Tuesday, April 10, 2012

Capital- Frédéric Bastiat - Pt 2


I have explained elsewhere the legitimacy and the perpetuity of interest. I shall limit myself here to reminding the reader that:
  • 1) The legitimacy of interest is based on the fact that the person who grants credit renders a service. Hence, interest is legitimate, by virtue of the principle of service for service.
  • 2) The perpetuity of interest is based on the additional fact that the person who borrows must repay in full at the date of expiration. Now, if the object or the value is returned to its owner, he can relend it. It will be returned a second time; he can lend it a third time; and so on perpetually. What one of the succeeding and voluntary borrowers can have any cause for complaint? But, since the legitimacy of interest has so frequently been contested in these times as to alarm capital and drive it away or into hiding, let me show how senseless all this strange uproar is.
Now, first of all, would it not be quite as absurd as it would be unjust if no interest were charged at all or if the interest payment were the same whether the terms agreed upon were for a period of one year, two years, or ten years? If, under the influence of the so-called egalitarian doctrine, our civil code should, unfortunately, so decree, it would mean the immediate suppression of an entire category of human transactions. There would still be barter transactions and cash sales, but there would no longer be installment buying or loans. The egalitarians would, indeed, lift from the borrowers the burden of interest, but by denying them the loan. On this analogy we can also relieve men of the painful necessity of paying for what they purchase. We have only to forbid them to buy, or, what amounts to the same thing, make the law declare that prices are illegal.
The egalitarian principle does indeed have an egalitarian element in it. First, it would prevent the accumulation of capital; for who would want to lay up savings from which no return could be realized? Secondly, it would reduce wages to zero; for, where there is no capital (tools, materials and provisions), there can be no provision for future labor, and so, no wages. We should therefore soon reach the state of perfect and absolute equality: no one would have anything.
But can any man be so blind as not to see that deferment of payment is in itself an onerous act, and, therefore, subject to remuneration? But even aside from the question of loans, does not everyone in all transactions try to shorten the delays he must experience? It is, in fact, the object of our constant concern. Every entrepreneur looks ahead to the time when the advances he has made will bring a return. We sell at a higher or a lower price with this in view. To be indifferent to this consideration, we should have to be unaware of the fact that capital is a force; for, if we do know it, we naturally desire to have it accomplish as quickly as possible the task to which we have assigned it, so that we may reassign it to still another.
They are poor economists indeed who believe that we pay interest on capital only when we borrow. The general rule, and a just one, is that he who enjoys the satisfaction must pay all that it costs to produce it, the inconveniences of delay included, whether he performs the service himself or has another perform it for him. The man in isolation, who, of course, carries on no transaction with anyone else, would consider as onerous any situation that would deprive him of his weapons for a year. Why, therefore, would not a similar situation be considered onerous in society? If one man voluntarily undergoes this privation for the benefit of another man who voluntarily agrees to compensate him, how can this compensation be considered illegitimate?
Nothing would be done in this world, no enterprise requiring advance outlays would be carried through to completion, men would not plant, sow, or plow, if delays and postponements were not in themselves considered as onerous, to be treated and paid for as such. General agreement is so unanimous on this point that there is no exchange in which it is not the guiding principle. Extensions of time and postponements enter into the appraisal of services, and, consequently, into the amount of value they possess.
Thus, in their crusade against interest, the egalitarians trample underfoot not only the most basic notions of justice, not only their own principle of service for service, but also all human precedent and universal practice. How dare they display, for all to see, such inordinate egotism and presumption? And is it not a strange and sorry sight to see these zealots implicitly and explicitly take as their motto: Since the world began all men have been wrong, except myself. Omnes, ego non.
I ask the reader to forgive me for having so much insisted on the legitimacy of interest, which is based on this axiom: Since postponements cost something, they must be paid for, cost and payment being correlative terms. The fault lies in the spirit of our age. We must, in the face of the attacks made by a few fanatical innovators, take our stand clearly on the side of those vital truths that all humanity accepts. For the writer who seeks to demonstrate the harmony of all economic phenomena, it is a most painful thing, believe me, to be compelled to stop at every step to explain the most elementary concepts. Would Laplace have been able to explain the solar system in all its fundamental simplicity, if there had not been certain areas of common understanding among his readers, if, in order to prove that the earth rotates, he had first been obliged to teach them to count? Such is the cruel dilemma of the economist in our day. If he does not stop to present fully the rudiments of his subject, he is not understood; and if he does explain them, the beauty and simplicity of the whole is swallowed up in a torrent of details.
It is truly fortunate for mankind that interest is legitimate.
Otherwise man too would face a difficult dilemma: either, by remaining just, to perish; or, through injustice, to prosper.
Every industry represents a union of efforts. But among these efforts there is an essential distinction to be made. Some are directed toward services that are to be performed immediately; others, toward an indefinite series of services of a similar nature. Let me explain.
The pains a watercarrier goes to in the course of a day must be paid for by those who are benefited by them; but the pains he took previously to make his cart and his waterbarrel must be distributed, as regards payment, among an indefinite number of users.
