Capital- Frédéric Bastiat - Pt 1

Capital

Economic laws act in accordance with the same principle, whether they apply to great masses of men, to two individuals, or even to a single individual condemned by circumstances to live in isolation.

An individual in isolation, provided he could survive for any length of time, would be at once capitalist, entrepreneur, workman, producer, and consumer. The entire economic cycle would run its course in him: want, effort, satisfaction, gratuitous and onerous utility. Observing each of these elements, he would have some notion of the workings of the whole mechanism, even though it would be reduced to its simplest form.

Now, if there is anything in the world that is clear, it is that he could never confuse what is gratis with what requires effort. That would imply a contradiction in terms. He would know full well when materials or forces were provided by Nature, without need for labor on his part, even in those cases where their addition made his own labor more productive.

An individual living in isolation would never dream of obtaining through his own labor something that he could get directly from Nature. He would not walk two miles for water if he had a spring beside his cabin. For the same reason, in every instance where his own labor might be called upon, he would try to substitute Nature's help as much as possible.

That is why, if he were building a boat, he would utilize the lightest wood in order to use to advantage the specific gravity of water. He would try to rig up a sail, so that the wind might spare him the trouble of rowing, etc.

In order thus to harness the forces of Nature, he needs tools and instruments.

At this point we perceive that our isolated man will have to do some calculating. He will ask himself this question: At present I obtain a certain satisfaction for a given amount of effort. When I have the proper tool, will I obtain the same satisfaction for less total effort, counting both the effort still to be exerted to obtain the satisfaction and the effort required to make the tool?

No man is willing to waste his strength for the mere pleasure of wasting it. Our Robinson Crusoe will not, therefore, set about making the tool unless he can foresee, when the work is done, a definite saving of his labor in relation to his satisfaction, or an increase in satisfactions for the same amount of labor.

A circumstance that will greatly influence his calculations is the number of products his tool will help him turn out and the number of times he will be called on to use it during its lifespan. Robinson Crusoe has a standard for his comparison, which is his present effort, the effort he must go to if he tries to obtain the satisfaction directly and without help of any kind. He estimates that the tool will save him effort each time he uses it; but it takes labor to make the tool, and he will mentally distribute this labor over the total number of occasions on which he may use it. The greater the number, the stronger will be his inclination to enlist the aid of the natural resource. It is here, in this distribution of an advance outlay over the total number of products to be made, that we find the principle and the basis of interest.

Once Robinson Crusoe has decided to make a tool, he discovers that his inclination to make it and the uses he can put it to are not enough. It takes tools to make tools; it takes iron to hammer iron, and so on, as he moves from one difficulty to another, until he reaches the first one, which seems to be insoluble. This cycle makes us aware of the extremely slow process by which capital must originally have been formed and of the tremendous amount of human effort that was required for every satisfaction.

Nor is this all. Even if the tools needed to make tools are available, the materials of production are still required. Even though they are furnished gratis by Nature, like stone, they still have to be collected, which involves going to some trouble. But nearly always the possession of these materials presupposes long and complicated earlier labor, as for example, processing wool, linen, iron, lead, etc.

And even this is not all. While a man is working thus for the sole purpose of making his future work easier, he is doing nothing for his present needs. Now, these belong to an order of phenomena in which Nature brooks no interruption. Every day he must feed, clothe, and house himself. Robinson Crusoe will therefore perceive that he can do nothing about harnessing the forces of Nature until he has accumulated provisions. Every day he is hunting he must redouble his efforts; he must lay aside part of his game; then he must impose privations on himself so as to have time to make the tool he has in mind. Under these circumstances, it is more likely that he will content himself with making a very crude and imperfect tool, barely adequate for its intended use.

With time, all his means and facilities will improve. Reflection and experience will have taught our Robinson Crusoe, stranded on his island, better working methods; the first tool itself will furnish him with the means of making others and of gathering his supplies more quickly.

