Production does not go on in a timeless world. The product is not ready for consumption at the same moment as labor is expended on it. Production takes time.
From this elementary technical fact it follows that the workers cannot consume the products of present labor, but only those of previous labor. In a money economy, the money which the workers receive from their entrepreneurs in wages and spend for their living during any given production period does not buy the products of this same period but those of an earlier period. And by the sale of these products of an earlier period the entrepreneurs receive back the money spent in that earlier period.
All this is unimportant in a stationary economy, where by definition outlays and production do not change from one period to another. But in the real world there are constant changes. Only a model clearly showing the time sequence of events is useful in analysis. It would not be necessary to stress this point were it not for the fact that, under the influence of Keynes' General Theory of Employment, Interest and Money, the tendency to use so-called circular analysis, which neglects the time element, has been strengthened.
Circular analysis presupposes that the current income of workers is spent on their current output. This would mean that current production in turn is influenced by current spending. But in reality current spending meets the products of past production which can no longer be influenced by current spending. On the other hand, the fact that a changed demand meets an as yet unchanged supply does lead to price increases and declines and to many other important changes. Only the so-called sequence analysis, as developed especially by Swedish economists, can give a satisfactory picture of these changes. For the analysis of equilibrium situations, for which they are meant in the first place, circular analyses remain permissible but dangerous because they serve very often, consciously or unconsciously, to analyze changes from one equilibrium situation to the other.
As production takes time, and we cannot therefore live from hand to mouth, a certain amount of goods in various stages of production must always be simultaneously present in the economy. Goods ready for consumption are, in the first place, essential for production by enabling the workers to survive during the production period; the other goods, as we shall see later, are essential by enabling the workers to be more productive. We shall call the total stock of these goods the capital of the community, and the individual goods capital goods.
The capital of the community is owned by people commonly called capitalists. For the time being we shall take the ownership situation as historically given. Later we shall inquire into the reasons for capital accumulation and changes in ownership.
In a money economy capitalists do not as a rule actually own the stock of capital goods. They own money and lend it to entrepreneurs, who use the money to pay their workers—who in turn use it to buy goods of a past production period.
As production goes on, new, half finished and finished goods accumulate in the hands of the entrepreneurs. Juridically these goods belong to the entrepreneurs, but economically they belong to the money capitalists because the money used for the production is owned by them. The entrepreneurs are, as it were, the trustees of the money capitalists.
When the entrepreneurs of the past period sell their products to the workers of the present period, the money they receive enables them to repay their loans and thus to free themselves from their debts to the capitalists.
Figure 9 shows how the money borrowed by an entrepreneur in the current production period is used by his workers to buy the goods produced in a past period, thereby enabling past debts to be repaid.