Economic laws act in accordance with the same principle, whether they apply to great masses of men, to two individuals, or even to a single individual condemned by circumstances to live in isolation.
An individual in isolation, provided he could survive for any length of time, would be at once capitalist, entrepreneur, workman, producer, and consumer. The entire economic cycle would run its course in him: want, effort, satisfaction, gratuitous and onerous utility. Observing each of these elements, he would have some notion of the workings of the whole mechanism, even though it would be reduced to its simplest form.
Now, if there is anything in the world that is clear, it is that he could never confuse what is gratis with what requires effort. That would imply a contradiction in terms. He would know full well when materials or forces were provided by Nature, without need for labor on his part, even in those cases where their addition made his own labor more productive.
An individual living in isolation would never dream of obtaining through his own labor something that he could get directly from Nature. He would not walk two miles for water if he had a spring beside his cabin. For the same reason, in every instance where his own labor might be called upon, he would try to substitute Nature's help as much as possible.
That is why, if he were building a boat, he would utilize the lightest wood in order to use to advantage the specific gravity of water. He would try to rig up a sail, so that the wind might spare him the trouble of rowing, etc.
In order thus to harness the forces of Nature, he needs tools and instruments.
At this point we perceive that our isolated man will have to do some calculating. He will ask himself this question: At present I obtain a certain satisfaction for a given amount of effort. When I have the proper tool, will I obtain the same satisfaction for less total effort, counting both the effort still to be exerted to obtain the satisfaction and the effort required to make the tool?
No man is willing to waste his strength for the mere pleasure of wasting it. Our Robinson Crusoe will not, therefore, set about making the tool unless he can foresee, when the work is done, a definite saving of his labor in relation to his satisfaction, or an increase in satisfactions for the same amount of labor.
A circumstance that will greatly influence his calculations is the number of products his tool will help him turn out and the number of times he will be called on to use it during its lifespan. Robinson Crusoe has a standard for his comparison, which is his present effort, the effort he must go to if he tries to obtain the satisfaction directly and without help of any kind. He estimates that the tool will save him effort each time he uses it; but it takes labor to make the tool, and he will mentally distribute this labor over the total number of occasions on which he may use it. The greater the number, the stronger will be his inclination to enlist the aid of the natural resource. It is here, in this distribution of an advance outlay over the total number of products to be made, that we find the principle and the basis of interest.
Once Robinson Crusoe has decided to make a tool, he discovers that his inclination to make it and the uses he can put it to are not enough. It takes tools to make tools; it takes iron to hammer iron, and so on, as he moves from one difficulty to another, until he reaches the first one, which seems to be insoluble. This cycle makes us aware of the extremely slow process by which capital must originally have been formed and of the tremendous amount of human effort that was required for every satisfaction.
Nor is this all. Even if the tools needed to make tools are available, the materials of production are still required. Even though they are furnished gratis by Nature, like stone, they still have to be collected, which involves going to some trouble. But nearly always the possession of these materials presupposes long and complicated earlier labor, as for example, processing wool, linen, iron, lead, etc.
And even this is not all. While a man is working thus for the sole purpose of making his future work easier, he is doing nothing for his present needs. Now, these belong to an order of phenomena in which Nature brooks no interruption. Every day he must feed, clothe, and house himself. Robinson Crusoe will therefore perceive that he can do nothing about harnessing the forces of Nature until he has accumulated provisions. Every day he is hunting he must redouble his efforts; he must lay aside part of his game; then he must impose privations on himself so as to have time to make the tool he has in mind. Under these circumstances, it is more likely that he will content himself with making a very crude and imperfect tool, barely adequate for its intended use.
With time, all his means and facilities will improve. Reflection and experience will have taught our Robinson Crusoe, stranded on his island, better working methods; the first tool itself will furnish him with the means of making others and of gathering his supplies more quickly.
Tools, materials, provisions, all constitute what he will doubtless call his capital, and he will readily grant that the larger this capital, the better the control he will have over the forces of Nature, that the more he harnesses them to his labor, the greater, in a word, will be his satisfactions in relation to his efforts.
Let us pass now to the social order. Here, too, capital will be composed of the tools and instruments of production, of the materials and provisions without which no long- range undertaking is possible either in isolation or in society. The possessors of this capital have it only because they have created it either by their efforts or their privations; and they have exerted their efforts (over and beyond their current wants), they have undergone these privations, only for the sake of future advantage, in order, for example, to turn to their use a large number of natural resources. To surrender this capital would mean for them to give up the advantage they had sought to obtain. It would mean surrendering this advantage to others; it would be rendering a service. Consequently, we must either disregard the simplest considerations of reason and justice, or we must admit that they have a perfect right to turn over this capital only in exchange for some other service freely bargained for and voluntarily agreed to.
I do not believe that there is a man on earth who will contest the equity of reciprocity of services, for reciprocity of services means equity in other terms. Will it be said that the transaction cannot possibly be free, because the one who has capital is in a position to impose his own terms on the one who does not? But how should the transaction be carried on? How can an equivalence of services be determined except by an exchange voluntarily agreed to?
