Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

Net Rent of Artificial Instruments Smaller than Gross Rent.—It is not safe, on the other hand, for the owner of buildings, tools, or live stock to take for his own consumption all that these produce. If he were to use up their gross produce as he gets it, he would find, in due time, that a considerable part of his property had vanished. Such instruments wear out and become worthless, and if no part of what they produce is set aside as a sinking fund with which to purchase other instruments to take their places, one whole genus of capital must go altogether out of existence.

Artificial Instruments Self-replacing.—What actually happens is that these instruments create enough wealth to pay for their own successors, and that, too, besides paying a net return, which, regarded in one way, is interest. If you compute the whole product of one of these instruments by the Ricardian formula which we have examined, the amount of it will be whatever the instrument, during its entire career, adds to the product of the labor and of the capital that are used in connection with it; and that includes the fund for renewal that has just been described, the amount, namely, which the owners must set aside for repairing the instrument and finally purchasing another. As the instrument itself provides this sinking fund, it may be said to create, in an indirect way, its own successor. The ship earns, over and above the net income which is interest on its cost, enough to keep itself seaworthy so long as it sails and, in the end, to build another ship. The locomotive, the furnace, the loom, the sewing machine, the printing press, etc., all pay for and thus indirectly produce their own successors.

The Net Rent of a Permanent Series of Similar Instruments.—The first charge on the product of any instrument of this kind is the amount necessary for replenishing the waste of it and for providing a successor when this original instrument shall have been wholly worn out. In like manner, the first charge on the successor is providing a similar fund, and so on indefinitely. A part of the productive power of every one in an endless series of similar instruments is devoted to this type of reproduction. The series maintains itself and yields an income besides; and that remainder of its gross rent which is left after waste of tissue is repaired is available as a net income for the owner. This net remainder constitutes an interest on the owner's capital. He possesses a permanent fund of productive wealth embodied in the endless series of these perishable instruments, and the series taken as a self-perpetuating whole yields nothing but this interest. Each instrument, separately considered, yields interest and a sinking fund; but the sinking fund is not available as an income, since it must take shape as another instrument which serves to keep the series intact. What the first instrument creates in addition to the sinking fund is its contribution to interest, and what each instrument creates above what is required for virtual self-perpetuation is also interest.

Interest and Net Rent Identical.—We may therefore reduce interest to the form of a net rent by calculating the gross rent afforded by each instrument in such a series and by ascertaining how much of this merely repairs waste and how much is true income. As interest is usually expressed in the form of a percentage, we may reduce the net rent to this form by comparing it with the cost of the first instrument, which is the amount originally invested. The series of instruments will yield a net return every year. We can compute the gross return of each instrument according to the Ricardian formula for measuring the product of the land. It will diminish from year to year and will ultimately vanish. We can add the several annual gross earnings of the instrument during its economic lifetime in the form of an absolute sum, which is the total rent of the instrument. From this we can deduct the cost of replacing this worn-out capital good, and the remainder will be the net rent of the instrument. We can, in a like way, get the net rent of all the following instruments in the series for a long period, add these net rents together, and get the true net earnings of the series for the time covered by the calculation. If this chances to be ten years we may compare a tenth of this total, or the earnings of the series for one average year, with the cost of the first instrument,—which is the capitalist's original investment,—and we shall thus get the fraction which represents the annual rate of interest on that investment. Perhaps in an average year the series has earned, above what is required to repair waste, five hundredths of what the first instrument cost. That is, then, the rate of interest that the series as a whole, or the permanent capital, is yielding. The whole procession of instruments in which permanent capital is invested creates every year this fraction of its own value, over and above the sum that is needed to offset the wear and tear of an average year's use.[2]

General Interest as Rent.—If you compute the net income of all tools, machines, and other like things in the world, add the amounts, and get the grand total of them all, you have the entire income from this part of the capital of the world in the form of net rent. If then you compute the value of all this class of instruments and see how large a part of this value the net rent is, you translate this total rent into the form of interest, and therefore net rent and interest are the same income regarded in two different ways.[3]

