CHAPTER II
Of the Ownership of Capital, as distinct from its Employment by Ability.
◆1 In the foregoing argument, all mention of Land has been omitted, for simplicity’s sake.
◆2 But rent, especially the rent of the large owners, is so small a part of the national income that the omission is of no practical importance.
Thefirst of the points I have alluded to can be disposed of very quickly. It relates to Land. In analysing the causes to which our national income is due, I began with showing that Land produced a certain definite part of it. ◆¹ For the sake, however, of simplicity, in the calculation which I went on to make, I ignored Land, and the fact of its being a productive agent; and treated the whole income as if produced by Labour, Capital, and Ability. I wish, therefore, now to point out to the reader that this procedure has had little practical effect on the calculation in question, and that any error introduced by it can be easily rectified in a moment. ◆² The entire landed rental of this country is, as I havealready shown, not so much as one thirteenth of the income; whilst that of the larger landed proprietors is not so much as one thirty-ninth. Now my sole object in dealing with the national income at all is to show how far it is susceptible of redistribution; and it is perfectly certain that no existing political party would attempt, or even desire, to redistribute the rents of any class except the large proprietors only. The smaller proprietors,—nine hundred and fifty thousandin number,—who take between them two-thirds of the rental, are in little immediate danger of having their rights attacked. The only rental therefore—namely, that of the larger proprietors—which can be looked on, even in theory, as the subject of redistribution, is too insignificant, being less thanthirty million pounds, to appreciably affect our calculations when we are dealing withthirteen hundred millions. The theory of Land as an independent productive agent, and of rent as representing its independent product, is essential to an understanding of the theory of production generally; but in this country the actual product of the Land is so small, as comparedwith the products of Labour, Capital, and Ability, that for purposes like the present it is hardly worth considering. Its being redistributed, or not redistributed, would, as we have seen already, make to each individual but a difference of three farthings a day.
◆1 Capital, as distinct from the Ability that uses it, has been omitted also.
◆2 We must now again consider it in connection with the classes which never themselves employ it, but live on the interest of it.
◆3 What place do these classes hold in the productive system?
◆¹ The second point I alluded to must be considered at greater length. In dealing with Capital and Ability, I first treated them separately. I then showed that, regarded as a productive agent, CapitalisAbility, and must be treated as identical with it. But it is necessary, now that we are dealing with distribution, to disunite them for a moment, and treat them separately once more. ◆² For even though it be admitted that Ability, working by means of Capital, produces, as it has been shown to do, nearly two-thirds of the national income, and though it be admitted further that a large portion of this product should go to those able men who are actively engaged in producing it,—the men whose Ability animates and vivifies Capital,—it may yet be urged that a portion of it which is very large indeed goes, as afact, to men who do not exert themselves at all, or who, at any rate, do not exert themselves in the production of wealth. These men, it will be said, live not on the products of Ability, but on the interest of Capital which they have come accidentally to possess; ◆³ and it will be asked on what grounds Labour is interested in forbearing to touch the possessions of those who produce nothing? If it has added to its income, as it has done, during the past hundred years, why should it not now add to it much more rapidly, by appropriating what goes to this wholly non-productive class?
To this question there are several answers. One is that a leisured class—a class whose exertions have no commercial value, or no value commensurate with the cost of its maintenance—is essential to the development of culture, of knowledge, of art, and of mental civilisation generally. But this is an answer which we need not dwell on here; for, whatever its force, it is foreign to our present purpose. We will confine ourselves solely to the material interests that are involved, and consider solely how the plunder of a classliving on the interest of Capital would tend to affect the actual production of wealth.
It would affect the production of wealth in just the same way as would a similar treatment of that class on whose active Ability production is directly dependent; and it would do this for the following reasons.
◆1 They are the heirs of Ability, and represent, by their possession of Capital, the main object with which that Capital was originally created.
