CHAPTER III. On the profits of Capital.

Profit is the reward of Capital for the service it renders in the Production of Wealth. Capital was defined, in a previous Section, as that part of wealth which is set aside to assist future production. Capital is consequently the result of saving; but, in order to fulfil its functions, it must be either wholly or partially consumed. It is now evident that the owners of wealth will not consent to its being appropriated to assist future production, unless they are rewarded by a share of the produce. This share is termed profits. It is thought by some, that it is an injustice that capital should receive any reward for its part in the production of wealth. Capitalists are by such persons denounced as selfish usurers, and the interest which their wealth returns to them is regarded as if it had been stolen from the public. M. Bastiat combated these notions (which at one time were very prevalent in France) in a series of little tracts, in which by a number of examples he shewed the real nature of the profits of capital, "proving that it is lawful, and explaining why it should be perpetual." The following is an abridgement of one of his examples. "There was once in a village a poor carpenter, who worked hard from morning to night. One day James thought to himself, 'With my hatchet, saw, and hammer, I can only make coarse furniture, and can only get the pay for such. If I had a plane I should please my customers more, and they would pay me more. Yes, I am resolved, I will make myself a plane.' At the end of ten days, James had in his possession an admirable plane, which he valued all the more for having made it himself. Whilst he was reckoning all the profits which he expected to derive from the use of it, he was interrupted by William, a carpenter in the neighbouring village. William, having admired the plane, was struck with the advantages which might be gained from it. He said to James:

'You must do me a service; lend me the plane for a year.' As might be expected James cried out, 'How can you

think of such a thing, William? Well, if I do you this service, what will you do for me in return?'

W. Nothing. Don't you know that a loan ought to be gratuitous?

7. I know nothing of the sort; but I do know that if I were to lend you my plane for a year, it would be giving it to you. To tell you the truth, that was not what I made it for.

W. Very well, then; I ask you to do me a service; what service do you ask me in return?

7. First, then, in a year the plane will be done for. You must therefore give me another exactly like it.

W. That is perfectly just. I submit to these conditions. I think you must be satisfied with this and can require nothing further.

7. I think otherwise. I made the plane for myself and not for you. I expected to gain some advantage from it. I have made the plane for the purpose of improving my work and my condition; if you merely return it to me in a

year, it is you who will gain the profit of it during the whole

of that time. I am not bound to do you such a service without receiving anything in return. Therefore, if you wish for my plane, besides the restoration already bargained for, you must give me a new plank as a compensation for the advantages of which I shall be deprived.

These terms were agreed to, but the singular part of it is that at the end of the year, when the plane came into James's possession, he lent it again; recovered it, and lent it a third and fourth time. It has passed into the hands of his son, who still lends it. Let us examine this little story. The plane is the symbol of all capital, and the plank is the symbol of all interest. If therefore the yielding of the plank by the borrower to the lender is a natural and equitable remuneration, we may conclude that it is natural and equitable that capital should produce interest. We may also conclude that interest is not injurious to the borrower. James and William are perfectly free as regards the transaction to which the plane gave rise. The fact of William consenting to borrow proves that he con

siders it an advantage to himself. He borrows, because he gains by borrowing."

The Profits of Capital are composed of three elements. The interest on capital, namely the sum which a borrower gives to the lender for the consideration of a loan, forms only a part of the Profits of Capital. The Profits of Capital are composed of three elements: interest on capital, compensation for risk, and wages of superintendence. The interest on capital, at any particular time and in any country, can be ascertained by the interest yielded, at the same time and in the same country, by those securities which involve no risk and no labour of superintendence. In this country, Government stock affords such a security. Those who invest money in the funds are with reason confident that they run no risk of losing it, and the possession of stock does not involve any labour. The owners of Government stock receive about 31 per cent. interest on their capital, and therefore 3 per cent. is the current rate of interest at the present time in this country. If more than this is now given in this country for a loan, it is because the lender has not complete confidence in the ability of the borrower to pay; and therefore compensation for risk increases the sum which is given for the loan. If the profits of capital were no greater than the interest on capital, no one would take the trouble or incur the risk of entering into business. If the employment of money in trade yielded only a profit of 3 per cent., merchants and shopkeepers would withdraw their capital from business and buy Government securities, The profits of capital are greatest in those pursuits in which the greatest risk is incurred and where the labour of superintendence is most costly; the variableness of these two elements produces great variations in the rate of profit in different trades. A butcher, for instance, realises larger profits than a draper because his labour of superintendence is more disagreeable, and he also incurs greater risk, for in thisclimate a thunderstorm or a sudden alteration from cool weather to intense heat is often sufficient to destroy his whole stock of meat.

