Wednesday, April 11, 2012

Capital- Frédéric Bastiat - Pt 3


In recent times great pains have been taken to stir up public resentment against that infamous, that diabolical thing, capital. It is pictured to the masses as a ravenous and insatiable monster, more deadly than cholera, more terrifying than riots, as a vampire whose insatiable appetite is fed by more and more of the life-blood of the body politic. Vires acquirit eundo. The tongue of this blood-sucking monster is called “rent,” “usury,” “hire,” “service charges,” “interest.” A writer whose great talents could have made him famous had he not preferred to use them to coin the paradoxes that have brought him notoriety has seen fit to cast this paradox before a people already tormented by the fever of revolution. I too have an apparent paradox to offer the reader, and I beg him to decide whether it is not both a great and a reassuring truth.
But, before presenting it, I must say a word about the manner in which M. Proudhon and his school explain what they call the injustice of interest.
Capital goods are tools of production. Tools of production are designed to harness the gratuitous forces of Nature. Through the steam engine we utilize the pressure of volatile gases; through the watch spring, the elasticity of steel; through weights or water-falls, gravitation; through Volta's battery, the speed of the electric spark; through the soil, the chemical and physical combinations that we call vegetation; etc., etc. Now, confusing utility with value, they think of these natural resources as having an inherent valueof their own, and consequently assume that those who appropriate these resources receive payment for the privilege of using them, for value implies payment. They assume that commodities are charged with one item for man's services, which is accepted as just, and with another item for Nature's services, which is rejected as unjust. Why, they say, require payment for gravitation, electricity, vegetation, elasticity, etc.?
The answer is found in the theory of value. That class of socialists who take the name of egalitarians confuse the legitimate value of the tool of production, which is produced by human service, with the useful result it accomplishes, which is in fact always gratis, once this legitimate value, or the interest on it, has been deducted. When I pay a farmer, a miller, a railroad company, I give nothing, absolutely nothing, for the properties of vegetation, gravitation, steam pressure. I pay for the human labor that has gone into the tools that have harnessed these forces; or, what is more advantageous for me, I pay the interest on this labor. I pay for service with service, and thereby the useful action of these forces is turned to my profit and without further cost. The whole transaction is like an exchange, like a simple act of barter. The presence of capital does not alter this law, for capital is merely accumulated value, orservices whose special function is to enlist the co-operation of Nature.
And now for my paradox:
Of all the elements that make up the total value of any product, the one we should pay for most gladly is that very element called interest on advance outlays or on capital.
And why is that? Because wherever this element makes us pay once, it saves us from paying twice. Because, by its very presence, it serves notice that the forces of Nature have contributed to the final result and are not being paid for their contribution; because, as a result, the same general amount of utility has been made available to us, but with this difference, that, fortunately for us, a certain proportion of gratuitous utility has replaced onerous utility; and, in a word, because the price of the product has gone down. We obtain it for a smaller proportion of our own labor, and what happens to society as a whole is what would happen to a man in isolation if he produced some ingenious invention.
Consider the case of a workingman in modest circumstances who earns four francs per day. For two francs, that is, for a half-day's labor, he buys a pair of cotton socks. If he tried to obtain them directly and by his own labor, I truly believe that his whole life would not be long enough for him to do so. How does it happen, then, that his half-day's labor pays for all the human services that were rendered to him for this commodity? In keeping with the law of service for service, why was he not required to contribute several years of labor?
The reason is that in the making of this pair of socks the proportion of human services has been enormously reduced, thanks to capital, by the use of natural resources. Our workman, nevertheless, pays not only for all the labor now required to perform this task but also for the interest on the capital that enlisted the co-operation of Nature; and we must note that had this last item not been available, or had it been declared illegal, capital would not have been employed in conjunction with natural resources, the commodity would have been produced by onerous utility only, that is, exclusively by human labor, and our workman would still be just where he started, that is, with the choice of either going without the socks or else of paying for them with several years of toil.
If our workman has learned to analyze what he sees, he will certainly make his peace with capital when he perceives how much he owes it. Above all, he will be convinced that God's gratuitous gifts to him are still gratuitous, that they have even been lavished upon him with a generosity that is not due to his own merits, but to the excellent operation of the natural social order. Capital is not the vegetative force of Nature that makes the cotton germinate and bloom, but the pains taken by the planter; capital is not the wind that filled the sails of the ship, nor the magnetic force to which the compass reacted, but the pains taken by the sailmaker and compass-maker; capital is not the compression of the steam that turns the spindles of the mill, but the pains taken by the builder of the mill. Germination, the power of the winds, magnetic attraction, stream pressure—all these things are certainly free of charge, and that is why the value of the socks is so low. As for the combined pains taken by the planter, the sailmaker, the compass-maker, the shipbuilder, the sailor, the manufacturer, the businessman, they are distributed, or rather, in so far as capital is concerned in the operation, the interest on them is distributed, over countless purchasers of socks; and that is why the amount of labor performed by each one of them in return for the socks is so small.
