21: Accumulation of Profits and Interest
Wealth was defined (previous chapter) as the enjoyment of the necessities and conveniences of life, considered in the present exchange of the fruit of one's production for another's - but wealth is also considered in terms of accumulated capital resources: where production in excess of consumption has left an individual with goods or token of exchange (money) that accumulate over time.
There has been some suggestion that an abundance of wealth decreases the profits of stock, but this results from too aggressive an aggregation: as wealth increases and is not put into production, the profits of all wealth seem to be diminished - but if working capital is considered on its own and any "dead money" left out of the category, it is clear that productivity itself is not decreased and the return on working capital remains the same even as the amount of non-working capital increases.
Neither is it necessarily true that diverting dead money to productive activity a reliable method of increasing wealth or effecting economic improvement: it must be invested in activity that is genuinely productive, and results in an increase that will be purchased and consumed. Nor is wealth necessarily increased in aggregate if labor is drawn from one productive activity to another, or if any additional labor does not also increase production over consumption.
In terms of necessities, it has been mentioned that people consume a fixed amount - an individual needs only so much food and the availability of food does not lead to an increase in consumption of food. As such, wealth accumulates in markets in much the same way as it accumulates for individuals: where production exceeds consumption. (EN: splitting hairs, perhaps, but wealth accumulates only in terms of durable goods that can be stored, or if those goods are sold outside the market in exchange for something durable, such as money.)
In terms of luxuries, this is even less dependable. Once necessities are met, surplus wealth can be consumed in any number of ways. One man may wish a finer meal, another finer clothing, another enlarge his house. Or it may be spent in ways that improve life in more aesthetic terms: to have a marble floor rather than a stone one, to adorn the walls with paintings, to pay admission to the theater. Adam Smith is quoted: "the desire of food is limited in every man by the narrow capacity of the human stomach, but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary."
It's also noted that the disposal of wealth is at the discretion of those who gain it, and no universal statement can be made regarding the consequences of capital accumulation. A man who has one coin more than he needs to meet his necessary expenses may spend it on luxury goods (EN: which would seem to increase his "conveniences" and make him more wealthy by the previous definition). He may set it aside in a safe place for exchange in the future. He may drop it down a well, never to be seen again. He may use it to repay a debt. He may loan it to another man or invest it in productive activities to enjoy a return on it. One cannot assert that he will certainly do any one of these things, nor that there is any consistency in the choices that all such men may make. (EN: True, but there may be certain proclivities of psychology or culture that enable one to assess with some confidence what is likely to be done - it's not scientific, but neither is it entirely random and unpredictable.)
The use of money encourages production beyond the needs of the producer or the market. Where direct barter is used, there is little incentive to produce once one has received in exchange all the goods that are needed or desired during the same period. It is only due to the preservative power of money that a person has incentive to produce and sell to gain more than they presently want or need, in expectation the profit can be used to satisfy future needs.
Ricardo does concede an instance, which is highly circumstantial, in which wealth could be seen to cause a decrease in profit. (EN: The example is elaborate and contrived, so I'll skip detail - in general, there's always someone who can construct a bizarre hypothetical situation to "prove" something is true or false to their liking - which is entirely sophomoric.)
Returning to the notion of increased production, there is a limit to the amount of production that must be done by a man to meet his needs, or by a market to meet the needs of all participants in aggregate. Also, except in rare instances, the necessities of a people can generally be produced in their own vicinity. Thus, when any merchant seeks to import goods from other markets, or a producer seeks to invest in foreign production, it is done for reasons of profitability: the goods can be produced more efficiently in another location, to a degree that undercuts the cost of domestic production by a wide enough margin to compensate for the risk and expense.
Ricardo again squares off with Smith, who asserts that foreign trade is necessary to dispose of excess production - that if England produces more tobacco than Englishmen wish to consume, it is necessary to export it to other markets. This assertion overlooks the possibility to produce less tobacco, and devote the labor and capital to the production of other goods that are needed. As such, it is choice and not necessity. Also, the principle of specialization is as true among markets as it is among men: if one is more efficient at producing a good than the other, it should produce it and trade for goods the other can produce with greater competency. Smith's own language later reveals the optional nature: that people who can produce more of a good than it can consume are willing to (willing implies choice rather than compulsion) trade their surplus.
It follows that capital can be invested in production that exceeds the need in the local market and yield additional profit for the producer and wealth to society if the product is in demand in other markets and can feasibly be transported to them - and that these other markets have something to offer in exchange.
In the various instances of money-lending, it is reasoned that producers are eager to borrow money in instances in which they can make more profit of it than they must pay for the use of it. As such the rate of interest on any loan represents an agreement that is the most the creditor can get from the borrower, and the least the borrower can pay to the creditor, from the loan. The attempts to define a fixed or fair rate of interest are perplexed by the myriad of uses there may be of capital, and the returns it may achieve. As such, the rate of interest a borrower will pay is highly variable, and the market rate of interest reflects an aggregation of the agreements between all borrowers and all creditors, more indicative of past agreements than future.
But in all countries, the state has interfered with the market rate of interest, sometimes with good intentions, but ultimately to the detriment of the economy. (EN: Ricardo elaborates further, but the case is well made by Jeremy Bentham that restricting interest rates does not mean borrowers get cheaper capital, but that many are denied capital at all, even at rates they could pay given the use they would make of it, and therefore there is less productive activity in a market.)