And is it not clear, moreover, that the borrower, being free to consent or not to consent, will refuse, unless it is to his advantage to accept, and unless the loan can improve his situation? It is clear that this is the question he will ask himself: Will the use of this capital afford me advantages that will more than compensate for the terms that are stipulated? Or else: Is the effort that I am now required to make for a given satisfaction greater or less than the sum total of the efforts to which I shall be obligated by the loan, first to render the services that are asked of me, and then to realize the satisfaction with the aid of the borrowed capital? If, all things considered, there is no advantage, he will not borrow; he will be content with his present situation; and in that case, how has he been wronged?
He can be mistaken, someone will say. True enough. We can be mistaken in every imaginable transaction. Does this mean, then, that no transaction can ever be free? Assuming for the moment that such is the case, will someone kindly tell us what should be put in the place of free will and free consent? Shall it be coercion? For, apart from free will, I know of nothing but coercion.
No, someone says, it will be the judgment of a third party. I am perfectly willing, on three conditions. First, that the decision of this person, whatever name he be given, not be executed by force. Second, that he be infallible, for it is not worth the trouble to replace one fallible person by another; and the fallible persons whom I distrust the least are the interested parties themselves. Finally, the third condition is that this person receive no pay; for it would be a strange way of showing one's good will toward the borrower to deprive him of his liberty and then place an added burden on his shoulders in compensation for this philanthropic service. But let us forget legal questions and return to political economy.
Capital, whether composed of materials, provisions, or tools, presents two aspects: utility and value. I have explained the theory of value very badly if the reader has not comprehended that the one who surrenders a certain amount of capital demands payment for its value only, that is, for the service he put into producing it, the pains he took, plus the effort saved the recipient.
Capital, indeed, is a commodity like any other. It receives its name only from the fact that it is designed for future consumption. It is a great error to believe that capital is in itself a distinct entity. A sack of wheat is a sack of wheat, even though, depending on the point of view, it is revenue for the seller and it is capital for the buyer. Exchange works on this invariable principle: value for value, service for service; and all the gratuitous utility that goes into the transaction is given into the bargain, inasmuch as what is gratis has no value, and transactions are concerned only with value. In this respect, transactions involving capital are no different from any others.
There are some remarkable implications for the social order in all this, though I can refer to them only briefly here.
Man in isolation has capital only when he has collected materials, provisions, and tools. Such is not the case with man in society. He needs only to have rendered services in order to have the means of receiving from society, through the mechanism of exchange, equivalent services.
What I mean by the mechanism of exchange is money, promissory notes, bank notes, and even bankers themselves. Whoever has rendered a service and has not yet received the corresponding satisfaction is the bearer of a token, which either itself has value, like money, or is fiduciary, like bank notes. This token entitles him to collect from society, when and where he wills, and in whatever form he wills, an equivalent service. These circumstances do not in any way, in principle, in effect, in point of legality, alter the great law that I seek to elucidate: Services are exchanged for services. It is still barter in embryo - developed, grown, and become complex, but without losing its identity.
The bearer of the token may therefore collect from society, at his pleasure, either an immediate satisfaction or an object that, for him, has the character of capital. This is a matter with which the one who surrenders the token has no concern whatsoever. All that matters in any way is that the services be equal. Or, again, he may surrender his token to another person to use it as he pleases, subject to the double condition that it be returned to him along with a service, and at a given date. If we analyze this transaction carefully, we find that in this case the one who surrenders the token deprives himself, in favor of the borrower, either of an immediate satisfaction that he will postpone for a few years or of an instrument of production that would have increased his own resources, harnessed the forces of Nature, and improved the ratio of his efforts to his satisfactions. He deprives himself of these advantages in order to bestow them upon another. This is certainly rendering a service, and it is impossible to deny that in all justice this service is entitled to something in return. The mere return of the thing advanced, at the end of a year, cannot be considered a payment for the special service. Those who maintain such a view fail to understand that this transaction is not a sale, in which, since delivery is immediate, the payment is also immediate.
Payment is deferred, and this deferment is itself a special service, since it imposes a sacrifice on the part of the one granting it, and bestows a favor on the one requesting it. There are, therefore, grounds for remuneration; otherwise we should have to negate this supreme law of society: Service for service. This remuneration is called by different names according to circumstances: hire, rent, installments, but its generic name is interest.1
Thus, thanks to the marvelous device of exchange, a remarkable thing takes place, for every service is, or may become, capital. If workmen are to begin a railroad ten years hence, we cannot set aside now the actual wheat that will feed them, the textiles that will clothe them, and the wheelbarrows that they will use during this long-range operation. But we can set aside and deliver to them the equivalent value of these things. To do so, we need only at the present time render society services and receive in return tokens or certificates, which ten years from now we can convert into wheat or textiles. And we are not even forced to let these tokens lie idle and unproductive during this period. There are businessmen and bankers, there is the necessary machinery in society, to render the service, in exchange for services in return, of assuming these sacrifices in our place.