◆2 For Capital is created and saved in order that it may yield interest, firstly, to the man who himself created and saved it;
◆¹ The greater part of the Capital that has been accumulated in the modern world is the creation of active Ability, as I have pointed out already. It has been saved not from the product of Labour, but from the product which Ability has added to this. It is Ability congealed, or Ability stored up. And the main motive that has prompted the men of Ability to create it has not consisted only of the desire of enjoying the income which they are enabled to produce by its means, when actually employing it themselves, but the desire also of enjoying some portion of the income which will be produced by its means if it is employed by the Ability of others. ◆² In a word, the men who create and add to our Capital are motived to do so by expectation that the Capital shallbe their own property; that it shall, when they wish it, yield them a certain income independent of any further exertions of their own. Were this expectation rendered impossible, were Capital by any means prevented from yielding interest either to the persons who made and saved it, or those to whom the makers might bequeath it, the principal motive for making or saving it would be gone. If a man, for instance, makesone thousand poundshe can, as matters stand, do three things with it, any one of which will gratify him. He can spend it as income, and enjoy the whole of it in that way; he can use it himself as Capital, and so enjoy the profits; or he can let others use it as Capital, and so enjoy the interest. But if he were by any means precluded from receiving interest for it, and desired for any reason to retire from active business, he could do with histhousand poundsone of two things only—he could spend it as income, in which case it would be destroyed; or let others use it as Capital, in which case he himself could derive no benefit whatever from it, and would, in effect, be giving it or throwing it away. Were the first course pursued, no Capital would besaved; were the second course obligatory, no Capital would be created.[48]
◆1 And secondly, to his family and his immediate heirs.
◆2 The bulk of the Capital owned now by those who do not employ it themselves has come to them from their fathers or grandfathers who created it;
◆3 As the history of the growth of Capital during the present century shows.
◆4 A man’s desire to leave money to his family is shown by history to be as strong a motive as the desire to enjoy it himself.
I have spoken thus far as though in creating Capital a man’s motive were the hope of enjoying the interest of it himself. ◆¹ But there is another motive almost equally powerful—in some cases more powerful—and that is the hope of transferring or transmitting it to his family or to his children. ◆² Now four-fifths of the Capital of the United Kingdom has been created within the last eighty years. The total Capital in 1812 amounted to abouttwo thousand millions; now it amounts to almostten thousand millions. Thereforeeight thousand millionsof the Capital of this country has been created by the Ability of the parents and of the grandparents of those who now possess it, supplemented by the Ability of many who now possess it themselves. The most rapid increase in it took place between 1840 and 1875. ◆³ If we regard men of fifty asrepresenting the present generation of those actively engaged in business, we may say that their grandfathers madetwo thousand millionsof our existing Capital, their parentsfour thousand millions, and themselvestwo thousand millions. It will thus be easily realised how those persons who own Capital which they leave others to employ, and which personally they have had no hand in making, are for the most part relatives or representatives of the very persons who made it, and who made it actuated by the hope that their relations or representatives should succeed to it. ◆⁴ All history shows us that one of the most important and unalterable factors in human action is a certain solidarity of interest between men—even selfish men—and those nearly connected with them; and just as parents are, by an almost universal instinct, prompted to rear their children, so are they prompted to bequeath to them—or, at all events, to one of them—the greater part of their possessions. We might as well try to legislate against the instincts of maternity, as against the instinct of bequest. Therefore, that the ownership of much of the Capital of the country should beseparated from the actual employment of it, is a necessary result of the forces by which it was called into existence; and in proportion as such a result was made impossible in the future, the continued operation of these forces would be checked.
◆1 Further, it is impossible to prevent interest being both offered and taken for the use of Capital.
◆¹ But interest depends also on a reason that is yet stronger and more simple than these. The owner of Capital receives interest for the use of it, because it is, in the very nature of things, impossible to prevent its being offered him, and impossible to prevent his taking it. If a man who possessesone hundred thousand pounds, by using it as Capital makesten thousand poundsa year, and could, if he had the use of anotherone hundred thousand pounds, add anotherten thousand poundsto his income, no Government could prevent his making a bargain with a man who happened to possess the sum required, by which the latter, in return for lending him that sum, would obtain a part of the income which the use of it would enable him to produce.
