Let the amount of capital in the industrial community be measured along the horizontal line AC; let the productivity of capital be measured along the perpendicular line AE; and let the descending line EC represent the rate of decrease in the marginal productivity of capital. If the amount

or AF'; and when the amount of capital equaled AD”, marginal productivity would equal B'D'", or AF". From this it follows inevitably that if capital went on increasing to AC, the marginal productivity of capital would be destroyed altogether. That is to say, the supply of capital would have reached that limit where no more could be used to advantage, and some could be spared without loss.1

1 T. N. Carver, The Distribution of Wealth, pp. 223-224. The Macmillan Company, New York.

CHAPTER XXXVI

THE COST OF CAPITAL AND ITS PRICE

Why capital is scarce. Seeing that the productivity of capital, or its advantageous use, diminishes as the supply of capital increases relatively to other factors, and increases as the supply of capital diminishes relatively to other factors, it is quite important that we should be able to account for the supply of capital as well as for its demand. Its demand, as has already been suggested, is based upon its desirability in production, that is, upon its productivity or the opportunity for its advantageous use. Unless, therefore, the supply were in some way limited, capital might become so abundant as to leave it with no marginal productivity. We found, when we were discussing the value of commodities, that the cost of producing them operated as a check on production and kept the supply within such limits as would give them a price approximately sufficient to pay the cost of production. Some factor must be found which will limit the supply of capital.

The irksomeness of waiting. There are two factors which are obviously at work. One is the mere cost of producing the capital goods; the other is the cost of waiting, or the disinclination which the average individual feels toward waiting. The cost of producing tools needs very little discussion. Unless the farmer's plow will return him, before it is worn out, enough to replace the price which he originally paid for it, he will of course have no motive for paying that price. If plows should become so numerous on a given farm that the farmer felt that he would probably never get back enough from a new plow, added to those already in use, to repay the price of that plow, it would be foolish for him to buy it. If every

farmer behaves in this way, certainly no more plows will be bought than can be used with that degree of advantage. If he has to pay fifty dollars for a new riding plow, and if he figures that in the course of its lifetime it will add only fifty dollars to his product over and above what he could produce with his existing equipment, then he would of course gain nothing from its purchase; he would merely get back the original purchase price. If the average farmer had no disinclination toward waiting, it is probable that farmers would buy so many plows as to reduce the marginal productivity of plows to the level of the cost, that is, to the level of the purchase price.

But suppose that the plow which cost fifty dollars will return the farmer only five dollars a year and will last ten years; it then just replaces its original cost; the farmer will have got back at the end of ten years the money which he put into it, and no more. Meanwhile he has had to wait ten years. If he did not mind waiting, — if waiting were not in the slightest degree irksome to him, he would probably be willing to buy a plow under such circumstances, though there would be neither loss nor gain. If, however, he does not like to wait, — if he prefers present enjoyment to future enjoyment, then he would hold on to his fifty dollars in the first place rather than spend it for something which will return fifty dollars in ten years' time. Under these circumstances he will certainly not buy the plow unless he has so few plows as to give a higher marginal productivity than that which we have been discussing. If he has so few plows that the possession of an additional plow will in the course of ten years add one hundred dollars to his income, he will add fifty dollars to his wealth during the ten-year period, that is to say, fifty dollars will go to replace the purchase price of the plow; the other fifty dollars is surplus. This and this alone is interest, and a rather high rate of interest, namely, 10 per cent. But if every farmer is likewise disinclined to wait, the market for plows will be limited. Only as many will be purchased as will yield a return large enough to

more than pay the purchase price. In other words, farmers in general will get some interest on that which they invested in plows.

This may be illustrated by the following diagram.

E

Let us suppose, as in the former diagram, that the number of implements of a certain kind, say plows, is measured along the line AC, and their marginal productivity along the line AE. In this case, however, we mean their total marginal product during their average lifetime, or that amount which an average plow will add to the product of the community during its lifetime, over and above what could be produced without it. To distinguish this from the marginal product per year, we shall call it the total earnings of a plow. Letting the descending curve represent the decline in the total earnings of each plow as the number of plows increases, the line DB, or AF, would represent the total earnings of each plow when their number was represented by the line AD. When their

F

F

F

"

G

A

B

B'

B"

D D'

D"

number is AD, the total earnings of each would be D'B', or AF'; and when the number is AD'', the total earnings of each would be D'B", or AF". Let us further suppose that the cost of making plows is represented by the perpendicular distance of the various points on the ascending curve GB above the base line AC. If this cost were the only check on the production of plows, there is no reason why they should not increase to the point D', where the total earnings of each plow would just pay the cost of making the most expensive part of the total supply. They would sell at the uniform price of D'B', or AF', which would be their normal equilibrium price. The total earnings of a plow would then just cover the price which the buyer would have to give for it.1

Why the present value of a productive agent is less than the future value of all its products. Now, as a matter of fact, people do not like to wait. Waiting is to some quite as irksome

1 T. N. Carver, The Distribution of Wealth, pp. 226-227. The Macmillan Company, New York.

as working. It is also quite as necessary to efficient production. Anything, whether it be working, waiting, or risking, which is necessary to efficient production, and which at the same time is irksome, must be paid for. The fact that it is necessary for production furnishes a sufficient motive for paying for it; the fact that it is irksome makes it necessary to pay for it, because men will not otherwise perform this function. In order that there may be an adequate supply of tools, which is necessary for efficient production, there must be waiting. Labor must be performed in the making of the tools, and then somebody must wait until they have been used for a number of years in order to get back from their use the equivalent of that which was originally expended in making them. If the laborers who make the tools are not themselves willing to wait, they may sell them to someone else, who then undertakes to wait for their products to mature. If both the laborers who make the tools and the one who purchases them are disinclined to wait, their market price will have to be something less than the sum of their future earnings. The laborers, being disinclined to wait, will be willing to sell for a cash price somewhat lower than the total sum of the future earnings, and the purchaser will not be willing to pay a price which would equal the sum total of the future earnings. In the price-making process, therefore, the capital goods must necessarily sell for less than the sum of the future earnings. The buyer who holds them during their lifetime finds himself in possession of a surplus, which is his compensation for waiting.

Take the case of a blacksmith who, by his own labor, makes a plow out of materials which cost him five dollars. Let us suppose that he can in a fortnight make a plow which will earn a total of thirty dollars during its lifetime of ten years. Deducting the cost of materials, this leaves him twenty-five as the net earnings of his fortnight's work; but he must wait for his wages, receiving them in installments over a period of ten years. If he does not mind waiting, this will be no drawback, and he would just as lief make a plow as work for the same amount in cash or in present consumable goods. Or, having made such a plow, he would not sell it