What is still more amazing is that we can reverse this procedure, impossible as this may seem at first glance. We can turn into tools, railroads, and houses, capital that has not yet been produced, utilizing for this purpose services that will not be rendered until the next century. There are bankers who will make the necessary advances on the faith that workers and travelers of the third or fourth generation to come will provide the payment; and these checks drawn on the future are passed from hand to hand and never remain unproductive.
I do not believe, frankly, that the inventors of artificial social orders, however numerous they may be, could ever imagine a system at once so simple and so complex, so ingenious, and so just. Surely, they would give up their dull and stupid utopias if they did but know the beautiful harmonies of the dynamic social mechanism instituted by the natural social evolution of mankind.* There was also once a king of Aragon who wondered what advice he would have given Reality on the running of the celestial mechanism if he had been called into consultation.? Such a presumptuous thought would not have occurred to Newton.
But, it must be emphasized, all transmission of services from one point to another, in time or space, rests upon this assumption: To grant a postponement of payment is to render a service; in other words, on the assumption that it is legitimate to charge interest. The man† who, in our day, tried to suppress interest did not understand that he was proposing to take exchange back to its primitive, embryonic form of simple, direct barter with no provision for time past or time to come. He did not realize that, while considering himself the most forward-looking of men, he was actually the most backward, since he wished to rebuild society on the crudest and most primitive plan. He desired, so he said, reciprocity of services. But he proposed to begin by refusing to admit as services the very type of services that link, bind together, and unite all times and all places. Of all the socialists he is the one who, despite the boldness of his resounding aphorisms, has best understood and most respected the present social order. His reforms are limited to a single proposal, which is negative. It consists of removing from society the most powerful and most remarkable of its moving parts.
I have explained elsewhere the legitimacy and the perpetuity of interest. I shall limit myself here to reminding the reader that:
- The legitimacy of interest is based on the fact that the person who grants credit renders a service. Hence, interest is legitimate, by virtue of the principle of service for service.
- The perpetuity of interest is based on the additional fact that the person who borrows must repay in full at the date of expiration. Now, if the object or the value is returned to its owner, he can relend it. It will be returned a second time; he can lend it a third time; and so on perpetually. What one of the succeeding and voluntary borrowers can have any cause for complaint? But, since the legitimacy of interest has so frequently been contested in these times as to alarm capital and drive it away or into hiding, let me show how senseless all this strange uproar is.
Now, first of all, would it not be quite as absurd as it would be unjust if no interest were charged at all or if the interest payment were the same whether the terms agreed upon were for a period of one year, two years, or ten years? If, under the influence of the so-called egalitarian doctrine, our civil code should, unfortunately, so decree, it would mean the immediate suppression of an entire category of human transactions. There would still be barter transactions and cash sales, but there would no longer be installment buying or loans. The egalitarians would, indeed, lift from the borrowers the burden of interest, but by denying them the loan. On this analogy we can also relieve men of the painful necessity of paying for what they purchase. We have only to forbid them to buy, or, what amounts to the same thing, make the law declare that prices are illegal.
The egalitarian principle does indeed have an egalitarian element in it. First, it would prevent the accumulation of capital; for who would want to lay up savings from which no return could be realized? Secondly, it would reduce wages to zero; for, where there is no capital (tools, materials and provisions), there can be no provision for future labor, and so, no wages. We should therefore soon reach the state of perfect and absolute equality: no one would have anything.
But can any man be so blind as not to see that deferment of payment is in itself an onerous act, and, therefore, subject to remuneration? But even aside from the question of loans, does not everyone in all transactions try to shorten the delays he must experience? It is, in fact, the object of our constant concern. Every entrepreneur looks ahead to the time when the advances he has made will bring a return. We sell at a higher or a lower price with this in view. To be indifferent to this consideration, we should have to be unaware of the fact that capital is a force; for, if we do know it, we naturally desire to have it accomplish as quickly as possible the task to which we have assigned it, so that we may reassign it to still another.
They are poor economists indeed who believe that we pay interest on capital only when we borrow. The general rule, and a just one, is that he who enjoys the satisfaction must pay all that it costs to produce it, the inconveniences of delay included, whether he performs the service himself or has another perform it for him. The man in isolation, who, of course, carries on no transaction with anyone else, would consider as onerous any situation that would deprive him of his weapons for a year. Why, therefore, would not a similar situation be considered onerous in society? If one man voluntarily undergoes this privation for the benefit of another man who voluntarily agrees to compensate him, how can this compensation be considered illegitimate?
Nothing would be done in this world, no enterprise requiring advance outlays would be carried through to completion, men would not plant, sow, or plow, if delays and postponements were not in themselves considered as onerous, to be treated and paid for as such. General agreement is so unanimous on this point that there is no exchange in which it is not the guiding principle. Extensions of time and postponements enter into the appraisal of services, and, consequently, into the amount of value they possess.
