments for allowing some one else to use it instead. I shall have my share of these payments, and, if I like, I may add it to my accumulations. If we are all doing the same we shall have our next house ready in something less than six months, and shall then be in receipt of another series of premiums, and so on, until in a period considerably shorter than ten years I shall find that my continued savings at the original rate, with the addition of my share of the premiums which we have received, will amount to the price of a house. Or put it in this way:—Week by week I may abstain from short-service commodities and cede them to others as payment for embodying their efforts in long-service or slowly maturing commodities. The abstinence is mine, not theirs. They have been enjoying immediate returns to their efforts, but I, through them, have been accumulating; and at any moment, by advancing my accumulations, I can, in virtue of the premium on anticipation which the market offers, secure the promise of a larger sum than I have saved, in a series of subsequent payments.
No attempt has been made in this example to represent the immense complexity and variety of the actual relations involved. It is merely intended as a concrete illustration of the way in which a man is able continuously to contribute towards the construction of long-service or slowly maturing commodities until such time as his command has risen to the point at which he can exercise it by summoning from the circle of exchange the commodity for which he has been saving up; and it shews that whoever does this may, so long as the market offers a premium on anticipation, expect to draw out more than the sum of his puttings-in.
Now suppose that a man expects to come into possession of a house, or other long-service or slowly maturing commodity of given value, at a certain time, and that he desires, instead of possessing it when the time comes, to command a series of short-service commodities during the intervening years. He might, even without the machinery of a bank and the combinations it makes possible, find another man who wished to save up for a house, and he might receive from him the command of short-service commodities for a series of years, and then surrender to him the long-service commodity at the end. And in this case (always under the same supposition as to the state of the market) he would draw out a smaller total sum by instalments during this series of years than the house would have realised had he not trenched upon its worth in advance. The other man is saving up and he is spending. The "advances," in this case, are made to, not by, the man who will ultimately cede the slowly maturing, long-service, or large-unit commodity; and it is he who will have to pay the premium. But that is because he does not yet possess this commodity that embodies accumulations. He only expects it. If it already exists, then the man who has present possession of it can command a premium for advancing it.
We can now give a certain extension to our conception of the market between wealth in the present and wealth in the future; for we have seen that exchange may be effected not only between a large sum in the present and a series of small sums in the future, or a single present sum and a single future sum, but also between a series of small payments over a period of time and a lump sum to be received at the end of it, or a series of small sums in the proximate future for another series of small sums in the remoter future. And if in any one of these transactions there is a premium in the market on the present, or the proximate future, as against the relatively remote future, there will be a like premium in all of them. And in this market, as in others, the man who carries either saving or anticipation to the point that brings its marginal significance to him personally into correspondence with the market price, gets what is worth as much as he gives for it at the margin, and more than he gives for it at all points short of the margin. That is to say, a man who postpones his expenditure may be supposed in many cases to receive a far greater return for his initial savings than would have been enough to induce him to make them. It is only at the margin that what he gives and what he gets will balance. And so also with the man who anticipates expenditure.
Hitherto we have dealt with cases in which the total resources which a man commands over a given period are supposed to be constant, and we have shewn that they will have a different vital significance to him according to the way in which their flow in upon him during that period is regulated. To one man they would naturally accrue evenly throughout the period, and if he can secure a broader flow at first by accepting a narrower flow subsequently he will be the gainer. To another man they will naturally accrue at the beginning of the period, and if he can narrow the flow at first and thereby secure a broader flow afterwards he will be the gainer. Or both will be the gainers, but one more than the other, by broadening the initial and narrowing the subsequent flow. But in every case we have supposed that the total of each man's resources for the whole period covered has a defined volume, and the only question is what distribution and regulation of their flow will maximise their vital significance to him. We have seen that this problem will solve itself on the general principles of the market, and that under existing conditions there is a premium on present as against future wealth. Therefore any one who has saved or has otherwise secured accumulations or possessions is in a position to exchange them for a sum total of future possession or enjoyment larger than themselves—not, indeed, because he has accumulated a present command of resources, but because he possesses it. Here, as elsewhere, he may accumulate painfully, because accumulations will command a premium; but they will command a premium not because they were accumulated (painfully or otherwise), but because they are there.
But now we must turn to another "market" (in the larger sense of the term), in which a man can exchange resources in the proximate for resources in the remoter future, and in which nature and art offer him a direct premium for doing so. This "market" is independent of any difference of need between different members of a society, and was as open to Robinson Crusoe on his island as it is to us in England.
Nature and art—that is to say, the whole complex of conditions that has risen out of the reactions between man and the forces of nature, throughout the ages—offer perpetually open opportunities of applying accumulated resources in such a way as actually and objectively to create revenue. In the cases hitherto examined we have supposed that future revenue will accrue to me, whereas you have command of present accumulations. You transfer to me some of your accumulations, and I shall transfer to you still more of my future revenue when it comes, so that you get a larger and I a lesser share of the total wealth, but that total itself is not changed by our transaction. Your share is increased, and mine, though decreased, is more conveniently distributed over time. The material total is unchanged, but its psychological significance is heightened. In the cases which we are now to examine, on the other hand, my application of the accumulations you put at my disposal will create revenue, so that the "more" which you obtain will not mean a "less" remaining to me; for it will have actually come into existence in virtue of our transaction, and there will be a "more" for me too. This is (or ought to be) the ordinary case of commercial interest. We shall approach the consideration of it most easily by examining the significance of tools.
Beyond gathering mushrooms, nuts, wild strawberries, birds' eggs, shell-fish, and the like, it is difficult to see what a man can do to supply his wants without tools. Even the botanist who boasts that he can fare sumptuously where another man would starve will probably need some kind of tools to extract his succulent roots from the soil. Those tools may be extremely simple. He may find a stone, or break off a twig, that will enable him to grub them out; but even that is increasing his ultimate efficiency by diverting his immediate efforts from the direct accomplishment of his purposes to securing the means for effecting them more adequately. When the savage shapes one flint with another, constructs his bow, twists grasses (or his mother-in-law's hair) into a bow-string, and fixes a flint head upon his shaft, and, still more, when he constructs a canoe for fishing, he is, in a very notable degree, accumulating resources and diverting his energies from the direct pursuit of his purposes. The gardener would be helpless without his spade, and would be at a cruel disadvantage without his wheel-barrow. The possession of a few nets makes a vast difference in the proportion between the amount of fruit which the birds get and the amount which he gets himself; and the pitchfork, the syringe, and many other articles which come under the general denomination of tools and apparatus have various degrees of efficiency in making the same labour, bestowed on the same land, yield a larger revenue of desired results. Walls and glass yield a yet further increase. And none of these things can be secured save by diverting human energy from its direct purposes, and accumulating it in such a form as to make it yield a revenue in the increased efficiency of the effort which it supports. The huge factories, the railway cuttings and embankments, the machinery, locomotive and stationary, by which the great industries of an advanced industrial community are supported, all of them represent accumulations, in return for the judicious application of which nature and the complex of industrial relations between man and man offer a revenue in the increased efficiency of human effort and resources.
