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PRODUCTIVITY OF CAPITAL. That the labour of men is rendered more efficient when that labour is assisted by capital, is accepted as a general truth by all. Something more than this is, however, implied when the statement is made that " 'capital is productive,' and when the productivity of capital is assigned as a reason for and source of interest. It is implied in this, not merely that labour assisted by capital produces more commodities than labour which has less or no assistance, but that more value is produced; and not only that more value is produced, but that this addition of value to the product exceeds the value of capital consumed in the process. The expression of this by M. Paul LEROY-BEAULIEU takes the form that the employment of capital saves time in the production which it assists—perhaps we should say labour-time-and that this saving in general exceeds the time, or labour-time, expended in the formation of the capital. This excess measures the productivity of the capital.

The school of writers represented and led by Dr. von Böнм-BAWERK, regarding value from an opposite point of view from that of the school of Adam Smith and RICARDO, find the idea of productivity of capital a stumbling-block. VALUE in their view rests on UTILITY, and the value of capital and the value of labour depend on the value of the products they serve to turn out. From this point of view, capital cannot serve to produce surplus value, that is, to replace its own value, with a surplus, in its product, since the value of the products precisely determines the value of the productive instrument. The products are future, and the total present value of the future products of the instrument is the actual value which that instrument has. The present value is less than the future value will be, when the products are complete and become "relative to their users" present. This agio on present goods or discount on future goods, being dependent on mental estimates of future versus present, does not depend on the cost of production of the capital, and does not leave any room for surplus value to be produced by the capital as it is consumed in giving birth to products.

The other view of value readily finds a place for productivity of capital. The value of products being conceived as dependent on their cost of production, the effectiveness of effort directed towards their production by different methods is compared. If a process involving the preliminary formation of capital, to be subsequently used in producing the required commodity, be productive of a greater quantity, and a greater value, of the commodity than equal effort applied otherwise without the intermediate formation of capital would have produced, the extra quantity, or value, of product is attributed to the capitalistic process. On such a basis the idea already mentioned, of

such writers as M. Leroy-Beaulieu, in regard to productivity of capital, rests.

The closer analysis of ideas on the part of representatives of both schools of thought, in fact, attributes the productivity, not to the capital, but to the different processes of production. The more direct process of production is less effective (at any rate in general, and up to a certain point) than the less direct process. The one school thinks of the use of a greater amount of capital, the other, striving to penetrate to the foundation of things, discusses the more prolonged production process, and asserts an increase of productivity with the prolongation of the process. This idea is, doubtless, in general correct, but not of necessity, for invention may, as has been suggested (e.g. by Prof. Taussig), take the direction of pointing out ways of abbreviating productive processes while rendering them more productive; that is to say, not merely showing how productive processes of the old duration may be made more productive, but giving a maximum productivity for a process of shorter duration than the former most productive process. This shorter process may require a larger proportionate value of capital in the intermediate stages than the displaced processes, in spite of its whole duration being shortened.

So long as the leading conception in thinking of value is its measure by "cost of production,' there is no difficulty about the idea "productivity of capital." But there is something like a negation of any possible meaning to it when value is conceived of as something determined wholly by utility, and when the comparison of present with future utilities is effected without reference to the production-costs of the sources of the one and the other. There is no room for a surplus of value to be produced by the capital, unless in that idea we comprise the gradual accretion of value as future ripens into present utility. We may go further, and say that, admitting that values tend to be proportionate to costs of production, this is effected by so distributing effort, in relation to utility aimed at, that equal effort realises equal utility in every direction. The value arises out of the utility of the resulting commodity, though it may preserve proportionality to the productive effort. From this point of view, the existence of a state of things such as that contemplated by M. Leroy-Beaulieu might perhaps be viewed as an indication of a misdirection of effort, since the realisation of greater value from the same expenditure of labour-time in one process than in another shows a want of balance between different processes, an absence of that equilibrium between the various phases of industry contemplated in most inquiries, where statical conditions are supposed achieved, or the statical condition which would equilibrate existing forces is sought. In fact, in a state of equilibrium,

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of new methods of adapting natural powers to the supply of utilities to mankind.

In

[On this subject special prominence may be given to Dr. von Böhm-Bawerk's works translated by Professor W. SMART, under the titles Capital and Interest and The Positive Theory of Capital. The former contains criticism of other writers, the latter the development of his own views. addition, Leroy-Beaulieu's Essai sur la Répartition des Richesses, and some chapters of his Traité théorique et pratique de l'Économie Politique should be consulted, and the corresponding parts of the general treatises of numerous writers, particularly J. B. SAY and MALTHUS. More or less on the subject is contained in almost every elaborate general treatise on political economy.]

