Labour and the Popular Welfare

by W. H. Mallock

◆2 Interest now forms but a small part of the income of the nation,

◆¹ In days preceding the rise of the modern industrial system, the average rate of interest was as high as ten per cent. As the modern system developed itself, as Ability more and more was diverted from war, and concentrated on commerce and industry, and produced by the use of Capital a larger and more certain product, ◆² the price it paid for the use of Capital fell, till by the middle of this century it was not more than five per cent. During the past forty years it has continued to sink still further, and can hardly be said now to average much more than three.

◆1 In spite of appearances to the contrary;

◆¹ This fact is sufficiently well known to investors; but there are other facts known equally well which tend to confuse popular thought on the subject, and which accordingly, in a practical work like this, it is very necessary to place in their true light. For, in spite of what has been said of the fall in the rate of interest from ten to six, and to five, and from five to three per cent, it is notorious that companies, when successful, often pay to-day dividends of from ten to twenty per cent, or even more; and founders’ shares in companies are constantly much sought after, which are merely shares in such profits as result over and above a return of at least ten per cent on the capital.

◆1 As much of what is vulgarly considered interest is something quite different.

But the explanation of this apparent contradiction is simple. Large profits must not be confounded with high interest. ◆¹ Large profits are a mixture of three things, as was pointed out by Mill, though he did not name two of them happily. He said that profits consisted of wages of superintendence, compensation for risk, and interest on Capital. If, instead of wages of superintendence, we say the product of Ability, and instead of compensation for risk, we say the reward of sagacity, which is itself a form of Ability, we shall have an accurate statement of the case. A large amount of the Capital in the kingdom is managed by the men who own it; and when they manage it successfully, the returns are large. Sometimes a man with a Capital of a hundred thousand pounds will make as much as fifteen thousand pounds a year; but that does not mean that his Capital yields fifteen per cent of interest. Let such a man be left another hundred thousand pounds, which he determines not to put into his own business, but invests in some security held to be absolutely safe, and he will find that interest on Capital means not more than three and a half per cent. If he is determined to get a large return on his Capital, and if he does this by investing it in some new and speculative enterprise, this result, unless it be the mere good luck of a gambler, is mainly the result of his own knowledge and judgment, as the following facts clearly enough show.

Between the years 1862 and 1885 there were registered in the United Kingdom about twenty-five thousand joint stock companies, with an aggregate Capital of about two thousand nine hundred million pounds. Of these companies, by the year 1885, more than fifteen thousand had failed, and less than ten thousand were still existing. During the following four years the proportion of failures was smaller; but a return published in 1889 shows that of all the companies formed during the past twenty-seven years, considerably more than half had been wound up judicially. Therefore a man who secures a large return on money invested in a business not under his own control, does so by an exercise of sagacity not only beneficial to himself, but in a still higher degree beneficial to the country generally; for he has helped to direct human exertion into a profitable and useful channel, whereas those who are less sagacious do but help it to waste itself.[49]

Of large returns on Capital, then, only a part is interest; the larger part being merely another name for what we have shown to be the actual creation of Ability—either the Ability with which the Capital has been employed in directing Labour, or the Ability with which some new method of directing Labour has been selected. There is accordingly no contradiction in the two statements that Capital may often bring more than fifteen per cent to the original investors; and yet that interest on Capital in the present day is not more than three or three and a half per cent. Here is the explanation of shares rising in value. A man who at the starting of a business takes a hundred one pound shares in it, and, when it is well established, gets twenty pounds a year as a dividend, will be able to sell his shares for something like six hundred pounds; which means that little more than three per cent is the interest which will be received by the purchaser.

◆1 Interest, then, has decreased, and the whole sum thus saved has gone to the labouring classes.

◆¹ Interest, then, or the sum which those who use Capital pay to those who own it, having decreased, as we have seen it has done, with the development of our industrial system, it remains to show the reader where the sum thus saved has gone. It must have gone to one or other of two classes of people: to the men of Ability, or to the labourers. If it had gone to the former,—that is, to the employers of Labour,—their gains now would be greater, in proportion to the Capital employed by them, than they were fifty years ago; but if their gains have not become greater, then the sum in question must obviously have found its way to the labourers. And that such is the case will be made sufficiently evident by the fact that Mr. Giffen has demonstrated in the most conclusive way that, if rent and the interest taken by the classes that pay income-tax had increased as fast as the sum actually taken by Labour, the sum assessed to income-tax would be four hundred million pounds greater than it is, and the sum taken by Labour four hundred million pounds less.[50] In this case the wealthier classes would be now taking one thousand and sixty million pounds, instead of the six hundred million pounds which they actually do take;[51] and the labouring classes, instead of taking, as they do, six hundred and sixty million pounds, or, as Mr. Giffen maintains, more, would be taking only two hundred and sixty million pounds.[52] In fact, as Mr. Giffen declares, “It would not be far short of the mark to say that the whole of the great improvement of the last fifty years has gone to the masses.” And the accuracy of this statement is demonstrated in a very striking way by the fact that had the whole improvement, according to the contrary hypothesis, gone not to the labourers, but to the classes that pay income-tax, the remainder, namely, two hundred and sixty million pounds, would correspond, almost exactly, allowing for the increase of their numbers, with what the labouring classes received at the close of the last century.