Here, then, we may note an extension in our conception of the meaning of the processes of saving. We have already considered saving as a diverting of effort from the increase of short-service commodities to the increase of long-service commodities—say, from catching more fish to building houses; and further, as the diverting of effort from directions in which it meets quick returns to the production of slowly maturing commodities—say, from gathering wild fruit to sowing and tending corn; and now we may think of it further as the deflection of effort from the direct to the indirect acquisition of desired things—from "tickling" more fish to building boats and making fishing-nets; from weaving cloth to making looms; from printing more books to founding type and constructing engines; from digging over the garden once more to making nets; from carrying consumable things from place to place, to making railway cuttings, embankments, etc. Or, to repeat it once again, saving seems to consist in (1) increasing our stock of relatively permanent or slowly maturing commodities by the application of resources and efforts which might have been applied to the increase of our stock of relatively perishable or quickly maturing ones, and (2) deflecting energies and resources to relatively indirect means of securing our ends (by embodying them in tools and apparatus) from relatively direct means of securing them (by employing the tools and apparatus we already have).
We will now take up this latter aspect of saving. It does not necessarily involve exchange, for the man who is cultivating his own land for his own use might make his own nets, for example; and in that case the saving would be effected by the same man, whose future efforts become more productive in consequence of it. Yet it may, and certainly often will, happen that one man is in a relatively favourable position for saving, and another in a relatively favourable position for fertilising the result of saving. Thus it may involve relatively smaller distress on my part than it would do on yours to deflect a certain sum from my current expenditure from the direct supply of my wants to the construction of tools; and you, on the contrary, may be able so to apply these tools as to make them increase the efficiency of your efforts more than any use to which I could have applied them would have increased mine. In that case it may well happen that the increased yield so secured, while it would less than compensate you for the relatively severe process of saving, will more than compensate me for the relatively light one. If, then, I transfer the tools in which my saving is embodied to you, and you assign to me anything less than the whole increase of revenue which results to you, I may be satisfied, and you may have a clear gain.
And here, too, the law of diminishing marginal significance very obviously comes into operation. To begin with the simpler case of the tools handled by a craftsman. I have known a carpenter of exceptional skill and resourcefulness do a wonderful day's work of a miscellaneous description with no tools but a flat-tailed hammer and an old broken chisel. The difference between his efficiency with these implements and with none at all was certainly far greater than the whole extra difference which the command of his complete basket of tools would have made; for no number of men, absolutely without tools, could have done his day's work at all, whereas a full supply of tools would probably not have enabled him to increase the yield of the same time and the same effort by more than from ten to twenty per cent. The tasks in which he was engaged on that particular day were no doubt of a comparatively simple nature, and if he had been engaged in building a cart his hammer and chisel would have been cruelly inadequate. But he could shape the wheel-hub perfectly with an axe, and a very small equipment of tools would have enabled him to do all his ordinary tasks as carpenter and wheelwright with fair expedition and efficiency. More elaborate tools, had he cared to command them, would have had a rapidly declining significance. They would have made his labour more fertile, but not at anything like the same rate as the initial supplies of the most useful tools. The principle hardly needs to be elaborated, for it will not be disputed. Successive increments of tools and appliances, after a certain point, while they still increase the efficiency and economy of efforts and resources, will do so at a decreasing rate.
The case is exactly the same with the manufacturer. A man may see his way to making £10,000, spent in improved machinery and appliances, yield him £1000 in the increased efficiency of his staff and materials. Perhaps by spending yet another £10,000 he could still further increase their efficiency, but possibly the further addition would amount not to £1000 but only to £500 a year. So if he went into the open market to raise the money, and found that under all the conditions of the case he would have to pay 6 per cent premium or interest, he would think it worth while to raise the first £10,000 and not the second. The declining significance, however, would be gradual, and he would not be confined to increments of £10,000. The first portions of the second £10,000 might have the power of increasing the output at less than the rate of 10 but more than the rate of 6 per cent, and therefore some portion of the further sum would be borrowed. In short, whatever the rate of interest at which the manufacturer can command an advance (that is to say, the immediate use of concentrated or accumulated resources), a balance must be struck between the industrial efficiency of increased apparatus and the price that has to be paid for it in the market. The point will come at which the man would lay down a certain machine, if interest were only 5 per cent, because he expects it to fertilise the concern to the amount of 5 per cent on the money expended, with a sufficient margin to cover risks, replacement, etc.; but if interest is 6 per cent he will not lay the machine down.
Here, then, is a vast army of fresh claimants on existing accumulations. They too will have to submit to the law of the market and will be able to secure its benefits. They will all compete, not only with each other, but with the other claimants; and the wants of all will be satisfied down to the same point of relative significance. That is to say, if I want to pay for my houseroom as I use it (instead of paying for a whole house before I begin to use it), because that way of fitting my burden to my shoulders suits me best, and if you want an engine before you have saved up for it, because the possession of it will itself put you in possession of a larger revenue, we shall bid against each other in the market, and the man who has something in hand will not ask either of us why we want to anticipate the resources he has accumulated, but will only ask how much we desire it, or rather how much we are in a position to pay him for gratifying our desires; and whichever of us offers most efficiently to further his purpose will find him most willing to further ours; provided only that either or both of us offer him better terms than he can make for himself by direct applications of his accumulations to his own concerns.
Lastly, we will introduce, if only for form's sake, our friend the "prodigal," to whom a few words are frequently devoted in books of Political Economy. He is a person who thinks, possibly not altogether without reason, that he is capable of enjoying £100 now more than he will be capable of enjoying £200, or, for the matter of that, £2000, at some remote period when he is likely to come into possession of it. He may think so, partly because he will then have larger annual resources and can therefore cut back from an objectively more advanced margin, and partly because he thinks he is himself capable of higher enjoyment now than he will be then, so that even if his revenues were evenly distributed throughout his life he would get a larger subjective value out of them by spending freely in his youth and economising in his age. Or he may not even have so good a reason as the worst of these for valuing future command of resources relatively low. He may be simply careless as to the future. But in any case his estimate of the present in terms of the future is presumably subject to the law of declining marginal significance. As his future resources dwindle, and the prospect of retrenchment or want comes nearer, he will probably cease to pawn the future still further in obedience to every whim, and will only do so to escape serious difficulties or secure objects of keen desire. If not, then the time will soon come when his promises of future payment are no longer current, and then he falls out of the market and we "see him no more." Meanwhile, as long as he draws the line anywhere, and has anything still in hand for the future, he too competes with the rest and has his claims satisfied down to the same relative point, for he is in the same market.
We have now examined a variety of cases in which a man may be willing to promise a premium in future wealth for the possession of present wealth; and two points have come out very clearly. Firstly: Whatever a man's reason for this wish may be, he comes into competition with all other men who, for the same or any other reason, are willing to make similar promises; that is to say, he comes into competition with all those upon whose relative scales a unit of future wealth (which they can convince people they command) stands lower than a unit of present wealth, irrespective of the reason why it so stands. It does not matter what a man wants wood for so long as he wants it, but it does matter how much he wants it relatively to other things in the circle of exchange. In like manner it does not matter whether a man wishes to anticipate wealth because it will enable him to administer the resources on which he can already count more advantageously by suitably distributing them in time, or whether he wishes to increase the total of his resources, by equipping himself with a better supply of tools or cultivating his own faculties, or what other reason he has for his wish. What does matter is the magnitude of the premium he is prepared to offer. Secondly: The premium he will actually have to pay for the whole advance that he receives is not determined by the premium he would have been willing to pay for some of it sooner than go without, but by the equilibrating value of present as measured in future wealth, which is the resultant of the collective forces that play upon the market. This resultant proclaims the position of a unit-at-any-given-time-in-the-future, relatively to that of a unit-at-the-present-time, on the communal scale. It is open to any one to bring the significance of the marginal units on his own scale into harmony with this resultant. In a state of equilibrium every individual has done so; and where there is not equilibrium every individual has something (in his own estimate) to gain by approaching it. This is but the common law of the market. We have therefore succeeded in bringing the phenomena of interest under our general law.