Thus, in their crusade against interest, the egalitarians trample underfoot not only the most basic notions of justice, not only their own principle of service for service, but also all human precedent and universal practice. How dare they display, for all to see, such inordinate egotism and presumption? And is it not a strange and sorry sight to see these zealots implicitly and explicitly take as their motto: Since the world began all men have been wrong, except myself. Omnes, ego non.
I ask the reader to forgive me for having so much insisted on the legitimacy of interest, which is based on this axiom: Since postponements cost something, they must be paid for, cost and payment being correlative terms. The fault lies in the spirit of our age. We must, in the face of the attacks made by a few fanatical innovators, take our stand clearly on the side of those vital truths that all humanity accepts. For the writer who seeks to demonstrate the harmony of all economic phenomena, it is a most painful thing, believe me, to be compelled to stop at every step to explain the most elementary concepts. Would Laplace† have been able to explain the solar system in all its fundamental simplicity, if there had not been certain areas of common understanding among his readers, if, in order to prove that the earth rotates, he had first been obliged to teach them to count? Such is the cruel dilemma of the economist in our day. If he does not stop to present fully the rudiments of his subject, he is not understood; and if he does explain them, the beauty and simplicity of the whole is swallowed up in a torrent of details.
It is truly fortunate for mankind that interest is legitimate. Otherwise man too would face a difficult dilemma: either, by remaining just, to perish; or, through injustice, to prosper.
Every industry represents a union of efforts. But among these efforts there is an essential distinction to be made. Some are directed toward services that are to be performed immediately; others, toward an indefinite series of services of a similar nature. Let me explain.
The pains a watercarrier goes to in the course of a day must be paid for by those who are benefited by them; but the pains he took previously to make his cart and his waterbarrel must be distributed, as regards payment, among an indefinite number of users.
Similarly, weeding, plowing, harrowing, reaping, threshing concern only the present harvest; but fences, clearings, drainage, buildings and improvements concern and facilitate an indefinite number of future harvests.
According to the general law of service for service, those who receive the satisfaction must recompense the efforts exerted for them. In regard to the first type of effort, there is no difficulty. Bargaining and evaluating are carried on between the one who exerts the effort and the one who benefits from it. But how can services of the second type be evaluated?
How can a fair proportion of the permanent outlay, general expenses, fixed capital, as the economists call it, be distributed over the entire series of satisfactions that these things are designed to effect? By what method can their weight be made to fall evenly on the shoulders of all those who use the water, until the cart is worn out; on those who consume the wheat, as long as the field remains productive?
I do not know how they would solve this problem in Icaria or in the phalanstery, but I am inclined to believe that the inventors of societies, who are so prolific in their artificial arrangements and so ready to have them foisted on the public by law - which means, whether they admit it or not, by force - could not imagine a more ingenious solution than the entirely natural procedure that men have discovered for themselves (how presumptuous of them!) since time immemorial, the procedure that it is now proposed to forbid them to use, namely, that derived from the law of interest.
Let us assume that a thousand francs have been spent in real property improvements; let us assume also an interest rate of five per cent and an average harvest of five thousand liters. By this reckoning one franc is to be charged against each hundred liters of wheat.
This franc is evidently the legitimate payment for an actual service rendered by the landowner (who could also be called the worker) just as much to the man who will receive a hundred liters of grain ten years from now as to the man who buys it today. Therefore, the law of strict justice is observed.
Suppose, now, that the property improvements or the cart or the waterbarrel has a lifespan that can be determined only within approximate limits; then, provision for a sinking fund is added to the interest, so that the owner will not suffer a loss but may continue to operate. This is still in accordance with justice.
We must not assume that this one-franc interest charged against each hundred liters of wheat is an invariable amount. On the contrary, it represents value and obeys the general law of value. It increases or decreases according to the fluctuations of supply and demand, that is, according to the particular pressures of the moment and the general prosperity of society.
We are usually inclined to believe that this type of remuneration tends to increase, if not for industrial improvements, at least for agricultural improvements. Even admitting that this rent was originally fair, it is said, it finally becomes exorbitant, for the landowner thereafter stands by in idleness while his rent continues to rise from year to year, simply because the population is increasing, and therefore the demand for wheat also.
This tendency exists, I agree, but it is not confined to land rent; it is common to all types of labor. The value of every kind of labor increases with the density of the population, and the common day laborer earns more in Paris than in Brittany.
But we must also bear in mind that this tendency is counter-balanced, as far as land rent is concerned, by an opposite trend, which is that of progress. Improvements made today by better methods, with less human labor, and at a time when the interest rate has fallen, prevent too high a rent from being asked for previous improvements. The landowner's fixed capital, like the manufacturer's, deteriorates in the long run as more and more efficient labor-saving devices appear. This is a remarkable law, which overturns Ricardo's gloomy theory; it will be analyzed more completely when we discuss real property.