Truly, modern reformers, when I see you trying to replace this admirable order by a contrivance of your own invention, there are two things (or rather two aspects of the same thing) that utterly confound me: your lack of faith in Providence and your great faith in yourselves; your ignorance and your arrogance.
It is clear from the foregoing analysis that the progress of humanity coincides with the rapid formation of capital; for, when new capital is created, obstacles that once were surmounted by labor, that is, onerously, are now overcome by Nature, without effort; and this is done, be it noted, not to the profit of the capitalists, but to the profit of the community.
This being the case, it is the paramount interest of all men (from the economic point of view, of course) that the rapid formation of capital be encouraged. But capital increases of its own accord, spontaneously, so to speak, under the triple influence of a dynamic society, frugality, and security. We can hardly exert direct action on the energy and frugality of our fellow men, except through public opinion, through an intelligent expression of our likes and our dislikes. But we can do a great deal for the creation of security, without which capital, far from expanding, goes into hiding, takes flight, or is destroyed; and consequently we see how almost suicidal is the ardor for disturbing the public peace that the working classes sometimes display. They must learn that capital has from the beginning of time worked to free men from the yoke of ignorance, want, and tyranny. To frighten away capital is to rivet a triple chain around the arms of the human race.
The vires acquirit eundo parallel is completely applicable to capital and the beneficial influence it exerts. The creation of new capital always and necessarily releases both labor and the resources for paying labor and makes them available for other enterprises. Capital, therefore, contains within itself a strong progressive tendency—something like the laws of momentum. And this is a further argument that can be used against the very different kind of progressive tendency that Malthus notes, although political economists, to my knowledge, have neglected it until now. But this is a harmony that cannot be developed here. We reserve it for the chapter on population.
I must arm the reader in advance against a specious objection. If the function of capital, it will be said, is to have Nature perform what was hitherto performed by human labor, regardless of the good it brings to humanity as a whole, it must be harmful to the working classes, especially those who live on wages; for anything that adds to the number of employable workers increases their competition for jobs, and this is doubtless the secret reason for the proletarians' hostility to capitalists. If this objection were well founded, there would indeed be a discordant note in the social harmony.
The misconception here involved consists in losing sight of this truth: For every amount of human effort that capital releases as it extends its operations, it likewise makes available a corresponding amount of money for wages, so that these two elements meet and complement each other. Labor is not made permanently idle; when replaced in one special category by gratuitous energy, it turns its attack against other obstacles on the main road to progress, all the more surely because its remuneration is already available within the community.
And therefore, returning to the illustration given above, we can readily see that the price of socks (like the price of books, transportation, and everything else) goes down, under the influence of capital, only by leaving a part of the former price in the hands of the purchaser. This is so obvious that even to state it is almost childishly redundant; the worker who now pays two francs for what used to cost six has, therefore, four francs left over. Now this is the exact proportion of human labor that has been replaced by the forces of Nature. These forces are, therefore, a pure and simple gain, and the ratio between labor and available remuneration has not been altered at all. I make bold to remind the reader that the answer to this objection was already given2 when, as we were studying man in isolation, or else still dependent on the primitive law of barter, I put the reader on his guard against the widespread fallacy that I am now attempting to refute.
Let us, therefore, have no qualms about allowing capital to form and increase in accord with its own tendencies and those of the human heart. Let us not imagine that, when the rugged workman saves for his old age, when the father plans a career for his son or a dowry for his daughter, by thus exercising man's noble faculty of foresight they are jeopardizing the general welfare. Such would be the case, private virtues would indeed be antagonistic to the public weal, if the interests of capital and labor were incompatible.
We must realize that humanity is far from being subject to this contradiction, rather, this impossibility (for how can we conceive of the constant deterioration of the whole resulting from the constant improvement of all its parts?); that, on the contrary, Providence, in its justice and goodness, has assigned, along the path of progress, a finer role to labor than to capital, more effective incentives, more generous compensations to him who now contributes the sweat of his brow, than to him who lives by the sweat and toil of his fathers.
