9: Capital and Capital Goods
It's been asserted that the value given by the consumers is distributed among the factor that produced the value, and that labor is only one factor. In this sense, labor competes with capital and to have a sense of the right/fair recompense of labor, it is necessary to also consider the contribution of capital.
As a basic definition, capital is the concrete and material instruments of production. Capital is the loom on which the weaver labors, as well as the thread he uses, the workshop in which he labors, and any other physical things that contributes to the production of cloth. Money is also considered to be capital, insofar as it is intended to be put to productive use and has the capacity to be exchanged for articles of production. The term "capital goods" refers to the specific items that have productive capabilities in their current state.
A few other notes about money, which seem pretty obvious:
- Money tends to maintain its value until it is spent, whereas capital goods decay with time
- Money can be used for a variety of purposes, a capital good is limited
- Money is easier to divert from one market or industry to another
- The designation of money as capital is arbitrary and can be changed at any time simply by spending it on something other than productive assets
- Money can be spent on labor as well as on physical goods
The entrepreneur and businessmen often speak of their investment in terms of money, even if it has been spent of capital goods. The merchant will say he has a hundred thousand dollars in inventory - but he must sell that inventory to have the money back so that he may invest it in something else. Likewise he shareholder states that he owns a certain dollar-value in a corporation, but must sell his shares to have the dollars. And quite often, when capital goods are sold in a hurry, the money the fetch is worth less than the money they cost. So be careful when speaking of capital in terms of dollars when it is embodied in things whose value is presumed to be a certain amount.
Labor and capital are interdependent. The loom produces no cloth without a weaver, and the weaver produces no cloth without a loom. Whereas labor is perishable, capital is durable - a tool may be used over and over, and may produce value for decades without any additional investment. The growth and evolution of society is most evident in the accumulation of its capital and the persistence of capital goods. If there is a sudden removal of capital goods (a fire destroys a factory or distribution society) it is as devastating as if a plague had wiped out many workers.
There is some distinction made between persistent and consumed capital goods. Thread is consumed to create cloth but the loom on which it is woven persists. There is also distinction between the capital that becomes part of a product and that which is consumed in its production (wood is burned in the forge but is not part of the smith's wares). Strictly speaking, however, even the "durable" goods are perishable, but over a longer period of time. The loom may last for years, but will eventually wear out. Even land, often considered to be permanent, is diminished: the soil loses its fertility over time.
Capitalists invest their money in productive operations in order to gain a return as a share of the profits - traditionally, this was called "rent" as a tenant farmer would pay his landlord a share of what was produced on the land. Bankers lend money to a business in order to receive interest, which has nothing to do with the profitability of the firm. Interest is due whether the firm is profitable or not, and this risk is borne by other parties who are due a share of the profits. If the interest is less than the profit, the other shareholders gain more than the value of their contribution (of capital or labor) but if the business is more profitable.
However, rent and interest are not entirely independent as they are alternative employments of capital. Investors who seek to have a predictable return seek interest, and rent must offer a premium rate of return to compensate investors for the added risk of depending on the profitability of a commercial endeavor. If this premium is insufficient, capital is attracted to vehicles that pay interest. So in all cases, rent is considered in comparison to interest, and the reverse also holds true.
It has been asserted that wealth is created when consumption is less than production and there is some durable medium of storing what was not consumed. This has led some to the conclusion that "capital originates in abstinence" because an individual must refrain from consuming all he produces in order to accumulate wealth. Clark balks at this, as the concept of abstinence implies some sort of sacrifice - whereas wealth accumulating is merely a matter of choice between satisfying immediate desires and satisfying future ones. When we refrain from spending a dollar on consumption to invest it in production, we are not losing that dollar, but to consume it later - and more, because productive employment increases its value, we are trading less present value for greater future value. To gain something we value more than what we presently possess cannot be considered a sacrifice.
There is rather a long and laborious bit about productive activity of any kind being undertaken for future consumption: the farmer sows in the spring to harvest in the fall, and he does not consume his entire crop on harvest-day but preserves it for consumption through winter and spring, until the next crop is harvested. In essence, it is our capacity for deferred enjoyment that makes us capable of production - as we undertake work of any kind in order to achieve a benefit to be enjoyed in the future. We plant now for the harvest later, we work upon raw materials for goods that cannot be enjoyed until they have been created, we work on Monday for a wage that will be paid at the end of the week. The productive man must always give now in expectation of receiving in future. The autistic worker will benefit when his work is done, the commercial worker will benefit when his work is done and the products are sold.
Even so, it can generally be observed that we are not fond of waiting, such that activities that produce a quick return are often valued over ventures that take a longer time to bear fruit. Likewise, we value certainty over uncertainty, such that activities that have a greater risk of failure must offer a greater premium for success. It is for this reason that investors tend to seek repayment at a specific time, and lay plans based on earnings that will be received at a specific future date (next month, next quarter, next year).
He pauses to dispute an argument of his time, that it is the fault of institutions that laborers may not have their wages immediately - that companies make workers wait. Waiting is a requirement of nature - the independent craftsman must invest time in making a thing and then wait on someone to purchase it before he is rewarded for his effort. No institution is making him wait. If anything, institutions enable laborers to be paid sooner - they receive their wages each week regardless of when their goods are finished and sold. In effect, they are receiving their wages on loan from the capitalist, who charges them interest on the loan of money between the day they receive it and the day it is actually made. The worker is also spared the risk that the product will not sell at all. And because the worker is being spared the need to wait and being spared the risk, he must accept a lower return.
Next, there is a brief consideration about the manner in which capital multiplies profit: we make an axe to fell a tree, use the lumber to make a shovel, use the shovel to dig ore, smelt the ore into metal, use the metal to make a better axe and a better shovel. The metal we gain is also used to make a better plow to plant more acres to produce more food to feed more workers, and so on. Every improvement of capital ripples outward and drives economic progress across the market. Where men produce only what they need to consume, they accumulate no capital, have no wealth, and enjoy no social progress.