Stocks of Made Instruments graded in Quality as is Land.—It is necessary to notice the fact that the permanent series of tools, buildings, and other active capital goods shows forever the same gradations of quality that are found in the case of land. There are always to be found some instruments which are producing a large amount—that is, they are adding a large amount to the product of the labor and the further capital that are combined with them in production. A given amount of labor and capital creates much more wealth when working with a machine of the highest class than it would if distributed in marginal positions; and this is equivalent to saying that such an instrument is itself highly productive. Other instruments are to be found which are creating less, and there is never wanting a grade of no-rent instruments which are adding nothing to the marginal product of the other agents. It would be as well for the labor that used them if it should drop them and add itself to the force which is working with good instruments. Any one manufactured instrument begins its career as a maximum-rent instrument and ends it as a no-rent one. The ship is at its best when it starts on its first voyage, and the mill is at its best in the first year of its running. Each instrument goes gradually downward in the scale till it reaches a stage in which it really produces nothing, since it adds nothing to what would be produced without it. The permanent series of instruments never thus deteriorates. All the depreciation of particular things is made good by the repairing and the replenishing which go on. In the series as a whole there are forever present grade number one, grade number two, grade number three, etc., exactly as in the case of land. If we wish, we can reckon the income that is to be gotten from each part of the series according to the old-time formula that is familiarly used in the case of land, "What labor and capital create by the use of this piece of ground in excess of what they would create if they were applied to the poorest land in use." For a grade of land read a grade of the self-perpetuating series of artificial instruments, and it will appear that each grade above the poorest yields, with the labor and capital that are combined with it, a surplus above what this labor and this capital could create if they were combined with the poorest grade in the permanent series.

Different Modes of Destroying and Replenishing Stocks of Capital Goods of the Two General Classes.—The process of keeping up a stock of tools of trade is unlike the process of keeping intact a stock of materials and unfinished goods, because the modes in which the two kinds of capital goods deteriorate and perish are unlike.

In the case of the raw materials that gradually ripen into articles for consumption and which we have called passive capital goods, the waste of tissues that takes place is quite unlike that which takes place in the case of active capital goods, the tools and implements that are used in the process. The raw material acquires value through the whole process, and in the end it gives itself, with all its acquired value, into the hands of the consumer. In a static state such goods embody the whole income of society, including the products of all labor and of all capital.

A´´´
A´´
A´
A

The series of A's represents the process of creating consumers' goods from the rawest material. The A´´´ as taken away for consumption represents, as it were, the wasting tissue of passive capital goods; and it contains in itself the wages of all the labor in this series of subgroups, the interest on all the capital there used, and, in addition to these, the sinking fund that is necessary in order to keep the active capital intact. Some of the articles of the kind A´´´ will have to be given over to the men who keep the tools, buildings, etc., in repair and replace them when they are worn out. The whole force of the industry of this group expends itself simply in making good the loss that the withdrawal of the A´´´ for use occasions. It does, in short, nothing but replace the perpetually wasting tissue of the A's. All industry, except that of the makers of active instruments, may be considered in the light of an operation, the aim of which is to keep the stock of passive capital goods intact, or, what is the same thing, to keep the fund of circulating capital undiminished. Whoever puts anything into this fund enables it to overflow and to furnish an income without suffering any diminution. The sole purpose of such capital is to overflow, that is, to suffer, at one and the same time, a loss and a replenishment which neutralizes the loss. It exists for nothing else except to ripen into consumers' wealth. Nevertheless, though the ripened A's are perpetually consumed, the series of A's is abiding capital, is entitled to its share of interest, and is certain to get it. A part of the perpetual flow of A´´´'s is this interest. As the whole income of the society consists in A´´´'s, a certain number of the A´´´'s that are withdrawn for consumption go to capitalists as interest on the permanent fund which is kept in existence in the form of A, A´, A´´, and A´´´. A certain other part of the outflow of A´´´'s goes also to capitalists as interest on that other permanent fund which is maintained in the form of tools, machines, and buildings, such as must everywhere be used in the series. A third part of the flow of A´´´'s is wages of labor in this group; and a final portion is what we have called the sinking fund, the amount that is given over as an income to the producers in another group, not here represented, who keep the stock of buildings, tools, etc., intact. These four withdrawals of income constitute the process by which the stock of passive goods is depleted, and the grand resultant of all industry is to atone for that depletion.