Therefore, having established that every increase in capital is necessarily accompanied by an increase in the general welfare, I venture to present as incontrovertible the following axiom relating to the distribution of this prosperity:
As capital increases, the capitalists' absolute share in the total production increases and their relative share decreases. On the other hand, the workers' share increases both relatively and absolutely.
I can express my thought more clearly with figures.
Let us represent society's total production at successive periods in its history by the numbers 1,000, 2,000, 3,000, 4,000, etc.
I state that capital's share will drop successively from 50% to 40%, to 35%, to 30%, and labor's share will consequently rise from 50% to 60%, to 65%, to 70%; but in such a way that capital's absolute share at each period will be larger, although its relative share will be smaller.
Thus, the distribution will be made in the following manner:

Distribution of Shares of Increased Production
First period ...................1,000500500
Second period ................2,0008001,200
Third period ........................3,0001,0501,950
Fourth period ................4,0001,2002,800
Such is the great, admirable, reassuring, necessary, and invariable law of capital. By proving it, it seems to me, we can utterly discredit those rantings that have been dinned into our ears for so long against the greed, the tyranny, of the most powerful instrument for civilization and equality that has ever been conceived.
This proof is divided into two parts. First, we must prove that capital's relative share does constantly decrease.
This will not take long, for it amounts to saying: The more plentiful capital is, the lower its interest rate. Now, this point is not open to question, nor has it been questioned. It not only can be explained scientifically; it is self-evident. Even the most unorthodox schools of thought admit it; in fact, the school that has specifically set itself up as the enemy of what it calls diabolical capital makes this fact the basis of its theory; since, from the evident fact of the decline in the rate of interest, it concludes that capital is inevitably doomed. For, this school says, since its extinction is inevitable, since it is sure to happen within a certain period of time, since this day will usher in the reign of unalloyed bliss, we must hasten and encourage its coming. This is not the place to refute these theories and their implications. I call attention only to the fact that all schools of thought—economists, socialists, egalitarians, and others—admit that, in the natural order of society, interest rates do indeed go down as capital increases. And even if they chose not to admit it, the fact would not be the less certain; for it is supported by the authority of the whole of human experience, and the acquiescence, perhaps involuntary, of all the capitalists in the world. It is a fact that the interest rate is lower in Spain than in Mexico, in France than in Spain, in England than in France, and in Holland than in England. Now, when interest goes down from 20% to 15%, then to 10%, to 8%, to 6%, to 4½%, to 4%, to 3½%, to 3%, what does this fact have to do with the question before us? It means that capital, for its contribution, through industry, to the general prosperity, is content with, or if you prefer, is forced to be content with, a share that becomes increasingly smaller as more capital is accumulated. Did capital once receive a third of the value of wheat, homes, linen, ships, canals? In other words, when these things were sold, did one-third go to the capitalists and two-thirds to the workers? Little by little the capitalists receive only a fourth, a fifth, a sixth; their relative share is constantly decreasing; the workers' share is rising proportionately, and thus the first part of my demonstration is proved.
It remains for me to prove that capital's absolute share constantly increases. It is true enough that interest rates tend to go down. But when and why? When and because capital increases. It is, therefore, entirely possible for the total accumulation of capital to increase, but for the percentage to decrease. A man has more income with 200,000 francs at 4% than with 100,000 francs at 5%, even though, in the first case, he charges less for the use of his capital. The same thing holds true for a nation and for all humanity. Now, I maintain that the percentage, in its tendency to decline, cannot and must not be reduced so rapidly that the sum total of interest paid is smaller when capital is plentiful than when it is scarce. I readily admit that if the capital of mankind is represented by 100 and the interest rate at 5, this rate will not be more than 4 when capital reaches 200. Here we see that the two effects are produced simultaneously: a smaller relative share, a larger absolute share. But, on the same hypothesis, I refuse to admit that the increase in capital from 100 to 200 can cause the interest rate to fall from 5% to 2%, for example. For, if such were the case, the capitalist who had 5,000 francs of income on 100,000 francs of capital would now have only 4,000 francs of income on 200,000 francs—a contradictory and impossible result, a strange anomaly that would be corrected by the simplest and least painful remedy imaginable; for in order to raise his income, the capitalist would need only to waste half of his capital. Strange and happy age when we could become rich by pauperizing ourselves!
We must, therefore, not lose sight of the fact that the combined action of these two correlated phenomena—increase of capital, lowering of the rate of interest—takes place necessarily in such a way that the total product constantly rises.
And, it may be remarked in passing, this fact destroys utterly and absolutely the fallacy of those who imagine that, because the interest rate falls, it eventually will disappear entirely. The result of this would be that the time would come when capital would be accumulated in such quantities that it would yield no return to its owners. Let us reassure ourselves; before that time comes, the owners of capital will be quick to dissipate it in order to restore their income.