Tools, materials, provisions, all constitute what he will doubtless call his capital, and he will readily grant that the larger this capital, the better the control he will have over the forces of Nature, that the more he harnesses them to his labor, the greater, in a word, will be his satisfactions in relation to his efforts.

Let us pass now to the social order. Here, too, capital will be composed of the tools and instruments of production, of the materials and provisions without which no long-range undertaking is possible either in isolation or in society. The possessors of this capital have it only because they have created it either by their efforts or their privations; and they have exerted their efforts (over and beyond their current wants), they have undergone these privations, only for the sake of future advantage, in order, for example, to turn to their use a large number of natural resources. To surrender this capital would mean for them to give up the advantage they had sought to obtain. It would mean surrendering this advantage to others; it would be rendering a service. Consequently, we must either disregard the simplest considerations of reason and justice, or we must admit that they have a perfect right to turn over this capital only in exchange for some other service freely bargained for and voluntarily agreed to. I do not believe that there is a man on earth who will contest the equity of reciprocity of services, for reciprocity of services means equity in other terms. Will it be said that the transaction cannot possibly be free, because the one who has capital is in a position to impose his own terms on the one who does not? But how should the transaction be carried on? How can an equivalence of services be determined except by an exchange voluntarily agreed to? And is it not clear, moreover, that the borrower, being free to consent or not to consent, will refuse, unless it is to his advantage to accept, and unless the loan can improve his situation? It is clear that this is the question he will ask himself: Will the use of this capital afford me advantages that will more than compensate for the terms that are stipulated? Or else: Is the effort that I am now required to make for a given satisfaction greater or less than the sum total of the efforts to which I shall be obligated by the loan, first to render the services that are asked of me, and then to realize the satisfaction with the aid of the borrowed capital? If, all things considered, there is no advantage, he will not borrow; he will be content with his present situation; and in that case, how has he been wronged? He can be mistaken, someone will say. True enough. We can be mistaken in every imaginable transaction. Does this mean, then, that no transaction can ever be free? Assuming for the moment that such is the case, will someone kindly tell us what should be put in the place of free will and free consent? Shall it be coercion? For, apart from free will, I know of nothing but coercion. No, someone says, it will be the judgment of a third party. I am perfectly willing, on three conditions. First, that the decision of this person, whatever name he be given, not be executed by force. Second, that he be infallible, for it is not worth the trouble to replace one fallible person by another; and the fallible persons whom I distrust the least are the interested parties themselves. Finally, the third condition is that this person receive no pay; for it would be a strange way of showing one's good will toward the borrower to deprive him of his liberty and then place an added burden on his shoulders in compensation for this philanthropic service. But let us forget legal questions and return to political economy.

Capital, whether composed of materials, provisions, or tools, presents two aspects: utility and value. I have explained the theory of value very badly if the reader has not comprehended that the one who surrenders a certain amount of capital demands payment for its value only, that is, for the service he put into producing it, the pains he took, plus the effort saved the recipient. Capital, indeed, is a commodity like any other. It receives its name only from the fact that it is designed for future consumption. It is a great error to believe that capital is in itself a distinct entity. A sack of wheat is a sack of wheat, even though, depending on the point of view, it is revenue for the seller and it is capital for the buyer. Exchange works on this invariable principle: value for value, service for service; and all the gratuitous utility that goes into the transaction is given into the bargain, inasmuch as what is gratis has no value, and transactions are concerned only with value. In this respect, transactions involving capital are no different from any others.

There are some remarkable implications for the social order in all this, though I can refer to them only briefly here. Man in isolation has capital only when he has collected materials, provisions, and tools. Such is not the case with man in society. He needs only to have rendered services in order to have the means of receiving from society, through the mechanism of exchange, equivalent services. What I mean by the mechanism of exchange is money, promissory notes, bank notes, and even bankers themselves. Whoever has rendered a service and has not yet received the corresponding satisfaction is the bearer of a token, which either itself has value, like money, or is fiduciary, like bank notes. This token entitles him to collect from society, when and where he wills, and in whatever form he wills, an equivalent service. These circumstances do not in any way, in principle, in effect, in point of legality, alter the great law that I seek to elucidate: Services are exchanged for services. It is still barter in embryo—developed, grown, and become complex, but without losing its identity.