Let us now consider the case of a man who desires to store his own energies in such a way that at a certain point of time in the future he will command in the market an accumulated volume of resources (instead of commanding a stream of resources during the whole period) in return for this continuous output of his energies. Suppose him to be provided with the proper supports, the following alternatives, amongst others, are open to him; and whichever of them he adopts he will expect the whole volume of resources he ultimately commands to be greater than the sum of those that would have come to him in a regular stream had he drawn upon them currently. He may cultivate and sow land, the crop of which will not be ready for marketing for some months and will require continuous expenditure until that time comes, but will then be capable of ministering to the immediate satisfaction of people's wants and will perish at once in satisfying them; or he may devote himself to the construction of some long-service article, such as a house, which will likewise be capable of directly satisfying human wants but will only gradually be consumed over a long period of years in satisfying them; or he may devote his resources to constructing machinery, which will not immediately satisfy any human want but will fertilise human effort and make it more productive than it would otherwise be. The body of persons who select amongst these alternatives will turn their efforts along the different channels in such proportions that the product of the same amount of resources in the present and in the proximate future, however directed, will have the same marginal significance at that point in the future at which they will all ripen. The conception of such a marginal balance offers no difficulty. We have seen that as a fact there is, in the general market, a premium on anticipated as against deferred satisfactions, and it follows that if a certain quantity of wheat is to balance in the market a certain house, since the total services rendered by the house will extend over a longer period than those rendered by the wheat, the total of those services must be higher, in order that it should weigh equally in the market, that is to say, command the same price. Again, if an engine can so fertilise a man's efforts and other resources that the same output with the aid of the engine will, in a given number of years during which the engine lives, produce a given surplus yield of resources, the total of that surplus must be larger than the satisfaction that the wheat can render, in order to balance it, or command the same price, in the market. For it will have to be gathered over a longer period.
So if I judiciously direct my resources to any purpose which involves waiting for the result, I shall be able to get a larger return than if I direct them so as to secure an immediate or proximate result. And if that result when it comes will be realisable only over an extended period of time, it must offer a larger total of advantage than if it is realisable at once, for otherwise it will not fetch the same price and I shall be a loser by choosing it. If the premium on the present is low a small excess will justify me. If it is high only a great one.
In reckoning the services that a house will render, year by year, we have to bear in mind that in order to avail ourselves of them without waste we shall have constantly to make expenditure upon it, and that probably or possibly it may gradually become unsuited to our requirements. And the same is true of an engine, the possibility of its being superseded in structure before it is mechanically worn out being a very important consideration. In the case both of the engine and of the house, therefore, we may set against the gross revenue of satisfaction in the one case, or of extra fertility of effort in the other, a fund for repairing and a fund for redeeming or replacing, and if we do this adequately we may regard the house or machine as immortal; and if a surplus revenue of enjoyment or efficiency remains we may regard that stream of future satisfactions, to be weighed against the present satisfactions of the corn, as flowing for an indefinite period, and therefore as having an indefinite total volume. But we shall presently see*29 that such indefinitely large volumes, accruing over an indefinitely long stretch of time and flowing at a definite rate, are always estimated at a definite sum. And as between the estimated stream of satisfactions which the house will yield (when such deductions as the purchaser thinks fit to make for redemption, etc., have been measured off) and the estimated stream of increased efficiency which the machine will give him or his successors, there is no theoretical difficulty whatever in striking a balance.
But the tool commands a price, not because it represents accumulations (that is, diversion in the past of resources and efforts from ministering directly to current wants), but because it has value in the present and future as a source of efficiency. No matter how much has been sacrificed in the past to secure it, it will only sell for what it is worth. And if it happens to be worth a great deal it will command its price quite independently of its history. If a tool fell down from heaven or sprang out of the bowels of the earth, and society granted any man a legal right to destroy it, to use it, or to allow or prevent its use by others, according to his discretion, he could sell it for a price determined by the sum of extra resources which the command of it would confer upon any one who should put it to its use. All forces of nature, in so far as they are available in insufficient quantities, seem to come under the conditions now contemplated. And so far as "land" is taken to mean mere space on the earth's surface it must be regarded in the same light. What we mean by "land" in ordinary life, however, is very largely a product in which effort has been stored just as much as in a plough; and from the point of view of commerce or industry there seems to be no difference between them. Both are matter that has been given us by nature so manipulated and modified as to make it indirectly serviceable to our needs. Fences, gates, roads, processes of reclaiming, permanent manures, and what not, all of them embody stored effort, and they all have as their substrate something that was never saved or accumulated, unless it were by nature. And whenever this original something, of the quality or in the places in which it is desired, exists in less than the desired quantity, subtractions from it would cripple, and additions to it would expand, the efficacy of human efforts. "Land," then, whether regarded as purely a gift of nature or partly as a manufactured article, has its marginal value, exactly as the tool has. It may be hired for its marginal annual yield or may be bought for the estimated significance of the indefinite succession of these annual yields, just as an engine or a house may be; and it will be balanced on the same principles against wheat or anything else that can directly minister to human satisfactions.
It should be noted, too, that land itself may yield a direct revenue of enjoyment when used as a garden, park, or hunting-ground, and that the desire for this direct revenue of pleasure will enter the market for land, and compete there with the desire for its services as a tool, or increaser of the industrial efficiency of effort.
At any given moment in the life of an industrial society a certain portion of its resources is already in a form in which it cannot administer directly to any human need. Such are tools or machinery, whether for carpentry, for agriculture, for spinning and weaving, or for whatever other purpose. Another portion consists of articles ready for direct use, such as food for short service, or houses for long service. All these are composed of substances and occupy space which were originally the gift of nature; and any article may be at any stage of elaboration towards the form in which it will render its direct or indirect services, and in any stage of transit towards the place in which it will render them. At the present moment, too, there are wants to be supplied, impulses that demand expression, and energies that are capable of directing and modifying the forces and substances of nature. These wants, impulses, and energies will rise and flow in continuous streams during the future also, and the direction our efforts take in the present and proximate future will affect the balance between our wants, our impulses, our capacities, and our resources in the remoter future also. The remoter future, then, has at any moment some sure provision appropriated to it in the ripening crops and commodities, the machines, the indestructible or not immediately exhaustible forces and gifts of nature, and the prospective flow of energies; and the present and proximate future have assigned to them exclusively all rapidly perishable commodities from the rocket that has just been fired, to fresh fish and fresh butter, and on by insensible steps to stores that will keep for a year without serious deterioration, and so forth. But, except where we are dealing with things that have passed out of our control, though we are still enjoying them (of which the rocket that has already been lighted, and the febrifuge that has already been mixed, are types), we are not compelled to use at once the things we can so use. However short the period during which fresh fish will deserve the name, the nearer and the remoter future are competitors, within that period, for it. And just as the future competes for things capable of immediate consumption, so the nearer future competes with the remoter future for things capable of use over a long period, and designed for such use, but capable also of being used up quickly. A house may be used up in a few years, or nursed for a century; a farm may be run down in a year or two, or may be maintained or improved; a machine may be racketed to pieces to save a day's stoppage for repairs; and the perpetually renascent energies and opportunities that are comparatively uncommitted may be turned in any proportions we choose towards provision for the nearer or the further future; and at every stage of elaboration and transport some alternatives may remain open, though many are closed; and from that point onward the original intention may be modified in the interests of a nearer or a remoter future.