This, then, is the great law of capital and labor, in so far as it relates to their sharing of what they produce jointly. Each one has a larger and larger absolute share, but capital's proportional share constantly decreases as compared with that of labor.
Therefore, capitalists and workers, cease looking at one another with envy and distrust. Shut your ears to those absurd tirades, as vain as they are ignorant, which, under pretence of brotherly love in the future, begin by sowing the seeds of discord in the present. Recognize that your interests are common, identical; that, whatever may be said to the contrary, they merge, they work together for the common good; that the toil and sweat of our generation mingle with the toil and sweat of generations gone by. Recognize too, that some amount of remuneration must indeed go to all those who have participated in the task, and that the most intelligent as well as the most equitable system of distribution is in operation among you, thanks to the wisdom of the laws of Providence, in a system of free and voluntary transactions. Let no parasitical sentimentalists impose their decrees upon you to the peril of your physical well-being, your liberty, your security, and your self-respect.
Capital has its roots in three attributes of man: foresight, intelligence, and thrift. For him to resolve to lay aside capital funds, he must, in fact, anticipate the needs of the future, sacrifice the present for them, exercise control over himself and his appetites, resist not only the allurements of the pleasures of the moment, but also the prickings of his vanity and the whims of public opinion, which is always so indulgent toward the light-minded and the extravagant. He must also link cause and effect in order to know by what means and by what tools Nature will become docile and will submit to the work of production. Above all, he must be moved by a sense of family devotion, so that he will not draw back before the sacrifices whose benefits will be enjoyed by his loved ones when he is no more. To accumulate capital is to provide for the subsistence, the protection, the shelter, the leisure, the education, the independence, the dignity of generations to come. None of this can be done without putting into practice all our most social virtues, and, what is harder, without making them our daily habit.
It is quite common, however, to attribute to capital a kind of deadly efficiency that would implant selfishness, hardness, and Machiavellian duplicity in the hearts of those who possess it or aspire to possess it. But is this not confused thinking? There are countries where labor is mainly fruitless. The little that is earned must quickly go for taxes. In order to take from you the fruit of your labor, what is called the state loads you with fetters of all kinds. It interferes in all your activities; it meddles in all your dealings; it tyrannizes over your understanding and your faith; it deflects people from their natural pursuits and places them all in precarious and unnatural positions; it paralyzes the activities and the energies of the individual by taking upon itself the direction of all things; it places responsibility for what is done upon those who are not responsible, so that little by little the distinction between what is just and what is unjust becomes blurred; it embroils the nation, through its diplomacy, in all the petty quarrels of the world, and then it brings in the army and the navy; as much as it can, it perverts the intelligence of the masses on economic questions, for it needs to make them believe that its extravagances, its unjust aggressions, its conquests, its colonies, represent a source of wealth for them. In these countries it is difficult for capital to be accumulated in natural ways. Their aim, above all, is by force and by guile to wrest capital from those who have created it. The way to wealth there is through war, bureaucracy, gambling, government contracts, speculation, fraudulent transactions, risky enterprises, public sales, etc. The qualities needed to snatch capital violently from the hands of the men who create it are exactly the opposite of the qualities that are necessary for its creation. It is not surprising, therefore, that in these countries capital connotes ruthless selfishness; and this connotation becomes ineradicable if the moral judgments of the nation are derived from the history of antiquity and the Middle Ages.
But when we turn our attention, not to the violent and fraudulent seizure of capital, but to its creation by intelligence, foresight, and thrift, we cannot fail to see that its acquisition by these means is a benefit for society and an aid to morality.
No less beneficial, socially and morally, than the formation of capital is its action. Its effect is to harness Nature; to spare man all that is most physical, backbreaking, and brutish in the work of production; to make mind master over matter; to provide more and more, I do not say idleness, but leisure; to make our most purely physical wants less imperious by rendering their satisfaction easier; to replace them with pleasures of a higher order, more delicate, more refined, more aesthetic, more spiritual.
Thus, no matter what our point of view, whether we consider capital in its relation to our wants, which it ennobles; to our satisfactions, which it refines; to Nature, which it tames for us; to morality, which it makes habitual in us; to our social consciousness, which it develops; to equality, which it fosters; to liberty, which is its life-blood; to justice, which it guarantees by the most ingenious methods; we shall perceive always and everywhere (provided only that it be created and put to work in a social order that has not been diverted from its natural course) that capital bears that seal and hallmark of all the great laws of Providence: harmony.

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