In uncivilized countries, the insecurity of property causes

compensation for risk to form a very large proportion of the profits of capital. Speaking of the state of society in some parts of Asia, Mr Mill says, "Those who lend, under these wretched governments, do so at the utmost peril of never being paid. In most of the native states of India, the lowest terms on which any one will lend money, even to the government, are such that if the interest is paid only for a few years, and the principal not at all, the lender is tolerably well indemnified." It is notorious that a spendthrift who has run through all his own property, can raise money only by promising an enormously high rate of interest. The moneylenders exact from him 60 or 70 per cent. as interest, for they know that there is a very great chance that they will never be paid at all. If they are paid, their profits are sufficiently large to compensate them for their frequent losses. There was a case in the papers a short time since of a Cambridge undergraduate who borrowed money at the rate of 75 per cent. The father of the young man refused to pay the debt because his son was not of age when it was contracted, and the law upheld him in his refusal. But the money-lender can well afford occasionally to lose both principal and interest, because it appears that he is able to find a considerable number of young men foolish enough to accept loans from him on the exorbitant terms just quoted. The profits of the money-lender are increased not merely by his risk of loss, but by the dishonourable character of his business, which protects him from the competition of honest men, and from that of men who, whether they are honest or the reverse, desire the good opinion and esteem of their neighbours.

The Rate of Interest is the same in all trades in the same

country and at the same time. If compensation for risk and for dishonourable reputation, together with the wages of superintendence, are eliminated from profits, the interest on capital alone remaining, the amount of this interest will re main constant in all trades at the same time and in the same country. The interest on the capital of the farmer, the grocer, and the manufacturer inevitably tends to an equality, at the same time and in the same place; the

differences in the profits of these individuals are caused by the differences in the risk and reputation which they incur and in the wages which they receive for superintendence. It is not therefore true that profits in different trades tend to an equality; for the risk in some occupations is permanently greater than in others, and this risk must receive compensation; some trades also require more superintendence than others; and the wages paid for particular kinds of labour vary in the manner described in the previous chapter. There must therefore always be natural and permanent differences in the rate of profit in different employments. The interest on capital alone remains constant in various trades at the same time and in the same country.

An explanation of the causes which produce a decline in the Rate of Interest as Wealth and Population increase. An inquiry may now be made into the causes which produce a decline in the rate of interest, as wealth and population increase. This leads to a very interesting example of Ricardo's theory of Rent. The amount of the reward given to labour and capital must ultimately depend on their efficiency. That is to say, any circumstance which causes the same amount of labour and capital to produce more wealth must, if other things remain unchanged, produce a corresponding increase in wages and interest. On the other hand, any circumstance which causes a given quantity of labour and capital to produce less wealth diminishes the amount distributed as wages and interest. If while a man is consuming a sack of wheat he can produce a sack and a half, the reward for his labour and capital is at the rate of 50 per cent. But if he has to move away to less fertile land so that he only produces a sack and a quarter of wheat, while he consumes a sack, his wages and profits are reduced to 25 per cent. As the margin of cultivation descends, that is to say, as land of less and less fertility has to be cultivated to supply the needs of the population, wages and profits tend to decline, and rents to increase; because rent is the excess in productiveness of any particular land, over the worst land in cultivation that pays no rent. Ricardo's theory shews