Thus there is always an enormous area over which the present and the future (or, more correctly, the nearer and the remoter future, at whatever point you choose to divide them) are in competition with each other, and there is always a premium to be paid for command in the present and the nearer future, as against the remoter.
We have seen that the "demand" for advances is just like any other demand, that it follows the law of diminishing marginal significance, and that the reason why advances are demanded does not affect the market price of them. It depends upon the position they take on the collective scale and the available supply of them. We know also that the supply of one market is always a demand upon another, and that in that larger market a wider range of demands is brought into balance. Now, we see that the market on which the supply of "advances" is a demand is the whole range of the realised utilities, or desired things, that are in the circle of exchange, so far as they are capable of being used at once, and that in that market all present and future satisfactions compete with each other, the resultant being a premium to be received on relinquishing the present.
Advances are made by the men who, for whatever reason, prefer a future (with the market premium) to be secured on some one else's credit, both to the immediate satisfaction of present desires and to the utilising of their resources in securing their own future at their own risk and by their own exertions. Advances are received by those who are willing and able, for whatever reason, to secure to their correspondents payment in the future of the market premium on present as against future resources. In both cases this preference, or willingness, will depend on anticipations of the future and on the provisions already made for the present and future respectively. And every man can so distribute his resources between present and future as to bring their marginal significance to himself into coincidence with the market price as registered in the premium.
And this brings us back to the administration of individual resources, from which we started. We now understand the exact nature and meaning of saving; and we understand that, as one man can make chairs for another, and get something from him that he wants more than anything he could have made for himself, so one man may save for another (that is, make something for him in advance) and get from him in the future something that he wants more than anything he could have made for himself in advance. This fact enters into the very penetralia of our ordinary affairs, and intimately affects the distribution of all our resources. If a man were confined to saving for himself; that is to say, if he could only embody his present resources in the things that he could himself make use of hereafter, he would be utterly unable to make provision for his future. For we have seen*30 that many of the things he will want this day ten years cannot possibly be kept so long if they exist already. Nor would he be able to embody indefinitely large resources in articles of lasting significance to himself, or in tools and appliances that would economise or fertilise his labour. No man, therefore, can adequately provide for his own future by the direct product of his own saving, nor can he indefinitely apply present resources to any kind of provision for his future. And, on the other hand, if no man could enjoy, or utilise, any accumulations, except in the shape of such specific articles as he himself had made or stored out of current revenue, or such as had been provided for him by persons obeying other than economic forces, the vast majority of us would never be able to begin living a civilised life at all. It is the exception for a man to possess a house, or to have "where to lay his head," on the strength of his own accumulations, or of possession that has come to him by gift. Most men, therefore, are dependent for civilised life upon the accumulations of others, and upon the market in which they can be commanded in exchange for currently accruing resources.
To sum up, no one can make or save for himself all the things he will want in the future, and few can live in the present without command of some forms of concentrated or accumulated wealth that they have neither made nor saved, neither concentrated nor accumulated, in advance. Therefore, A may want in the remote future something which he has not got, which he cannot make and which in any case would not keep, but for which he is very willing to spare or to make some equivalent-in-value in the present or the proximate future. He cannot himself transmute the one into the other; so what he does is to look for B, who can make (or put him in touch with C who can make) the thing he expects to want by the time when he expects to want it; and who will do so in consideration of receiving now or in the proximate future some of those equivalent-in-value things which A possesses or can make in the proximate future. Such a B he will always be able to find on certain terms. Thus any individual, however large his resources, can always find means of embodying them in tools and apparatus for the use of others; and under existing conditions he can always get a premium for doing so. And, on the other hand, any one who can give security (that is, any one who can make people believe that he can and will keep his promise to give them command of future wealth) may secure the tools and apparatus that he needs without saving up to secure them; or if he likes he may get them first and save up for them afterwards, instead of saving up first and getting them afterwards. But under existing conditions he will have to pay a premium for being enabled to do so.
A millionaire is not only able to save but unable not to save, because he cannot spend all his accumulations at once, and he is always able to transmute present into future command of wealth. And under existing conditions persons who desire to anticipate wealth compete with each other in the premiums they offer him for doing that which he cannot help doing; so that he not only keeps but increases his wealth. A very rich man, then, cannot help saving; and a poor man cannot save enough to provide himself with a civilised shelter. These have no choice; but it may be wise and good husbandry for one man to save, though he is not compelled to do so; and foolish and wasteful for another to save, although he could do so if he liked. The last of this series of assertions is perhaps the only one that would be even thoughtlessly challenged; and it is therefore the only one that we need especially elaborate. And even this should hardly be necessary, for the proposition is directly deducible from our fundamental principle that marginal significance declines as supplies increase. The difference between 15s. and 20s. a week is psychologically greater than the difference between 20s. and 25s. It follows, then, that unless there are special conditions to make it so, it would not be worth a man's while to live on 15s. a week instead of £1 a week for twenty years, in order that he might have 25s. a week instead of £1 for twenty other years. Let us take an extreme case and suppose that a family with £1 a week were to live on 7s. 1d. a week, all told, for three years, saving 12s. 11d., in order that at the end of this time they might buy a cottage for £100, instead of renting it, at say 3s. a week, all their lives. Now of that 3s. a week we may say that 5d. represents the maintenance of the cottage, which they would have had to see to if it had been their own. If they buy the cottage, then, they are thenceforth 2s. 7d. a week better off, for the rest of their lives, than they would have been had they not saved; and in a little under fifteen years they will, objectively, have recovered the whole sum of advantages which they sacrificed during the three years of saving. The extra 2s. 7d. a week, which they will enjoy as long as they live, after that will be, objectively, pure gain. But psychologically? We know that 12s. 11d. off £1 is psychologically more than five times as significant as 2s. 7d. off £1. The privation of the three years, therefore, will be less than compensated by the advantages of the fifteen years, even if there is no loss of positive income from permanently lowered vitality. If we extend the period of saving, so as to bring it within the range of easier possibilities, the principle still holds. The terms on which a house can be rented may of course be so hard as to turn the balance the other way at any given point. But it is clear that to a poor man an evenly distributed income of smaller amount may be of more value than an unevenly distributed income of larger amount. It might, no doubt, be very wise for a young man to live hard as a bachelor for a few years and then start life as a married man with a house of his own; for a man may control not only the distribution of his resources but the incidence of the claims and liabilities upon them, and this is an enormously important branch of administration; but the mere fact that only a small percentage of prudent men own their houses is sufficient prima facie evidence that it may be better husbandry to hire than to buy, that is to say, better to borrow than to save.
Even to a rich man, saving may be bad economy; or if it is good economy it may be better to borrow first and save afterwards, than to save first and not borrow at all. Suppose a man to be in the enjoyment of an income of £700 a year. He believes that by putting an extra £10,000 into his business he could make it yield £1000 a year more, and he could raise the money at 6 per cent. This would leave him a balance of £400, raising his income to £1100. If he is willing to live on a comparatively small income for twenty years in order to enjoy a revenue of £1700 after that, he can do it either by borrowing the £10,000 and saving £500 a year out of his income of £1100, or by not borrowing at all and saving £500 a year out of his present income of £700. Obviously the first course is the more rational. But there is an element of risk and anxiety in it that must be duly estimated. The principle remains unchanged if we reckon for the gradual rise of income, in the first case by the gradual paying off of the sum borrowed, and in the second by the gradual investment of the savings.