The most practical aspect of the matter, however, yet remains to be considered. I have spoken of interest as of a thing withwhose nature we are all familiar. But let us pause and ask, What is it? It is merely a part of the product which active Ability is enabled to produce by means of its tool, Capital. It is the part given by the man who uses the tool to the man who owns it. But the tool, or Capital, is, as we have seen already, itself the product of the Ability of some man in the past; so that the payment of interest, whether theoretically just or no, is a question which concerns theoretically two parties only: the possessor of living Ability, and the possessor of the results of past Ability. Thus, whatever view we may happen to take about it, Labour, in so far as theoretical justice goes, has no concern in the matter, one way or the other. For if interest is robbery, it is Ability that is robbed, not Labour.
◆1 And whether interest be just or no, it at all events represents no injustice to Labour.
◆2 For it will modify, though not extinguish, their desire to appropriate a part of what is paid as interest.
◆¹ It is important to take notice of this truth; for a knowledge of what is theoretically just, though it can never control classes so far as to prevent their seizing on whatever they can obtain and keep, exercises none the less a very strong influence on their views as to how much of the wealth of other classes is obtainable, and also on the temper in which, and theentire procedure by which, they will endeavour to obtain it. ◆² For this reason it is impossible to insist too strongly on the fact that, as a matter of theoretical justice, Labour, as such, has no claim whatever on any of the interest paid for the use of Capital; and that if it succeeds in obtaining any part of this interest, it will be obtaining what has been made by others, not what has been made by itself. It is not that such arguments as these will extinguish the desire of Labour to increase its own wages at the expense of interest, if possible; for might—the might that can sustain itself, not the brute force of the moment—will always form in the long run the practical rule of right; but they will disseminate a dispassionate view of what the limits of possibility are, and on what these limits depend.
◆1 History shows us that they have been doing this already,
◆¹ And now let us turn to the facts of industrial history, and see what light they throw on what has just been said. I have pointed out that if Capital is to be made or used at all, it must necessarily, for many reasons, be allowed to yield interest to its owners; but the amount of interest it yields has varied at various times; and, although toabolish it altogether would be impossible, or, if possible, fatal to production, it is capable, under certain circumstances, of being reduced to a minimum, without production being in any degree checked; and everypoundwhich the man who employs Capital is thus relieved from paying to the man who owns it constitutes, other things being equal, a fund which may be appropriated by Labour. To say this is to make no barren theoretical statement. The fund in question not only may, under certain circumstances, be appropriated by Labour; but these circumstances are the natural result of our existing industrial system; and the fund, as I will now show, has been appropriated by Labour already, and forms a considerable part of that additional income which Labour, as we have seen, has secured from the income created by Ability.
◆1 to an increasing extent.
◆2 Interest now forms but a small part of the income of the nation,
◆¹ In days preceding the rise of the modern industrial system, the average rate of interest was as high as ten per cent. As the modern system developed itself, as Ability more and more was diverted from war, and concentrated on commerce and industry, and produced by the use of Capital a larger and more certainproduct, ◆² the price it paid for the use of Capital fell, till by the middle of this century it was not more than five per cent. During the past forty years it has continued to sink still further, and can hardly be said now to average much more than three.
◆1 In spite of appearances to the contrary;
◆¹ This fact is sufficiently well known to investors; but there are other facts known equally well which tend to confuse popular thought on the subject, and which accordingly, in a practical work like this, it is very necessary to place in their true light. For, in spite of what has been said of the fall in the rate of interest from ten to six, and to five, and from five to three per cent, it is notorious that companies, when successful, often pay to-day dividends of from ten to twenty per cent, or even more; and founders’ shares in companies are constantly much sought after, which are merely shares in such profits as result over and above a return of at least ten per cent on the capital.
◆1 As much of what is vulgarly considered interest is something quite different.
