THE LAW OF INTEREST.
Let us turn now to the law of interest, keeping in mind two things to
which attention has heretofore been called—viz:
_First_—That it is not capital which employs labor, but labor which
employs capital.
_Second_—That capital is not a fixed quantity, but can always be
increased or decreased, (1) by the greater or less application of labor
to the production of capital, and (2) by the conversion of wealth into
capital, or capital into wealth, for capital being but wealth applied
in a certain way, wealth is the larger and inclusive term.
It is manifest that under conditions of freedom the maximum that can be
given for the use of capital will be the increase it will bring, and
the minimum or zero will be the replacement of capital; for above the
one point the borrowing of capital would involve a loss, and below the
other, capital could not be maintained.
Observe, again: It is not, as is carelessly stated by some writers, the
increased efficiency given to labor by the adaptation of capital to any
special form or use which fixes this maximum, but the average power
of increase which belongs to capital generally. The power of applying
itself in advantageous forms is a power of labor, which capital as
capital cannot claim nor share. A bow and arrows will enable an Indian
to kill, let us say, a buffalo every day, while with sticks and stones
he could hardly kill one in a week; but the weapon maker of the tribe
could not claim from the hunter six out of every seven buffaloes
killed as a return for the use of a bow and arrows; nor will capital
invested in a woolen factory yield to the capitalist the difference
between the produce of the factory and what the same amount of labor
could have obtained with the spinning-wheel and hand-loom. William when
he borrows a plane from James does not in that obtain the advantage of
the increased efficiency of labor when using a plane for the smoothing
of boards over what it has when smoothing them with a shell or flint.
The progress of knowledge has made the advantage involved in the use of
planes a common property and power of labor. What he gets from James is
merely such advantage as the element of a year’s time will give to the
possession of so much capital as is represented by the plane.
Now, if the vital forces of nature which give an advantage to the
element of time be the cause of interest, it would seem to follow that
this maximum rate of interest would be determined by the strength of
these forces and the extent to which they are engaged in production.
But while the reproductive force of nature seems to vary enormously,
as, for instance, between the salmon, which spawns thousands of eggs,
and the whale, which brings forth a single calf at intervals of years;
between the rabbit and the elephant, the thistle and the gigantic
redwood, it appears from the way the natural balance is maintained that
there is an equation between the reproductive and destructive forces of
nature, which in effect brings the principle of increase to a uniform
point. This natural balance man has within narrow limits the power
to disturb, and by the modification of natural conditions may avail
himself at will of the varying strength of the reproductive force in
nature. But when he does so, there arises from the wide scope of his
desires another principle which brings about in the increase of wealth
a similar equation and balance to that which is effected in nature
between the different forms of life. This equation exhibits itself
through values. If, in a country adapted to both, I go to raising
rabbits and you to raising horses, my rabbits may, until the natural
limit is reached, increase faster than your horses. But my capital will
not increase faster, for the effect of the varying rates of increase
will be to lower the value of rabbits as compared with horses, and to
increase the value of horses as compared with rabbits.
Though the varying strength of the vital forces of nature is thus
brought to uniformity, there may be a difference in the different
stages of social development as to the proportionate extent to
which, in the aggregate production of wealth, these vital forces are
enlisted. But as to this, there are two remarks to be made. In the
first place, although in such a country as England the part taken by
manufactures in the aggregate wealth production has very much increased
as compared with the part taken by agriculture, yet it is to be
noticed that to a very great extent this is true only of the political
or geographical division, and not of the industrial community. For
industrial communities are not limited by political divisions, or
bounded by seas or mountains. They are limited only by the scope of
their exchanges, and the proportion which in the industrial economy of
England agriculture and stock-raising bear to manufactures is averaged
with Iowa and Illinois, with Texas and California, with Canada and
India, with Queensland and the Baltic—in short, with every country to
which the world-wide exchanges of England extend. In the next place,
it is to be remarked that although in the progress of civilization
the tendency is to the relative increase of manufactures, as compared
with agriculture, and consequently to a proportionately less reliance
upon the reproductive forces of nature, yet this is accompanied by a
corresponding extension of exchanges, and hence a greater calling in
of the power of increase which thus arises. So these tendencies, to a
great extent, and, probably, so far as we have yet gone, completely,
balance each other, and preserve the equilibrium which fixes the
average increase of capital, or the normal rate of interest.