Thus for poor and rich alike the wisdom of any particular act of saving may depend upon the magnitude of the accumulation contemplated in proportion to the total estimated resources of a lifetime. We have seen that it may be impossible or ruinous to save up for a house, if there is the alternative of renting. But even where there is no such tempting alternative saving may be ruinously expensive. For example, a very poor man cannot make adequate provision against old age, or even long sickness, except by encountering the certainty of present misery as great as that from the risk of which in the future he seeks relief. Hence it is contended that old-age pensions are more likely to stimulate than to check providence. In many cases it seems highly probable that this will be so; for there are many men who could not make full provision for old age without reducing themselves to premature penury, but who can hope, without placing an intolerable burden on their years of vigour, to improve the conditions under which an old age, secure in any case from extreme privation, may be passed. To save enough to secure the probability of 1s. a week after seventy would be almost futile, for 1s. a week would not be likely to keep a man out of the workhouse; but it might be worth much thought and self-denial to secure the difference between the bare independence of 5s. and the comparative affluence of 6s. a week. The first few shillings-per-week in old age may have a rising, not a falling significance, and securing a sixth shilling per week may in many cases be worth a greater effort and sacrifice than securing a first.
This, however, is a digression. Our immediate point is that if a very poor man were called upon to make complete provision for his old age or leave it unprovided for, it might be wise to take the latter course; whereas if he were a little richer he would be able to secure himself against extreme penury in old age without squeezing the life out of his youth. Thus it would seem that there is a point at which poverty makes it not only hard but unwise to save for distant objects; though it is always wise to save out one week's or month's expenditure to meet heavy and seldom recurrent expenses. For the extremely poor it would not be wise to save even against death by starvation; for a man can but die once, and it is not wise to deepen misery and eliminate from it any gleam of relief and enjoyment in order to protract it. Nor is it wise to provide for old age, unless there is fair prospect of making old age tolerable without making youth and maturity intolerable. As we have seen, it is only a minority of even well-to-do people that consider it wise to save up for the purchase of a house. And however rich a man may be it is obvious that there is always a natural limit to the wisdom of saving.
Indeed to the rich man the problem often is how he can avoid saving too much. The exigencies of his business may drain him of his income. It is always demanding to be extended, till he no longer controls it, but it controls him. It has become a kind of Frankenstein's monster that dominates his life. It must grow or die. And he cannot let it die, partly because he is dependent upon it, and partly because it has become a kind of entity to him, and, independently of all the things in the circle of exchange that it represents to him, has acquired a kind of independent claim upon his affection and his imagination, and is bound up with all manner of personal relations and obligations. So he curtails the indulgence of his tastes in every direction in order to provide for its extension, and is living in relative poverty in order that he may die relatively rich. Regarded simply as provision for the future, his saving is foolish, wasteful, nay, positively aimless; and if he is wise he will seek the means of escaping from it, though it may need years of scheming to do so. For the wealthiest, then, as well as for the poorest, there is a point at which saving becomes folly.
The fact that saving may produce revenue for an indefinite period does not really affect the matter; though a sophist might urge that, however little a man thinks of the future, an infinite series of future gains must outweigh any finite sacrifice. The answer is that even if a man's thoughts extend beyond his own life, and beyond those of his children and grandchildren, yet all human things are subject to uncertainty, and it is impossible so to forecast or control a very remote future as to secure that our purposes shall be even approximately realised in it; so that even if we could be sure that a definite saving would produce an unending revenue (that is a series of sums of money accruing "for ever"), yet the whole sum of the series, as valued in the mind of any given man, would only carry a definite and limited weight of significance and would be comparable to some definite sum of purposes, to be realised within periods which the imagination can grasp and the judgment handle with a certain degree of precision. There may be persons to whom the conception of establishing or controlling something that is to last as long as the planet is inhabited may have a certain value, but it will be a defined value. And even the diseased estimates of the miser will not escape the general law; for if his passion for saving suffers no sensible abatement as his wealth increases, yet the rate at which he saves will determine the degree of his present privation and abstinence, and the point will come at which sooner than make that privation and abstinence still more severe he will abstain from the minute additions to his savings which such a proceeding would secure. The principle of price as a determining condition of exchange asserts itself inexorably. If it did not the miser would—not as we sometimes say he does, "practically," in the course of years—but actually, in the course of days, die from starvation and exposure.
In fine, every man who is not living absolutely from hand to mouth will make some attempt so to distribute his resources over time as to apply them where they will give the best psychic return. Even if he is so constituted that he values the future more than the present, still, as long as he attaches any value to the present at all, there will come a point at which the receding margin of present satisfaction balances the advancing margin of contemplated satisfaction in the future. The balance between the present and future will be determined partly by a man's comparative poverty or wealth, partly by his individual disposition and circumstances, partly by the premium on savings which the markets to which he has access offer him; but that balance will always be struck somewhere, and it will be struck on precisely the same principles that determine us in striking the balance between potatoes and carrots, between dress and charity, between abundance of possessions and leisure in which to enjoy them, or between any of the other alternatives which are open to us whether they are or are not concerned with things that enter the circle of exchange.
Let us now return to the individual administration of resources, and let us consider how all that we have now learned bears upon it. We may suppose that a man who has arrived at a settled administration of his annual resources receives a legacy of £100. He may invest it, and if he does so he will have to consider what risks he will take. He may be content with a trifle over 2½ per cent, or he may consider that the extra risk in an investment which will give him a higher return is worth incurring at the price. Suppose he considers 4 per cent a suitable interest. He will then expect (subject always to the risk he has deliberately taken) to have an extra £4 a year as long as he lives, and to leave his heirs the option between enjoying this £4 a year as long as they live, or exercising any of the other alternatives that are now open to himself. What are they? He may draw out £100 at once. He may make arrangements by which he will receive £4:10s. a year for forty years (£180 in all, the extra £80 being his premium on waiting). Or he may take £7 a year for twenty years (£140 in all, receiving the lower premium of £40 for the shorter period of waiting). Or he may choose £12 a year for ten years (£120 in all). If he has reason to think that the marginal significance of £1 to him during the next ten years will be considerably higher than during the ten or thirty years that will follow, he may be wise to adopt this last arrangement. Or if he makes a permanent investment and receives £4 a year he may spend it on insuring himself against fire, or he may save it up now in order to spend it later on, together with the premium he will then have received on it. Or, on the other hand, he may spend the whole £100 upon fireworks, thinking that the pleasure of making one grand display in the course of his life, and being able to look back upon it as long as he lives, will weigh against all the sum of advantages which he is forgoing. Or he may spend it on a holiday, either because he hopes it will renew his vigour and make him efficient industrially, or because he thinks it will be a keen delight at the time and will bring him a perpetual revenue in the pleasures of memory hereafter, or that these two considerations between them will equal in value anything that he could get for his £4 a year for life, together with the thought of the capital sum being passed on to his heirs. Or he may devote the sum to study or education, whether his own or his children's, and whether technical (in order to make himself more efficacious in creating commodities, or rendering services, which pass into the circle of exchange) or liberal (rendering him more capable of receiving and giving satisfactions that do not enter into it), or sharing the characteristics of both. Or he may effect some improvement in his house, or he may buy a picture, expecting to derive from the one or the other a revenue of enjoyment. Or he may combine any number of these things. He may spend 10s. on fireworks to celebrate the happy event. He may relieve a feeling of discomfort in his mind by spending £2 on a wedding present, when he had meant only to spend 10s., but was not feeling happy about it. He may spend £10 on furniture, £10 on the singing lessons he has been promising his daughter "as soon as he can afford it." He may devote £20 to a much-needed holiday, and after a few other "extravagances" he may lay by £50 "for a rainy day"; and out of the £2 a year that he receives on it meanwhile he may take out a modest policy in a fire insurance office, and may still enjoy the feeling that he can indulge himself in a little more tobacco, or a few more tram rides, than he has hitherto allowed himself. Some such distribution amongst a variety of applications would indeed be theoretically normal; for a number of margins would have to be advanced pari passu if there was already equilibrium in the man's expenditure and if that equilibrium were to be preserved. Very often, however, there would be no real attempt to distribute the sum in accordance with rational principles. Many people have a preconceived idea of what is proper to do under such circumstances. We have already noticed the force of tradition, and in such cases as this tradition often takes the form of some maxim or "general principle" which supersedes thought. The thought it supersedes in any special case would perhaps have been foolish or impulsive, and the collective experience embodied in the saw may be superior to it. But since the general principle takes no account of the special circumstances (on which after all everything really depends), it is also possible that thought would have been a better guide than tradition. Even such wholesome maxims as "Never trench upon your capital," or "Some saving should be made out of the narrowest income," though they have doubtless saved many people from folly, have also had their victims, and even their martyrs.