Note that the problem of the distribution of services to be performed in payment for permanent improvements could not be solved without the law of interest. The owner could not distribute his actual capital over an indefinite number of successive users; for where would he stop, since the exact number cannot be determined? The earlier ones would have paid for the later ones, which is not just. Furthermore, a time would have come when the owner would have been in possession of both his capital outlay and his improvements, which is not just either. Let us acknowledge, then, that the natural machinery devised by society is ingenious enough so that we do not have to supplant it with any artificial device.
I have presented the phenomenon in its simplest form in order to give a clear idea of its nature. In practice things do not occur in quite this way.
The landowner does not himself work out the distribution, and he does not decide that a charge of one franc, more or less, will be placed on each hundred liters of wheat. He finds that men have already decided these matters, both the prevailing price of wheat and the rate of interest. On this information he decides how he will invest his capital. He will use it to improve his land if he estimates that the price of wheat will permit him to realize the normal rate of interest. If such is not the case, he will invest it in an industry that promises a better return, and is, fortunately for society, more likely to attract capital for that very reason. This is the way the process really operates in reaching the same result as sketched above, and it offers us still another harmony of economic law.
The reader will understand that I have confined myself to one particular case simply as a means of illustrating a general law that applies to all professions and occupations.
A lawyer, for example, cannot make the first client who comes his way reimburse him for all he has spent on his education, his probation, his law office - perhaps amounting to as much as twenty thousand francs. This would not only be unjust; it would be impossible. The first client would never put in his appearance, and our budding Cujas? would be reduced to imitating the host who, when he saw that no one had come to his first ball, declared: "Next year I shall begin by putting on my second ball."
The same thing applies to the businessman, the doctor, the shipowner, the artist. In every calling these two types of effort are to be found; the second type must, without fail, be distributed over an indeterminate number of consumers, and I defy anyone to contrive a method of distribution other than the mechanism of interest.
In recent times great pains have been taken to stir up public resentment against that infamous, that diabolical thing, capital. It is pictured to the masses as a ravenous and insatiable monster, more deadly than cholera, more terrifying than riots, as a vampire whose insatiable appetite is fed by more and more of the life-blood of the body politic. Vires acquirit eundo. The tongue of this blood-sucking monster is called "rent," "usury," "hire," "service charges," "interest." A writer whose great talents could have made him famous had he not preferred to use them to coin the paradoxes that have brought him notoriety has seen fit to cast this paradox before a people already tormented by the fever of revolution. I too have an apparent paradox to offer the reader, and I beg him to decide whether it is not both a great and a reassuring truth.
But, before presenting it, I must say a word about the manner in which M. Proudhon and his school explain what they call the injustice of interest.
Capital goods are tools of production. Tools of production are designed to harness the gratuitous forces of Nature. Through the steam engine we utilize the pressure of volatile gases; through the watch spring, the elasticity of steel; through weights or water-falls, gravitation; through Volta's battery, the speed of the electric spark; through the soil, the chemical and physical combinations that we call vegetation; etc., etc. Now, confusing utility with value, they think of these natural resources as having an inherent value of their own, and consequently assume that those who appropriate these resources receive payment for the privilege of using them, for value implies payment. They assume that commodities are charged with one item for man's services, which is accepted as just, and with another item for Nature's services, which is rejected as unjust. Why, they say, require payment for gravitation, electricity, vegetation, elasticity, etc.?
The answer is found in the theory of value. That class of socialists who take the name of egalitarians confuse the legitimate value of the tool of production, which is produced by human service, with the useful result it accomplishes, which is in fact always gratis, once this legitimate value, or the interest on it, has been deducted. When I pay a farmer, a miller, a railroad company, I give nothing, absolutely nothing, for the properties of vegetation, gravitation, steam pressure. I pay for the human labor that has gone into the tools that have harnessed these forces; or, what is more advantageous for me, I pay the interest on this labor. I pay for service with service, and thereby the useful action of these forces is turned to my profit and without further cost. The whole transaction is like an exchange, like a simple act of barter. The presence of capital does not alter this law, for capital is merely accumulated value, or services whose special function is to enlist the co-operation of Nature.
And now for my paradox:
Of all the elements that make up the total value of any product, the one we should pay for most gladly is that very element called interest on advance outlays or on capital.
And why is that? Because wherever this element makes us pay once, it saves us from paying twice. Because, by its very presence, it serves notice that the forces of Nature have contributed to the final result and are not being paid for their contribution; because, as a result, the same general amount of utility has been made available to us, but with this difference, that, fortunately for us, a certain proportion of gratuitous utility has replaced onerous utility; and, in a word, because the price of the product has gone down. We obtain it for a smaller proportion of our own labor, and what happens to society as a whole is what would happen to a man in isolation if he produced some ingenious invention.
Consider the case of a workingman in modest circumstances who earns four francs per day. For two francs, that is, for a half-day's labor, he buys a pair of cotton socks. If he tried to obtain them directly and by his own labor, I truly believe that his whole life would not be long enough for him to do so. How does it happen, then, that his half- day's labor pays for all the human services that were rendered to him for this commodity? In keeping with the law of service for service, why was he not required to contribute several years of labor?