A. W. F.

PRODUIT NET. The PHYSIOCRATS (q.v.), to whom we owe the distinction between gross and net national income, applied it in accordance with their cardinal doctrine that all wealth is derived from the land. Thus QUESNAY uses the term produit net as signifying the surplus of the raw produce of the earth left after defraying the cost of its production. He reasoned further that since natural agents are the sole source of wealth, and since only one class in the state-the class of agriculturists engaged in obtaining raw produce-pays rent for the use of natural agents, therefore the produit net is represented by this rent, which serves for the support of Quesnay's second or proprietary class, and the payment of his third or unproductive class of merchants, manufacturers, public officials, etc. On this theory it follows that the entire expenses of government are ultimately defrayed out of the rent received by the landlords; Quesnay was therefore consistent in proposing that all taxes should be repealed and replaced by an IMPÔT UNIQUE (q.v.) laid directly on the rent of the land (Quesnay, Tableau Econ., London, 1894; Physiocratie, 102 et seq.).

Quesnay's reasoning suffers partly from the inadequacy of the physiocratic conception of WEALTH (q.v., also PRODUCTIVE LABOUR), and partly from a misunderstanding of the origin and causes of RENT (q.v.). As M'CULLOCH shows (Introduction to Smith's Wealth of Nations, Edinburgh, 1850, p. xli.; note, p. 305; supplementary note on rent, p. 444), the payment of rent is not a necessary condition of agricultural labour, but arises only in an advanced state of society as "a consequence of the decreasing fertility of the soil, or of our being obliged to resort to inferior lands to obtain supplies of food for our increasing population." In any case, Quesnay was wrong in identifying rent with excess of price over cost of production (Malthus, Principles of Pol. Econ., London, 1836, ch. iii. § 1).

[Smith (Wealth of Nations, bk. ii. chs. i. v.) and Lauderdale (Inquiry into the Nature and Origin

of Public Wealth, Edinburgh, 1804, pp. 122 et seq.) attempt to avoid the consequences of Quesnay's theory by classifying kinds of labour according as they increase not the revenu net but the revenu brut. But this does not touch Quesnay's real See Roscher, System der Volkswirthschaft, Stuttgart, 1880, vol. i. § 147.-Sismondi, Pol. Econ., London, 1847 (Eng. trans.), p. 224, "On the National Economy, or the Income of the Community."]

error.

E. R. F.

Reference may also be made here to recent support given to the practical issue of the produit net doctrine, though on somewhat different grounds. Henry GEORGE, through

the study of the Ricardian theory of rent, and experiences of California and the mushroom rapidity of growth of great American cities, was led to depreciate the contribution of individual owners to the value of land; he considered the land in the main as directly God-given, and increased in utility by the progress of the community in wealth and numbers. Hence he was further led to consider the absorption of its increased values by individuals fundamentally unjust, and a great cause of modern poverty. Recognising, however, certain advantages in private ownership, he did not propose to abolish it, but preferred to secure for the community the rents under the form of a "tax" on land. This tax he persuaded himself would suffice to bear the whole burden of the expenses of the state. From a certain vigour of style and a directness of attention to the contrast between poverty and affluence which modern civilisation has not removed, his writings gained a hearing in England, while in the United States of America he was hailed as the leader of a considerable party. In 1892 he was run as a candidate for the presidency, and in 1897 he was actually engaged in the contest for the first mayoralty of Greater New York when he died, Oct. 1897, within three or four days of the election. [H. George, Progress and Poverty, 1879; Social Problems.]

A. C.

PROFICUUM. See FARM, OF THE COUNTIES; INCREMENTUM; PIPE ROLLS.

PROFIT, originally a vague word signifying any kind of gain to obtain which some expense or risk must be incurred, has had various narrower significations attributed to it by the definitions of economists.