One or two further examples of the bearing of the rate of interest upon the administration of our resources and our selection between alternatives may be added, not because they introduce any new principle, but by way of exercises. Taking interest at 4 per cent, a man who is building a house and considering some improvement which will cost £100, and will effect economies in service or will render repairs less necessary, should ask whether it will save £4 a year. If so, it is just worth spending £100 upon it. If interest had been 2 per cent, it would have been worth while making not only this, but further and less important labour-saving improvements. Or it may be that the proposed improvements will add to the pleasure, but not reduce the expense, of living in the house, and the question then is, will it yield a revenue of satisfaction year by year equal to that which £4 (or £2) spent on horse and carriage hire, or on books, or on hospitalities, or in any other way, could yield? Thus, the lower interest is the better shall I be inclined to build. The substantial quality of the houses in many Dutch cities is attributed to the fact that at the close of the eighteenth century interest, on good security, was as low as 2 per cent.
So, too, the man who refuses an offer of £2000 for an old family portrait by a great master, practically pays, say, £80 a year for the privilege of keeping it on his walls. Does it secure him a revenue of enjoyment equal to anything he could get for that annual sum? Perhaps he has never asked himself the question, and hardly realises that the economy or extravagance of keeping it depends on the rate of interest. In like manner a man may buy a house for £1000, and then, by a few judicious purchases of adjacent sites, and a few suitable clearances, altogether at the expense of £200 or £300, may double its value. But he does not always realise that he has now practically doubled the rent. He might now let or sell his house, and have twice as much to spend on other alternatives as he could have had before. Therefore he sacrifices twice the value in other things for his house that he did before; and he has, without reflection, determined to apply the whole of the proceeds of his successful strokes of business to one item in his own expenditure. Neither of these men realises exactly what he is doing, nor do we, as a rule, admire the man who obviously does realise such things. But why? Only because we suspect that it is a sordid habit of mind that has made him realise them. The man who does not value personal relations and associations, and who is in the habit of looking at all his possessions apart from their atmosphere of association, their individuality—one might almost say their personality—who regards them merely as "things" that can be exchanged for other "things," is probably a sordid person. He is thinking more of the value that things have for others than of the value that they have for himself, and it is only in comparatively gross forms that he is susceptible to the flavours of life. His consciousness that it costs him £80 a year to keep a picture on his walls, or £50 a year to be able to sit in his garden and enjoy a pleasant prospect on Sunday afternoons, appears to indicate that he is in the habit of considering these things under their most material and detached aspect, as separable possessions, rather than as ministrant to inalienable experiences. The habit of perpetually dwelling on the exchange value of things suggests an undue preoccupation with means and appliances and an undervaluing of ends and experiences, an overvaluing of things that are and an undervaluing of things that are not in the circle of exchange. But it need not be so. A man accustomed to generalised thought on such matters would necessarily realise the facts that have just been mentioned, and on due occasion would act upon them; but he would also realise the value of the finer experiences that these things can provoke in him but in no other, and will understand that it may be very wise to keep a thing, if its roots have struck down into his life and its memories and associations have made an atmosphere around it, on terms on which it would be very foolish to acquire it as a naked material object or opportunity, on the mere chance of its clothing itself with "living garments" at some time or other.
Thus the balancing of present against future and of long-period against short-period satisfactions, and the saving up and investing of revenue in the hope of securing increased revenue hereafter, are not processes confined to what enters into the circle of exchange. The man who curtails his indulgences and his holidays in order to accumulate capital in his business that will yield him a revenue of things in the circle of exchange, and the man who turns aside from literary and artistic pursuits that he enjoys to severe and exhausting mental effort in order to acquire the elements of a new language or a new science, not because he enjoys the process but because he expects a revenue of enjoyment and power from its results in the future, are both of them measuring short-service against long-service expenditure, and are reckoning on a premium for choosing the latter; and both must be in command of certain resources in order to make such expenditure wise. But in the latter case there is no public market, and there is no objective measure of results. I cannot say that just as £100 will secure me £12 a year for ten years, or as a saving of £10 a year will secure me a lump sum of £118 ten years hence, so such and such a capitalising of mental effort will yield me such and such a series of mental experiences of defined magnitude; but nevertheless I must form, however unconsciously, some rough estimate of the value of the sacrifices and of the results. And though there may be no market in which I can barter these results against the commodities and services in the circle of exchange, I must always be adjusting their relations to them in my own life as best I may, and the two sets of considerations perpetually and inextricably work into each other. In determining my business or profession, and at every turning point of my life, I may consider the congenial or uncongenial character of the occupation itself, or of the course of action I am contemplating, its moral implications, its social connections, its personal relations, what it will allow for leisure and relaxation, and very likely its opportunities for influencing the lives of others in directions that I desire. And all these things will take their places in my mind and will weigh for something, but not for everything, as against the excess or defect of income that I should expect to accrue from this course or that.
Again, we have already seen that purposes concerned with things that are not in the circle of exchange cannot be accomplished except with the support of things that are. If I am a student who can earn more money by one kind of work, and a larger measure of enjoyment or imagined usefulness by another, the books that I need for the pursuit of the latter study are in the circle of exchange. How much energy am I to divert from the present pursuit of it with the resources I have, in order to increase my resources for pursuing it in the future? It is in the strictest sense a problem of saving in order to acquire and invest capital that shall henceforth yield me a revenue. I trench upon the enjoyment and usefulness of the present in order to gain a more than compensating enlargement of enjoyment and usefulness in the future, and the things I sacrifice and the things I seek are alike personal and spiritual, and cannot enter into the circle of exchange; yet the transmutation of the present sacrifice into the larger future command of them can only be effected by the instrumentality of things that do enter into that circle. Once again, therefore, we see that the underlying laws which regulate the market have an application beyond the range of business. The fundamental laws of economic science, in fact, are the laws of life, and our economic life not only derives its meaning from things that lie outside its own domain, but also submits to and illustrates laws which cannot be rightly formulated with exclusive reference to its phenomena.