The reason is that in the making of this pair of socks the proportion of human services has been enormously reduced, thanks to capital, by the use of natural resources. Our workman, nevertheless, pays not only for all the labor now required to perform this task but also for the interest on the capital that enlisted the co-operation of Nature; and we must note that had this last item not been available, or had it been declared illegal, capital would not have been employed in conjunction with natural resources, the commodity would have been produced by onerous utility only, that is, exclusively by human labor, and our workman would still be just where he started, that is, with the choice of either going without the socks or else of paying for them with several years of toil.
If our workman has learned to analyze what he sees, he will certainly make his peace with capital when he perceives how much he owes it. Above all, he will be convinced that Society's** gratuitous gifts to him are still gratuitous, that they have even been lavished upon him with a generosity that is not due to his own merits, but to the excellent operation of the natural social order. Capital is not the vegetative force of Nature that makes the cotton germinate and bloom, but the pains taken by the planter; capital is not the wind that filled the sails of the ship, nor the magnetic force to which the compass reacted, but the pains taken by the sailmaker and compass-maker; capital is not the compression of the steam that turns the spindles of the mill, but the pains taken by the builder of the mill. Germination, the power of the winds, magnetic attraction, stream pressure - all these things are certainly free of charge, and that is why the value of the socks is so low. As for the combined pains taken by the planter, the sailmaker, the compass-maker, the shipbuilder, the sailor, the manufacturer, the businessman, they are distributed, or rather, in so far as capital is concerned in the operation, the interest on them is distributed, over countless purchasers of socks; and that is why the amount of labor performed by each one of them in return for the socks is so small.
Truly, modern reformers, when I see you trying to replace this admirable order by a contrivance of your own invention, there are two things (or rather two aspects of the same thing) that utterly confound me: your lack of faith in Reality and your great faith in yourselves; your ignorance and your arrogance.
It is clear from the foregoing analysis that the progress of humanity coincides with the rapid formation of capital; for, when new capital is created, obstacles that once were surmounted by labor, that is, onerously, are now overcome by Nature, without effort; and this is done, be it noted, not to the profit of the capitalists, but to the profit of the community.
This being the case, it is the paramount interest of all men (from the economic point of view, of course) that the rapid formation of capital be encouraged. But capital increases of its own accord, spontaneously, so to speak, under the triple influence of a dynamic society, frugality, and security. We can hardly exert direct action on the energy and frugality of our fellow men, except through public opinion, through an intelligent expression of our likes and our dislikes. But we can do a great deal for the creation of security, without which capital, far from expanding, goes into hiding, takes flight, or is destroyed; and consequently we see how almost suicidal is the ardor for disturbing the public peace that the working classes sometimes display. They must learn that capital has from the beginning of time worked to free men from the yoke of ignorance, want, and tyranny. To frighten away capital is to rivet a triple chain around the arms of the human race.
The vires acquirit eundo parallel is completely applicable to capital and the beneficial influence it exerts. The creation of new capital always and necessarily releases both labor and the resources for paying labor and makes them available for other enterprises. Capital, therefore, contains within itself a strong progressive tendency - something like the laws of momentum. And this is a further argument that can be used against the very different kind of progressive tendency that Malthus notes, although political economists, to my knowledge, have neglected it until now. But this is a harmony that cannot be developed here. We reserve it for the chapter on population.
I must arm the reader in advance against a specious objection. If the function of capital, it will be said, is to have Nature perform what was hitherto performed by human labor, regardless of the good it brings to humanity as a whole, it must be harmful to the working classes, especially those who live on wages; for anything that adds to the number of employable workers increases their competition for jobs, and this is doubtless the secret reason for the proletarians' hostility to capitalists. If this objection were well founded, there would indeed be a discordant note in the social harmony.
The misconception here involved consists in losing sight of this truth: For every amount of human effort that capital releases as it extends its operations, it likewise makes available a corresponding amount of money for wages, so that these two elements meet and complement each other. Labor is not made permanently idle; when replaced in one special category by gratuitous energy, it turns its attack against other obstacles on the main road to progress, all the more surely because its remuneration is already available within the community.
And therefore, returning to the illustration given above, we can readily see that the price of socks (like the price of books, transportation, and everything else) goes down, under the influence of capital, only by leaving a part of the former price in the hands of the purchaser. This is so obvious that even to state it is almost childishly redundant; the worker who now pays two francs for what used to cost six has, therefore, four francs left over. Now this is the exact proportion of human labor that has been replaced by the forces of Nature. These forces are, therefore, a pure and simple gain, and the ratio between labor and available remuneration has not been altered at all. I make bold to remind the reader that the answer to this objection was already given2 when, as we were studying man in isolation, or else still dependent on the primitive law of barter, I put the reader on his guard against the widespread fallacy that I am now attempting to refute.