The bearer of the token may therefore collect from society, at his pleasure, either an immediate satisfaction or an object that, for him, has the character of capital. This is a matter with which the one who surrenders the token has no concern whatsoever. All that matters in any way is that the services be equal. Or, again, he may surrender his token to another person to use it as he pleases, subject to the double condition that it be returned to him along with a service, and at a given date. If we analyze this transaction carefully, we find that in this case the one who surrenders the token deprives himself, in favor of the borrower, either of an immediate satisfaction that he will postpone for a few years or of an instrument of production that would have increased his own resources, harnessed the forces of Nature, and improved the ratio of his efforts to his satisfactions. He deprives himself of these advantages in order to bestow them upon another. This is certainly rendering a service, and it is impossible to deny that in all justice this service is entitled to something in return. The mere return of the thing advanced, at the end of a year, cannot be considered a payment for the special service. Those who maintain such a view fail to understand that this transaction is not a sale, in which, since delivery is immediate, the payment is also immediate. Payment is deferred, and this deferment is itself a special service, since it imposes a sacrifice on the part of the one granting it, and bestows a favor on the one requesting it. There are, therefore, grounds for remuneration; otherwise we should have to negate this supreme law of society: Service for service. This remuneration is called by different names according to circumstances: hire, rent, installments, but its generic name is interest.1

Thus, thanks to the marvelous device of exchange, a remarkable thing takes place, for every service is, or may become, capital. If workmen are to begin a railroad ten years hence, we cannot set aside now the actual wheat that will feed them, the textiles that will clothe them, and the wheelbarrows that they will use during this long-range operation. But we can set aside and deliver to them the equivalent value of these things. To do so, we need only at the present time render society services and receive in return tokens or certificates, which ten years from now we can convert into wheat or textiles. And we are not even forced to let these tokens lie idle and unproductive during this period. There are businessmen and bankers, there is the necessary machinery in society, to render the service, in exchange for services in return, of assuming these sacrifices in our place.

What is still more amazing is that we can reverse this procedure, impossible as this may seem at first glance. We can turn into tools, railroads, and houses, capital that has not yet been produced, utilizing for this purpose services that will not be rendered until the next century. There are bankers who will make the necessary advances on the faith that workers and travelers of the third or fourth generation to come will provide the payment; and these checks drawn on the future are passed from hand to hand and never remain unproductive. I do not believe, frankly, that the inventors of artificial social orders, however numerous they may be, could ever imagine a system at once so simple and so complex, so ingenious, and so just. Surely, they would give up their dull and stupid utopias if they did but know the beautiful harmonies of the dynamic social mechanism instituted by God. There was also once a king of Aragon who wondered what advice he would have given Providence on the running of the celestial mechanism if he had been called into consultation.∗ Such a presumptuous thought would not have occurred to Newton.

But, it must be emphasized, all transmission of services from one point to another, in time or space, rests upon this assumption: To grant a postponement of payment is to render a service; in other words, on the assumption that it is legitimate to charge interest. The man† who, in our day, tried to suppress interest did not understand that he was proposing to take exchange back to its primitive, embryonic form of simple, direct barter with no provision for time past or time to come. He did not realize that, while considering himself the most forward-looking of men, he was actually the most backward, since he wished to rebuild society on the crudest and most primitive plan. He desired, so he said, reciprocity of services. But he proposed to begin by refusing to admit asservices the very type of services that link, bind together, and unite all times and all places. Of all the socialists he is the one who, despite the boldness of his resounding aphorisms, has best understood and most respected the present social order. His reforms are limited to a single proposal, which is negative. It consists of removing from society the most powerful and most remarkable of its moving parts.

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