Returning now to the narrower economic field, we may add to what has already been said a few words as to the forces which tend to dissipate accumulations when made or to retard their formation. We have already referred incidentally to the prodigal. His disposition to underestimate the significance of the future is plainly hostile to saving, and it is a disposition which a very large proportion of mankind share with him. We read of tribes of savages who so little realise the future that, however frequent their experience of want may be, they cannot be induced to lay in any kind of stores. When food is accessible they will literally eat as much as they can hold. They do not consider it a more desirable alternative to have a good meal every day for a week than absolutely to gorge themselves one day and have nothing at all for the rest of the week. A Neapolitan rubbing his shoulders against a street corner, when offered a lira for carrying a portmanteau, answered, "Ho già mangiato"—"I have had my dinner." The fact that he would want a dinner to-morrow was not effectively present to his mind. He did not realise that although he had no present wants the satisfaction of which would compensate him for the proposed effort, he would have such wants to-morrow, and might not be able to satisfy them on such easy terms as those on which he could provide against them to-day. Still less can the mind at a low stage of reflectiveness realise the value of a revenue. A savage tribe might be capable of storing food and yet be incapable of maintaining a herd of cattle. They might be able to realise that famine a month hence was worth averting by some exertion or some degree of restraint exercised to-day, and yet they might not be able to grasp the subtler idea that by abstaining from eating up a herd of cattle that they had captured they might obtain a permanent revenue of milk and calves. The same Australian black-fellow who took great pains and made great efforts to make a bottle of milk last a kitten, that he had in charge, over a journey of a hundred miles, pronounced the white man in general "big fellow fool" because he did not kill his herd of cattle and have a feast with his friends.
All tools and apparatus of every kind, and all breeding stocks of plants and animals, owe their existence to the realisation of the fact that the same output of energy will produce a higher return the more adequately it is supported by suitable instruments and possessions—that is to say, to a vivid realisation of the future. It is clear, then, that the more provident a community is (that is to say, the higher the general level of realisation of future wants), the more favourable will the conditions be for accumulation.
But we have also seen that even if the poor man is as prudent as the rich man he will probably save a smaller part of his income; therefore both the total wealth of the community and the way in which it is distributed will affect the rate of accumulation. Much that is true, but much also that is false, has been written on the subject of the improvidence of the working classes. That improvidence is unquestionable and is often disastrous. But we should bear two points in mind. (1) For the extremely poor it is no paradox to say that providence is improvident. (2) The fairly well-to-do workman is far more provident and has far more accumulations than is commonly realised. I am thinking not only of the sums in the savings bank and of the property of the cooperative societies, the sick clubs, and so forth, but also of the weekly subscription paid by so many artisans to their trade societies for trade and political purposes. The power of the trade unions in controlling the industry and shaping the legislature of the present day is due entirely to the providence of the working classes, whether or not that power is providently exercised. It represents a sustained self-denial and an effective realisation of a remote and problematic future. The full significance of this is seldom realised. It may or may not be wise. It is certainly a striking manifestation of providence. While these pages are passing through the press we are waiting for the highest court of appeal to determine whether this form of providence, as now exercised, is legal or illegal; and the discussions that have taken place as to the issues dependent on the decision shew that some who deplore the improvidence of the working classes fear their providence still more. It is, at any rate, formidable enough to be regarded as a danger by those who fear the influence of organised labour in politics, and as one of the best promises of our times by those who welcome it. And indeed, apart from these far-reaching aspects of the question, many of those who know the working classes best are much readier to recommend them to spend more wisely than to urge them to spend less and to save more. But this is a digression. Our main inquiry is not into the actual level of prudence in any class of the community, but into the effect of its rise or fall upon accumulations and the rate of interest; and the general proposition is safe that the providence or improvidence of the members of a community is, together with the amount and the distribution of its resources, a determining cause of the rate of its accumulations. As these conditions become more favourable, a lower premium will induce accumulations, and accordingly accumulations will grow and will reach a lower marginal significance. Other things being equal, then, the rate of interest will fall as the community increases in wealth and in the intelligence and self-command needed for a vivid and effective realisation of future wants and enjoyments.
Having considered the conditions that determine the formation of accumulations, let us glance at some of the forces that dissipate them. If the poor man is improvident and forms no accumulations, at any rate he has no opportunity of dissipating them. His improvidence can at most only retard their formation. But the rich man who is improvident dissipates accumulations. If his wealth is to accrue to him in the future he enters the market and demands present wealth, promising future wealth instead of it; and since his offer or promise appeals to the economic forces just as powerfully as the offer of another man who will preserve and fructify any accumulations of which he gets control, the prodigal curtails the supply of the industrial and impoverishes the community by determining the flow of its resources into barren channels. But the prodigal is very far from being alone in this. Everything in the future is uncertain, and the man who lays down apparatus, or who sinks a shaft, in the anticipation of future wealth, may be disappointed by the event. So far from securing him a premium, the future may fail to give him back his principal. In this case there has been waste and misdirection. The length to which this waste and misdirection go will depend on the sagacity and honesty of the directors of commercial enterprises, and the nature of these enterprises themselves. The risk is there and must be taken; but if the risks are taken wisely as well as boldly, there is, properly speaking, no waste, for the failures are incidental to the successes, and the more cautious conduct which took fewer risks would secure lower average or aggregate results. The risk, being part of the price, must not be reckoned as waste. But we have constantly to remind ourselves that the very service which a successful business renders may itself be destructive. It is on his power of giving men what they desire that a man's success depends; and what they desire may be ruinous to the accumulations of themselves and of the community, though incidentally profitable to the man who supplies it. Moreover, a man may get what he wants from others, not by rendering them anything which they regard as a service even in the blindest and narrowest way, but by ignorantly or fraudulently persuading them that he is doing so. Prodigious sums of money are perpetually being diverted to enterprises which will swallow them up and never render them back, and which no one who knows anything about them seriously expects to make an adequate return. Those who know about them persuade those who do not to think that they will give a return, and in one form or another get a commission from them for their "services" in inducing them to misdirect and destroy their resources under the impression that they are increasing them.
Thus the rate at which a community accumulates its resources, or, in other words, the comparative breadth of the stream which is turned to long-service expenditure and to indirectly productive effort, will depend partly on the nature of the tastes, desires, and impulses of the community, partly on the amplitude of its resources, partly on their distribution, partly on the vividness with which the wants and pleasures of the future are realised, and partly on the sound judgment and integrity of all its members, more especially of those who are most active in directing its industrial affairs.
As the premium on the present as against the future falls, it is clear that the annual net revenue in increased fertility which a tool must render in order to justify the expenditure upon it of resources which would have produced a given volume of corn will become smaller and smaller. For as £1 one, two, or twenty years hence comes to be estimated more and more nearly as equal in significance to £1 to-day, it is obvious that the revenue accruing from a tool will reach farther and farther out into the future before its attenuated and continuously attenuating significance ceases to influence our estimate; and thus it will have a longer period over which to run in order to make up the given volume of significance with which we compare it. There is no theoretical limit above zero to this decline of interest.
