1.10 Production Transforms Capital
As previously stated, the economic activity of a nation has more to do with the materials and goods in production and consumption than it has to do with the value that is frozen in nonproductive capital: those resources considered to be wealth for their potential to be used in exchange offer no benefit to owners until they are used.
Even so, the value they store is expected to eventually be used, and as such the capital reserves represent potential economic activity, in the same way that an untapped mine represents potential production, so the influence of capital cannot be entirely dismissed from any consideration of economics.
Capital is stored in land and equipment: land is a capital resource that can be brought into an act of production, and if the field has been cleared and prepared, its potential to create value is increased - hence its value as an asset is increased, though by historical exertion rather than future.
Capital resources can degrade in value over time if they are not tended, but the amount of labor and expense to keep a field or a factory in working order is generally a trifle.
Other instruments of production, such as plows and oxen, have less longevity, require greater maintenance, and are subject to break down from use more frequently, but their value due to their potential future use is of the same nature.
Finally, there is a need of working capital for the materials and labor used in acts of production: the farmer must buy his seed well in advance of selling his crop, and his laborers expect to be paid regular wages throughout the growing season rather than receiving compensation all at once upon the harvest and sale.
(EN: This is the typical arrangement, but not universally true, as arrangements can be made to pay laborers at the time of sale, which was common in the author's time for merchant sailors, as well as obtaining materials on credit to be paid at a later date.)
(EN: A second not on materials is that it is very common for ongoing operations to receive short-term credit by virtue of an invoice for which payment is due a month after goods are received. If the manufacturer or wholesaler can turn his inventory in less than a month, he is in effect paying for materials after the time of sale.)
As such, we find that capital is not merely the excess of profit that is stored after goods are sold, but necessary to finance the initiation of productive operations. For an established operation, the two become commingled and inseparable, but one who undertakes a new venture faces a need for significant capital to get the process started.
In terms of the transformation of capital:
- Agriculture has been used as an example - capital to purchase and prepare land, sow seed, and pay laborers is necessary to produce a crop.
- In manufacturing, a building replaces a field, tools and equipment replace the plow and oxen, raw materials replace the seed, and labor remains the same.
- In commerce, a warehouse replaces a field, a ship or wagon replaces the plow and oxen, inventory replaces the seed, and labor remains the same.
In essence, the factors of production that require capital investment may vary among the various fields of endeavor and their specific identities are likely innumerable, but the process remains the same: capital must be consumed to obtain the facilities, equipment, materials, and labor requisite to production and it is reclaimed when finished goods are delivered to a consumer.
There's a bit on government interference, by way of levying taxes on the various factors of production - capital, land, materials, equipment, labor, etc. - which ultimately visits itself upon the consumer in the price he pays for goods.
Worse still is the intervention of law into the productive process. It should be self-evident that "the producers themselves are the only competent judges" of the manner of their business, and that "every government which interferes, every system calculated to influence production, can only do mischief."
There is also some difference in the turn of working capital in commerce - that is, the frequency with which capital invested in an operation is recovered through revenue. A farmer may turn capital twice a year, as he brings in as two crops. A shipper may make six voyages a year to China or the East Indies, and turn his capital as many times. A wholesaler in a city may turn his entire capital on a weekly basis by clearing his inventory repeatedly. A baker in the same city may turn his capital every day by baking all his flour into bread.
In general, the longer it takes to turn capital, the higher the risk to the producer and the greater the margin of profit he will demand for his goods.
The author returns to a previous example of the way in which capital is consumed by a value chain: between the harvesting of raw ore to the sale of silverware, each of several parties each have capital invested for a portion of the time.