Adam SMITH, when classifying the national income under the three heads of wages of labour, profits of stock, and rent of land, says that wages are "confounded with profit" when the term " profits" is applied to the whole of the gains of a working farmer or of an independent artisan. A part of these gains, he explains, is wages due to the farmer as labourer or overseer, and to the independent artisan as journeyman. Though he does not lay down any rule on the subject, it may be gathered from his refutation of the proposition that profits "are only a different name for the wages of a particular

sort of labour," that he would decide how much of the gains of any particular capitalist is true profit by means of a comparison of the total with the amount earned by noncapitalists by performing similar labour (W. of N., bk. i. ch. vi.). RICARDO, James MILL, and MALTHUS, in his Political Economy, did not subject the idea of profits to analysis. But Malthus in his Definitions (1827) divides "the gross profits of capital independent of monopoly" into (1) "net profits" or "interest," and (2) the profits of industry, skill, and enterprise" (Definitions 34 and 35). M'CULLOCH, in the 2nd ed. of his Principles, makes the same division of " gross profits" into (1) net profits or interest, and (2) "wages or remuneration of the capitalist for his skill and trouble in superintending" the employment of his capital, and "compensation for such risks as it might not be possible to provide against by an insurance" (p. 506). J. S. MILL (Unsettled Questions, pp. 107-109, and Principles, bk. ii. ch. xv. § 1) treats profits as including the whole of the gains of the capitalist, whether due to the mere possession of capital, or to that and the performance of labour and the undergoing of risk. FAWCETT (Manual, bk. ii. ch. v.), | JEVONS (Primer, p. 52), MARSHALL (Principles of Economics, 15th ed. vol. i. bk. ii. ch. iv.) adopt the same course. Some writers, however, e.g. ROGERS (Manual, ch. xi.), B. PRICE (Practical Political Economy, ch. v.), C. L. SHADWELL (System, p. 158), follow Adam Smith's plan of regarding as profits proper only that portion of the capitalist's gain which he may be supposed able to obtain without personal labour and if fully insured against risk, while F. A. WALKER, on the other hand, desires to apply the term "profits" only to the other portion of the entrepreneur's gain, namely, that which is over after deducting interest on all the capital he employs, whether it belongs to himself or to another person (Political Economy, 1885, p. 247). In practical life the term "profits" is used in all three senses with almost equal frequency. It would be applied without hesitation (1) to the total gain of an individual capitalist employing none but his own capital, and personally performing all necessary labour of management (Mill's profits), (2) to the gains of a JOINT-STOCK COMPANY or private firm in the case of which all labour of management was paid for by fixed salaries (Adam Smith's true profit), and (3) to the net gain of an entrepreneur employing no capital of his own (Walker's profit).

The earlier 19th century economists, believing that profits in the larger sense were to be regarded as a residue left to employers after payment of rent and wages, assumed that both elements rose and fell together, and in consequence of the same causes. The assumption is unfounded, and it is necessary to consider the two elements separately. As regards the in

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terest element, the kernel of the modern theory is as follows: An isolated individual will often find it advantageous to spend a certain portion of his time in increasing his stock of useful things by the addition of fresh instruments or other objects the enjoyment of which is not immediate but spread over a length of time. The time may be short, as in the case of a stock of grain to last till the next harvest; of moderate length, as in the case of a spade; or interminable, as in the case of the diversion of a stream into a new channel. In deciding what work of this kind he will undertake, the isolated individual will be guided by the relative "profitableness" of the different kinds of work open to him. The "profit" will be reckoned by the amount of future annual labour the work will save him, or, which comes to the same thing, the amount of additional annual income it will enable him to obtain without increasing his annual labour. He will not, for example, first divert stream B at the cost of ten days' labour if that will save him one day's labour per annum ever after, and he knows that to expend ten days' labour in diverting stream A would save him two days' labour per annum ever after. But if he is able to go on accumulating, and knows of no better investment, he may divert stream B after he has diverted stream A.—The rate of interest he obtains would then fall from twenty to ten per cent per annum.—The introduction of other individuals practising exchange of commodities and services does not alter the essential features of the process. The isolated individual, in adding to his stock, selects the most profitable investments known to him first, and so, on the whole, does a number of indi viduals holding private property and practising exchange. The only important difference lies in the fact that in the latter case the investment and the profit are both reckoned by their value in money, instead of directly by the amount of labour expended and the amount of labour periodically saved, or amount of utility periodically gained. Consequently, in the highly organised modern community as well as in the case of the isolated individual, accumulation tends to cause a fall in the rate of interest, and if there were no change in men's knowledge of profitable investments, the rate could only be maintained or increased in face of accumulation by an increase of population proportionate to or greater than the increase of accumulated useful things. But men's knowledge of profitable investments does not remain the same. Inventions are continually being made which either reveal new profitable investments unknown before, or reveal direct methods of production which enable men to dispense with the additions to the accumulated stock which would otherwise have been profitable. Invention thus sometimes tends to raise the rate of interest, and sometimes, but probably