Under like conditions the value of anything that cannot be accumulated or increased (if in the last analysis any such thing is found to exist), say, space on the surface of the earth, would acquire indefinite value, for it would have a marginal significance in fertilising labour of indefinite volume, and the fact of that volume's only accruing over a period extending through an indefinitely protracted future would not, under the conditions we are supposing, reduce it to a definite estimate. The extreme remoteness from practical conditions of these suppositions will be obvious to the reader, and will probably be sufficient reason in his eyes for not entering on the speculations that have sometimes been indulged in of the possibility of negative interest—that is to say, of a condition of industrial life in which there should be a premium on the future, and in which men should think it worth their while to devote present effort to the securing of future wealth, although if devoted to present satisfaction it would positively produce a larger volume, and should actually find it necessary at the existing margins to do this if they wished to "save" any more. While declining, however, to enter upon these purely academic discussions, it is well to observe that with increasing intelligence, integrity, and providence we have no means of fixing on any definite limit above zero to the fall of interest. Zero may conceivably be the limit, i.e. the point that will never be reached, but may be approached as nearly as we please, but certainly it will not be any point below zero. The question is often discussed whether the fall of interest will reduce the volume of accumulations. Normally the fall of interest must rise from increased accumulations; and accumulations increase because people are willing to make them on the terms they can command. Those terms become less and less favourable, and doubtless this will prevent some people from saving, or prevent them saving as much and as eagerly as they would have done had the terms remained more favourable. But the decline in the premium is itself due to the very fact that a smaller reward is enough not only to maintain but to increase the volume of accumulation, and therefore to ask whether the check which that decline puts upon accumulation will diminish its volume is to ask whether the drag you put upon a carriage as it goes down hill will make it back up the hill again.
I will conclude this chapter by trying to determine the meaning of the words "hire," "rent," and "interest," as generally used. This will involve some useful analysis which may help to give consistency and firmness to our conceptions; and incidentally it will lead us to a brief consideration of the principle of insurance, which has not found a place elsewhere in our investigations.
We have already spoken of the difficulties which the existence of large units introduces into the individual's budget. Much of the present chapter has borne upon some aspects of this problem, but there are others on which it has not touched. We saw that a large unit may threaten to disturb the administration of a small income by demanding concentrated expenditure before due preparation can have been made for it; and also that even if the payment for the large unit could be extended over its whole term of service, it might still happen that since two-thirds, or one-half, or one-tenth of the service is worth more than two-thirds, or one-half, or one-tenth of the whole, many persons who cannot afford the whole of a thing, and who therefore go without it, could and would, if they had the option, afford to get one-tenth of it at one-tenth of a price the whole of which they decline to pay for the whole of it. When a man keeps a stock of any articles, horses and cabs, bicycles, pianos, or anything else, for hire, he lets people actually buy them in fractions. And for the business to be sound it is necessary that each purchaser of a fragment should pay for the fragment he actually uses (which includes maintenance in the case of animals), should pay a premium to the jobber on his accumulations as high as he (the jobber) could get from any one else by placing them at his disposal, should pay him an insurance against the risk of there being interspaces during which no one applies for the commodities (which meanwhile deteriorate or run to waste, and demand maintenance, so that a certain fraction of them perishes without being sold), and lastly should remunerate him for the services he renders in conducting all the necessary business on a scale sufficiently high to induce him to pursue this trade instead of applying his energies to something else. We usually speak of "hiring" concrete things that can be moved, and which we undertake to return identically; and all the elements now enumerated normally enter into the payments made for them. The desire to have them on hire will only be gratified down to the point at which it is (objectively) high enough to make an effective bid in all the markets of capital, energy, enterprise, and so on, which we have indicated.
The man who lets houses may also be regarded as selling in fractions. For though the tenant uses (or at any rate buys the right to use) the house continuously, yet he may retain it for a few years only, and in that case he only buys a fraction of it altogether. Here there is the same liability as before to interspaces between lettings—that is to say, fractional periods during which the house must be looked after and kept in repair and when no one is paying for it. Thus the same elements may be distinguished in the rent of a house as in the hire of a cab. In addition to any remuneration the landlord may be able to command for his own attention to the premises, there is the charge for maintenance, which may be regarded as paying for the fraction of the house actually used up, the insurance against no-rent periods, and the revenue which the market offers to any man who has made accumulations and who places them at the service of those who have not. There seems to be no difference in theory, then, between rent and hire, except that the tenant of a house frequently undertakes the maintenance of it himself—that is to say, he actually replaces (or partially replaces) that part of the house that he has used up; whereas the man who hires a horse and cab does not. Similar arrangements are often made in letting and renting land. The distinction between hiring and renting, then, appears to be mainly one of usage. We generally speak of "rent" in the case of things that cannot be moved (houses and lands), but which have to be handed back to their owners identically.
Very closely connected with this fractional consumption of large units is the whole range of provision for uncertain future events which are best met by insurance. It is obviously bad economy to provide for an uncertainty as though it were a certainty. Any one's house may be burnt down, but nobody knows either when or whether his own house will be. It is impossible to make instant provision for it, and if each of a thousand men made express and adequate provision for the event, and it only came to one of them, each of the others would have distributed his resources on the assumption that at such and such a time he would require to make a great outlay, which assumption would have turned out to be false. Here a difficulty analogous to that of the large unit presents itself in a complex and aggravated form. The demand for a heavy expenditure may come before provision can possibly be made for it, or it may not come at all. It may be impossible to provide against the event; and if provision can be and is made, it will most likely not be wanted. And yet if the man whose chance of needing the provision any one year is one in a thousand could contribute a thousandth part of the provision and then be safe, it might be very wise for him to do so. The system of insurance enables him to do this. He may tell off the fraction which corresponds to his computed risk, and no more, and may then be safe. A thousand men have each paid for a fraction of an ideal house, which they may be regarded as holding in common, with the agreement that actual possession shall be given to the one amongst them whose present house is burnt down. The premium paid by each of them to a certain insurance company may be analysed on the principles that we have already illustrated. Each policy-holder must pay a fraction of the sum he will possibly receive corresponding to his chance of receiving it, so that all the policy-holders together pay for all they get. They must also pay a premium on the accumulations or capital with which the company starts; and they must pay a further sum out of which the staff is remunerated. The privilege they enjoy of being allowed to secure themselves by paying for their risk and no more must be worth these two premiums. The same analysis applies to insurance against sickness or accident; and part of it applies to provision for old age.
What is called "life insurance" stands on a somewhat different footing. In many, perhaps in most, cases it is at first what might more rightly be called an "insurance against some of the consequences of early death." A man earning a certain income cannot at once make adequate provision for his family against the improbable event of his dying within a few years; but he can make a fraction of adequate provision against it corresponding to the fractional chance of its being needed. This he does by insurance. If, as may well be the case, the risks against which it was originally intended to provide have after the lapse of years been safely passed, the payment of the premiums changes into a method by which a man can save up for his heirs on better terms than would be possible by other investments, though the urgency of saving for them at all is no longer there. Further analysis has no special bearing on the matter now in hand.
"Interest" is usually spoken of when the borrower does not receive and return things that he wishes to use and enjoy, but nominally money and actually the command of such items as he chooses to draw from the circle of exchange to a specified value in gold. In this case the borrower has to see to it that he either maintains throughout, or is able to restore at the close, the full value that he has received; and therefore he makes no payment for maintenance. The whole payment in this case is the premium on the accumulation that has been made for him. It is usual, however, to include in "interest" the payment that is made in compensation for the risk incurred in accepting a promise which it may not be in the power of the party making it to keep.
It will be seen that the distinction between rent and interest has little theoretical value. If a man takes a house on a repairing lease he pays "rent" for it; but if he borrows money, buys the house, keeps it in repair, and pays the man who lent him the money, he pays "interest," not "rent." Into "hire," "rent," and "interest" alike, the premium on enjoying accumulations without having accumulated enters as a factor, and except in cases where risk is negligible this premium never constitutes the whole payment.
Notes for this chapter
End of Notes
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