Similarly, weeding, plowing, harrowing, reaping, threshing concern only the present harvest; but fences, clearings, drainage, buildings and improvements concern and facilitate an indefinite number of future harvests.
According to the general law of service for service, those who receive the satisfaction must recompense the efforts exerted for them. In regard to the first type of effort, there is no difficulty. Bargaining and evaluating are carried on between the one who exerts the effort and the one who benefits from it. But how can services of the second type be evaluated? How can a fair proportion of the permanent outlay, general expenses, fixed capital, as the economists call it, be distributed over the entire series of satisfactions that these things are designed to effect? By what method can their weight be made to fall evenly on the shoulders of all those who use the water, until the cart is worn out; on those who consume the wheat, as long as the field remains productive?
I do not know how they would solve this problem in Icaria or in the phalanstery, but I am inclined to believe that the inventors of societies, who are so prolific in their artificial arrangements and so ready to have them foisted on the public by law—which means, whether they admit it or not, by force—could not imagine a more ingenious solution than the entirely natural procedure that men have discovered for themselves (how presumptuous of them!) since time immemorial, the procedure that it is now proposed to forbid them to use, namely, that derived from the law of interest.
Let us assume that a thousand francs have been spent in real property improvements; let us assume also an interest rate of five per cent and an average harvest of five thousand liters. By this reckoning one franc is to be charged against each hundred liters of wheat.
This franc is evidently the legitimate payment for an actual service rendered by the landowner (who could also be called the worker) just as much to the man who will receive a hundred liters of grain ten years from now as to the man who buys it today. Therefore, the law of strict justice is observed.
Suppose, now, that the property improvements or the cart or the waterbarrel has a lifespan that can be determined only within approximate limits; then, provision for a sinking fund is added to the interest, so that the owner will not suffer a loss but may continue to operate. This is still in accordance with justice.
We must not assume that this one-franc interest charged against each hundred liters of wheat is an invariable amount. On the contrary, it represents value and obeys the general law of value. It increases or decreases according to the fluctuations of supply and demand, that is, according to the particular pressures of the moment and the general prosperity of society.
We are usually inclined to believe that this type of remuneration tends to increase, if not for industrial improvements, at least for agricultural improvements. Even admitting that this rent was originally fair, it is said, it finally becomes exorbitant, for the landowner thereafter stands by in idleness while his rent continues to rise from year to year, simply because the population is increasing, and therefore the demand for wheat also.
This tendency exists, I agree, but it is not confined to land rent; it is common to all types of labor. The value of every kind of labor increases with the density of the population, and the common day laborer earns more in Paris than in Brittany.
But we must also bear in mind that this tendency is counter-balanced, as far as land rent is concerned, by an opposite trend, which is that of progress. Improvements made today by better methods, with less human labor, and at a time when the interest rate has fallen, prevent too high a rent from being asked for previous improvements. The landowner's fixed capital, like the manufacturer's, deteriorates in the long run as more and more efficient labor-saving devices appear. This is a remarkable law, which overturns Ricardo's gloomy theory; it will be analyzed more completely when we discuss real property.
Note that the problem of the distribution of services to be performed in payment for permanent improvements could not be solved without the law of interest. The owner could not distribute his actual capital over an indefinite number of successive users; for where would he stop, since the exact number cannot be determined? The earlier ones would have paid for the later ones, which is not just. Furthermore, a time would have come when the owner would have been in possession of both his capital outlay and his improvements, which is not just either. Let us acknowledge, then, that the natural machinery devised by society is ingenious enough so that we do not have to supplant it with any artificial device.
I have presented the phenomenon in its simplest form in order to give a clear idea of its nature. In practice things do not occur in quite this way.
The landowner does not himself work out the distribution, and he does not decide that a charge of one franc, more or less, will be placed on each hundred liters of wheat. He finds that men have already decided these matters, both the prevailing price of wheat and the rate of interest. On this information he decides how he will invest his capital. He will use it to improve his land if he estimates that the price of wheat will permit him to realize the normal rate of interest. If such is not the case, he will invest it in an industry that promises a better return, and is, fortunately for society, more likely to attract capital for that very reason. This is the way the process really operates in reaching the same result as sketched above, and it offers us still another harmony of economic law.
The reader will understand that I have confined myself to one particular case simply as a means of illustrating a general law that applies to all professions and occupations.
A lawyer, for example, cannot make the first client who comes his way reimburse him for all he has spent on his education, his probation, his law office—perhaps amounting to as much as twenty thousand francs. This would not only be unjust; it would be impossible. The first client would never put in his appearance, and our budding Cujas would be reduced to imitating the host who, when he saw that no one had come to his first ball, declared: “Next year I shall begin by putting on my second ball.”
The same thing applies to the businessman, the doctor, the shipowner, the artist. In every calling these two types of effort are to be found; the second type must, without fail, be distributed over an indeterminate number of consumers, and I defy anyone to contrive a method of distribution other than the mechanism of interest.

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