Now, this normal point of interest, which lies between the necessary
maximum and the necessary minimum of the return to capital, must,
wherever it rests, be such that all things (such as the feeling of
security, desire for accumulation, etc.) considered, the reward of
capital and the reward of labor will be equal—that is to say, will give
an equally attractive result for the exertion or sacrifice involved.
It is impossible, perhaps, to formulate this point, as wages are
habitually estimated in quantity and interest in a ratio; but if we
suppose a given quantity of wealth to be the produce of a given amount
of labor, cooperating for a stated time with a certain amount of
capital, the proportion in which the produce would be divided between
the labor and the capital would afford a comparison. There must be such
a point at, or rather, about, which the rate of interest must tend to
settle; since, unless such an equilibrium were effected, labor would
not accept the use of capital, or capital would not be placed at the
disposal of labor. For labor and capital are but different forms of
the same thing—human exertion. Capital is produced by labor; it is,
in fact, but labor impressed upon matter—labor stored up in matter,
to be released again as needed, as the heat of the sun stored up in
coal is released in the furnace. The use of capital in production
is, therefore, but a mode of labor. As capital can be used only by
being consumed, its use is the expenditure of labor, and for the
maintenance of capital, its production by labor must be commensurate
with its consumption in aid of labor. Hence the principle that, under
circumstances which permit free competition, operates to bring wages
to a common standard and profits to a substantial equality—the
principle that men will seek to gratify their desires with the least
exertion—operates to establish and maintain this equilibrium between
wages and interest.
This natural relation between interest and wages—this equilibrium at
which both will represent equal returns to equal exertions—may be
stated in a form which suggests a relation of opposition; but this
opposition is only apparent. In a partnership between Dick and Harry,
the statement that Dick receives a certain proportion of the profits
implies that the portion of Harry is less or greater as Dick’s is
greater or less; but where, as in this case, each gets only what he
adds to the common fund, the increase of the portion of the one does
not decrease what the other receives.
And this relation fixed, it is evident that interest and wages must
rise and fall together, and that interest cannot be increased without
increasing wages; nor wages lowered without depressing interest. For if
wages fall, interest must also fall in proportion, else it becomes more
profitable to turn labor into capital than to apply it directly; while,
if interest falls, wages must likewise proportionately fall, or else
the increment of capital would be checked.
We are, of course, not speaking of particular wages and particular
interest, but of the general rate of wages and the general rate of
interest, meaning always by interest the return which capital can
secure, less insurance and wages of superintendence. In a particular
case, or a particular employment, the tendency of wages and interest to
an equilibrium may be impeded; but between the general rate of wages
and the general rate of interest, this tendency must be prompt to act.
For though in a particular branch of production the line may be clearly
drawn between those who furnish labor and those who furnish capital,
yet even in communities where there is the sharpest distinction
between the general class laborers and the general class capitalists,
these two classes shade off into each other by imperceptible
gradations, and on the extremes where the two classes meet in the same
persons, the interaction which restores equilibrium, or rather prevents
its disturbance, can go on without obstruction, whatever obstacles may
exist where the separation is complete. And, furthermore, it must be
remembered, as has before been stated, that capital is but a portion
of wealth, distinguished from wealth generally only by the purpose to
which it is applied, and, hence, the whole body of wealth has upon
the relations of capital and labor the same equalizing effect that a
fly-wheel has upon the motion of machinery, taking up capital when
it is in excess and giving it out again when there is a deficiency,
just as a jeweler may give his wife diamonds to wear when he has a
superabundant stock, and put them in his showcase again when his stock
becomes reduced. Thus any tendency on the part of interest to rise
above the equilibrium with wages must immediately beget not only a
tendency to direct labor to the production of capital, but also the
application of wealth to the uses of capital; while any tendency of
wages to rise above the equilibrium with interest must in like manner
beget not only a tendency to turn labor from the production of capital,
but also to lessen the proportion of capital by diverting from a
productive to a non-productive use some of the articles of wealth of
which capital is composed.