Let us, therefore, have no qualms about allowing capital to form and increase in accord with its own tendencies and those of the human heart. Let us not imagine that, when the rugged workman saves for his old age, when the father plans a career for his son or a dowry for his daughter, by thus exercising man's noble faculty of foresight they are jeopardizing the general welfare. Such would be the case, private virtues would indeed be antagonistic to the public weal, if the interests of capital and labor were incompatible.
We must realize that humanity is far from being subject to this contradiction, rather, this impossibility (for how can we conceive of the constant deterioration of the whole resulting from the constant improvement of all its parts?); that, on the contrary, Reality, in its justice and goodness, has assigned, along the path of progress, a finer role to labor than to capital, more effective incentives, more generous compensations to him who now contributes the sweat of his brow, than to him who lives by the sweat and toil of his fathers.
Therefore, having established that every increase in capital is necessarily accompanied by an increase in the general welfare, I venture to present as incontrovertible the following axiom relating to the distribution of this prosperity:
As capital increases, the capitalists' absolute share in the total production increases and their relative share decreases. On the other hand, the workers' share increases both relatively and absolutely.
I can express my thought more clearly with figures.
Let us represent society's total production at successive periods in its history by the numbers 1,000, 2,000, 3,000, 4,000, etc.
I state that capital's share will drop successively from 50% to 40%, to 35%, to 30%, and labor's share will consequently rise from 50% to 60%, to 65%, to 70%; but in such a way that capital's absolute share at each period will be larger, although its relative share will be smaller.
Thus, the distribution will be made in the following manner:
Distribution of Shares of Increased Production
Such is the great, admirable, reassuring, necessary, and invariable law of capital. By proving it, it seems to me, we can utterly discredit those rantings that have been dinned into our ears for so long against the greed, the tyranny, of the most powerful instrument for civilization and equality that has ever been conceived.
This proof is divided into two parts. First, we must prove that capital's relative share does constantly decrease.
This will not take long, for it amounts to saying: The more plentiful capital is, the lower its interest rate. Now, this point is not open to question, nor has it been questioned. It not only can be explained scientifically; it is self-evident. Even the most unorthodox schools of thought admit it; in fact, the school that has specifically set itself up as the enemy of what it calls diabolical capital makes this fact the basis of its theory; since, from the evident fact of the decline in the rate of interest, it concludes that capital is inevitably doomed. For, this school says, since its extinction is inevitable, since it is sure to happen within a certain period of time, since this day will usher in the reign of unalloyed bliss, we must hasten and encourage its coming. This is not the place to refute these theories and their implications. I call attention only to the fact that all schools of thought - economists, socialists, egalitarians, and others - admit that, in the natural order of society, interest rates do indeed go down as capital increases. And even if they chose not to admit it, the fact would not be the less certain; for it is supported by the authority of the whole of human experience, and the acquiescence, perhaps involuntary, of all the capitalists in the world. It is a fact that the interest rate is lower in Spain than in Mexico, in France than in Spain, in England than in France, and in Holland than in England. Now, when interest goes down from 20% to 15%, then to 10%, to 8%, to 6%, to 41⁄2%, to 4%, to 31⁄2%, to 3%, what does this fact have to do with the question before us? It means that capital, for its contribution, through industry, to the general prosperity, is content with, or if you prefer, is forced to be content with, a share that becomes increasingly smaller as more capital is accumulated. Did capital once receive a third of the value of wheat, homes, linen, ships, canals? In other words, when these things were sold, did one-third go to the capitalists and two-thirds to the workers? Little by little the capitalists receive only a fourth, a fifth, a sixth; their relative share is constantly decreasing; the workers' share is rising proportionately, and thus the first part of my demonstration is proved.
It remains for me to prove that capital's absolute share constantly increases. It is true enough that interest rates tend to go down. But when and why? When and because capital increases. It is, therefore, entirely possible for the total accumulation of capital to increase, but for the percentage to decrease. A man has more income with 200,000 francs at 4% than with 100,000 francs at 5%, even though, in the first case, he charges less for the use of his capital. The same thing holds true for a nation and for all humanity. Now, I maintain that the percentage, in its tendency to decline, cannot and must not be reduced so rapidly that the sum total of interest paid is smaller when capital is plentiful than when it is scarce. I readily admit that if the capital of mankind is represented by 100 and the interest rate at 5, this rate will not be more than 4 when capital reaches 200. Here we see that the two effects are produced simultaneously: a smaller relative share, a larger absolute share. But, on the same hypothesis, I refuse to admit that the increase in capital from 100 to 200 can cause the interest rate to fall from 5% to 2%, for example. For, if such were the case, the capitalist who had 5,000 francs of income on 100,000 francs of capital would now have only 4,000 francs of income on 200,000 francs - a contradictory and impossible result, a strange anomaly that would be corrected by the simplest and least painful remedy imaginable; for in order to raise his income, the capitalist would need only to waste half of his capital. Strange and happy age when we could become rich by pauperizing ourselves!
We must, therefore, not lose sight of the fact that the combined action of these two correlated phenomena - increase of capital, lowering of the rate of interest - takes place necessarily in such a way that the total product constantly rises.