But the explanation of this apparent contradiction is simple. Large profits must not be confounded with high interest. ◆¹ Large profits are a mixture of three things, as waspointed out by Mill, though he did not name two of them happily. He said that profits consisted of wages of superintendence, compensation for risk, and interest on Capital. If, instead of wages of superintendence, we say the product of Ability, and instead of compensation for risk, we say the reward of sagacity, which is itself a form of Ability, we shall have an accurate statement of the case. A large amount of the Capital in the kingdom is managed by the men who own it; and when they manage it successfully, the returns are large. Sometimes a man with a Capital ofa hundred thousand poundswill make as much asfifteen thousand poundsa year; but that does not mean that his Capital yields fifteen per cent of interest. Let such a man be left anotherhundred thousand pounds, which he determines not to put into his own business, but invests in some security held to be absolutely safe, and he will find that interest on Capital means not more than three and a half per cent. If he is determined to get a large return on his Capital, and if he does this by investing it in some new and speculative enterprise, this result, unless it bethe mere good luck of a gambler, is mainly the result of his own knowledge and judgment, as the following facts clearly enough show.
Between the years 1862 and 1885 there were registered in the United Kingdom abouttwenty-five thousandjoint stock companies, with an aggregate Capital of abouttwo thousand nine hundred million pounds. Of these companies, by the year 1885, more thanfifteen thousandhad failed, and less thanten thousandwere still existing. During the following four years the proportion of failures was smaller; but a return published in 1889 shows that of all the companies formed during the past twenty-seven years, considerably more than half had been wound up judicially. Therefore a man who secures a large return on money invested in a business not under his own control, does so by an exercise of sagacity not only beneficial to himself, but in a still higher degree beneficial to the country generally; for he has helped to direct human exertion into a profitable and useful channel, whereas those who are less sagacious do but help it to waste itself.[49]
Of large returns on Capital, then, only a part is interest; the larger part being merely another name for what we have shown to be the actual creation of Ability—either the Ability with which the Capital has been employed in directing Labour, or the Ability with which some new method of directing Labour has been selected. There is accordingly no contradiction in the two statements that Capital may often bring more than fifteen per cent to the original investors; and yet that interest on Capital in the present day is not more than three or three and a half per cent. Here is the explanation of shares rising in value. A man who at the starting of a business takesa hundred one pound sharesin it, and, when it is well established, getstwenty poundsa year as a dividend, will be able to sell his shares for something likesix hundred pounds; which means that little more than three per cent is the interest which will be received by the purchaser.
◆1 Interest, then, has decreased, and the whole sum thus saved has gone to the labouring classes.
◆¹ Interest, then, or the sum which those whouse Capital pay to those who own it, having decreased, as we have seen it has done, with the development of our industrial system, it remains to show the reader where the sum thus saved has gone. It must have gone to one or other of two classes of people: to the men of Ability, or to the labourers. If it had gone to the former,—that is, to the employers of Labour,—their gains now would be greater, in proportion to the Capital employed by them, than they were fifty years ago; but if their gains have not become greater, then the sum in question must obviously have found its way to the labourers. And that such is the case will be made sufficiently evident by the fact that Mr. Giffen has demonstrated in the most conclusive way that, if rent and the interest taken by the classes that pay income-tax had increased as fast as the sum actually taken by Labour, the sum assessed to income-tax would befour hundred million poundsgreater than it is, and the sum taken by Labourfour hundred million poundsless.[50]In this case the wealthier classes would be now takingone thousand and sixty million pounds, instead of thesix hundred million poundswhich they actually do take;[51]and the labouring classes, instead of taking, as they do,six hundred and sixty million pounds, or, as Mr. Giffen maintains, more, would be taking onlytwo hundred and sixty million pounds.[52]In fact, as Mr. Giffen declares, “It would not be far short of the mark to say that the whole of the great improvement of the last fifty years has gone to the masses.” And the accuracy of this statement is demonstrated in a very striking way by the fact that had the whole improvement, according to the contrary hypothesis, gonenot to the labourers, but to the classes that pay income-tax, the remainder, namely,two hundred and sixty million pounds, would correspond, almost exactly, allowing for the increase of their numbers, with what the labouring classes received at the close of the last century.
◆1 What the social reformer should study is not the dreams of Socialists, but the forces actually at work, through which Labour has already gained, and is gaining so much.
◆¹ What, then, the social reformer, what the labourer, and the friend of Labour, ought to study with a view to improving the condition of the labouring classes, is not the theories and dreams of those who imagine that the improvement is to be made only by some reorganisation of society, but the progress, and the causes of the progress, that these classes have actually been making, not only under existing institutions, but through them, because of them, by means of them.