To recapitulate: There is a certain relation or ratio between wages and
interest, fixed by causes, which, if not absolutely permanent, slowly
change, at which enough labor will be turned into capital to supply the
capital which, in the degree of knowledge, state of the arts, density
of population, character of occupations, variety, extent and rapidity
of exchanges, will be demanded for production, and this relation or
ratio the interaction of labor and capital constantly maintains; hence
interest must rise and fall with the rise and fall of wages.
To illustrate: The price of flour is determined by the price of wheat
and cost of milling. The cost of milling varies slowly and but little,
the difference being, even at long intervals, hardly perceptible; while
the price of wheat varies frequently and largely. Hence we correctly
say that the price of flour is governed by the price of wheat. Or,
to put the proposition in the same form as the preceding: There is a
certain relation or ratio between the value of wheat and the value
of flour, fixed by the cost of milling, which relation or ratio the
interaction between the demand for flour and the supply of wheat
constantly maintains; hence the price of flour must rise and fall with
the rise and fall of the price of wheat.
Or, as, leaving the connecting link, the price of wheat, to inference,
we say that the price of flour depends upon the character of the
seasons, wars, etc., so may we put the law of interest in a form which
directly connects it with the law of rent, by saying that the general
rate of interest will be determined by the return to capital upon the
poorest land to which capital is freely applied—that is to say, upon
the best land open to it without the payment of rent. Thus we bring the
law of interest into a form which shows it to be a corollary of the law
of rent.
We may prove this conclusion in another way: For that interest must
decrease as rent increases, we can plainly see if we eliminate wages.
To do this, we must, to be sure, imagine a universe organized on
totally different principles. Nevertheless, we may imagine what Carlyle
would call a fool’s paradise, where the production of wealth went on
without the aid of labor, and solely by the reproductive force of
capital—where sheep bore ready-made clothing on their backs, cows
presented butter and cheese, and oxen, when they got to the proper
point of fatness, carved themselves into beefsteaks and roasting
ribs; where houses grew from the seed, and a jackknife thrown upon
the ground would take root and in due time bear a crop of assorted
cutlery. Imagine certain capitalists transported, with their capital in
appropriate forms, to such a place. Manifestly, they would get, as the
return for their capital, the whole amount of wealth it produced only
so long as none of its produce was demanded as rent. When rent arose,
it would come out of the produce of capital, and as it increased,
the return to the owners of capital must necessarily diminish. If we
imagine the place where capital possessed this power of producing
wealth without the aid of labor to be of limited extent, say an island,
we shall see that as soon as capital had increased to the limit of the
island to support it, the return to capital must fall to a trifle above
its minimum of mere replacement, and the land owners would receive
nearly the whole produce as rent, for the only alternative capitalists
would have would be to throw their capital into the sea. Or, if we
imagine such an island to be in communication with the rest of the
world, the return to capital would settle at the rate of return in
other places. Interest there would be neither higher nor lower than
anywhere else. Rent would obtain the whole of the superior advantage,
and the land of such an island would have a great value.
To sum up, the law of interest is this:
_The relation between wages and interest is determined by the
average power of increase which attaches to capital from its use in
reproductive modes. As rent arises, interest will fall as wages fall,
or will be determined by the margin of cultivation._
I have endeavored at this length to trace out and illustrate the law
of interest more in deference to the existing terminology and modes
of thought than from the real necessities of our inquiry, were it
unembarrassed by befogging discussions. In truth, the primary division
of wealth in distribution is dual, not tripartite. Capital is but a
form of labor, and its distinction from labor is in reality but a
subdivision, just as the division of labor into skilled and unskilled
would be. In our examination we have reached the same point as would
have been attained had we simply treated capital as a form of labor,
and sought the law which divides the produce between rent and wages;
that is to say, between the possessors of the two factors, natural
substances and powers, and human exertion—which two factors by their
union produce all wealth.