And, it may be remarked in passing, this fact destroys utterly and absolutely the fallacy of those who imagine that, because the interest rate falls, it eventually will disappear entirely. The result of this would be that the time would come when capital would be accumulated in such quantities that it would yield no return to its owners. Let us reassure ourselves; before that time comes, the owners of capital will be quick to dissipate it in order to restore their income.
This, then, is the great law of capital and labor, in so far as it relates to their sharing of what they produce jointly. Each one has a larger and larger absolute share, but capital's proportional share constantly decreases as compared with that of labor.
Therefore, capitalists and workers, cease looking at one another with envy and distrust. Shut your ears to those absurd tirades, as vain as they are ignorant, which, under pretence of brotherly love in the future, begin by sowing the seeds of discord in the present. Recognize that your interests are common, identical; that, whatever may be said to the contrary, they merge, they work together for the common good; that the toil and sweat of our generation mingle with the toil and sweat of generations gone by. Recognize too, that some amount of remuneration must indeed go to all those who have participated in the task, and that the most intelligent as well as the most equitable system of distribution is in operation among you, thanks to the wisdom of the laws of Reality, in a system of free and voluntary transactions. Let no parasitical sentimentalists impose their decrees upon you to the peril of your physical well-being, your liberty, your security, and your self-respect.
Capital has its roots in three attributes of man: foresight, intelligence, and thrift. For him to resolve to lay aside capital funds, he must, in fact, anticipate the needs of the future, sacrifice the present for them, exercise control over himself and his appetites, resist not only the allurements of the pleasures of the moment, but also the prickings of his vanity and the whims of public opinion, which is always so indulgent toward the light-minded and the extravagant.
He must also link cause and effect in order to know by what means and by what tools Nature will become docile and will submit to the work of production. Above all, he must be moved by a sense of family devotion, so that he will not draw back before the sacrifices whose benefits will be enjoyed by his loved ones when he is no more. To accumulate capital is to provide for the subsistence, the protection, the shelter, the leisure, the education, the independence, the dignity of generations to come. None of this can be done without putting into practice all our most social virtues, and, what is harder, without making them our daily habit.
It is quite common, however, to attribute to capital a kind of deadly efficiency that would implant selfishness, hardness, and Machiavellian duplicity in the hearts of those who possess it or aspire to possess it. But is this not confused thinking? There are countries where labor is mainly fruitless. The little that is earned must quickly go for taxes. In order to take from you the fruit of your labor, what is called the state loads you with fetters of all kinds. It interferes in all your activities; it meddles in all your dealings; it tyrannizes over your understanding and your faith; it deflects people from their natural pursuits and places them all in precarious and unnatural positions; it paralyzes the activities and the energies of the individual by taking upon itself the direction of all things; it places responsibility for what is done upon those who are not responsible, so that little by little the distinction between what is just and what is unjust becomes blurred; it embroils the nation, through its diplomacy, in all the petty quarrels of the world, and then it brings in the army and the navy; as much as it can, it perverts the intelligence of the masses on economic questions, for it needs to make them believe that its extravagances, its unjust aggressions, its conquests, its colonies, represent a source of wealth for them. In these countries it is difficult for capital to be accumulated in natural ways. Their aim, above all, is by force and by guile to wrest capital from those who have created it. The way to wealth there is through war, bureaucracy, gambling, government contracts, speculation, fraudulent transactions, risky enterprises, public sales, etc. The qualities needed to snatch capital violently from the hands of the men who create it are exactly the opposite of the qualities that are necessary for its creation. It is not surprising, therefore, that in these countries capital connotes ruthless selfishness; and this connotation becomes ineradicable if the moral judgments of the nation are derived from the history of antiquity and the Middle Ages.
But when we turn our attention, not to the violent and fraudulent seizure of capital, but to its creation by intelligence, foresight, and thrift, we cannot fail to see that its acquisition by these means is a benefit for society and an aid to morality.
No less beneficial, socially and morally, than the formation of capital is its action. Its effect is to harness Nature; to spare man all that is most physical, backbreaking, and brutish in the work of production; to make mind master over matter; to provide more and more, I do not say idleness, but leisure; to make our most purely physical wants less imperious by rendering their satisfaction easier; to replace them with pleasures of a higher order, more delicate, more refined, more aesthetic, more spiritual.
Thus, no matter what our point of view, whether we consider capital in its relation to our wants, which it ennobles; to our satisfactions, which it refines; to Nature, which it tames for us; to morality, which it makes habitual in us; to our social consciousness, which it develops; to equality, which it fosters; to liberty, which is its life-blood; to justice, which it guarantees by the most ingenious methods; we shall perceive always and everywhere (provided only that it be created and put to work in a social order that has not been diverted from its natural course) that capital bears that seal and hallmark of all the great laws of Reality: harmony.
* "God" in the original, was replaced by "the natural social evolution of mankind." I omitted some theistic language from this treatise. HB
** "God's" replaced by "Society's".
All occurrences of "Providence" were replaced by "Reality."