What it includes.
Now the factor which has enabled production to become indirect and long-spread-out is capital. Capital consists of all the intermediate things which men use in producing economic goods. It includes buildings, materials, machinery, and the money which pays the wages of the workers. The use of capital saves labor by enabling a given amount of it to achieve vastly better results than would be the case if capital did not exist. Capital is really stored-up labor in the form of economic goods which have been produced but not consumed. In other words it is the result of saving. If everything that the world produces were at once consumed, there would be no capital.
How the rate of interest is determined.
Interest on Capital.—Interest is the return paid to the owner of capital for its part in production. It is his recompense for saving his economic goods instead of consuming them. Productive capital is frequently in the form of material things but its value is reckoned in terms of money and a certain per cent per annum is paid on this value in the form of interest. Were it not so, there would be no strong inducement for men to save, and capital would not be forthcoming. The rate of interest depends, in a general way, upon the interaction of demand and supply. If the demand for capital exceeds the supply, the rate of interest will ordinarily go up, and vice-versa. But this does not always take place because capital is sometimes obtained at a fixed rate for a long period, and this rate, whatever it is, remains the same for the duration of such period.
Why organization is essential.
Organization and Management as a Factor in Production.—When labor and capital are brought into play upon natural resources the production of economic goods is the outcome. But these three factors are in separate hands and have to be brought into co-operation. Owners of lands, mines, and forests control the natural resources; another class possesses the capital; a third is in a position to furnish the labor. Organization brings all three into joint action for the production of wealth.
The forms of organization.
This organization may take any one of several forms. The simplest form of organization is represented by the individual employer, the man who borrows capital (or provides it from his own savings), purchases the raw materials, and hires labor to be applied to it. He is an organizer of the productive process. This system of single employers was nearly universal in the earlier stages of industry and trade. Next comes the partnership. Two or more men assume the task of bringing natural resources, capital, and labor together. The partners divide the work and jointly assume all responsibilities of loss. Finally, and most common in large-scale production nowadays, there is the joint stock company or business corporation in which many persons participate. Each contributes to the organization and takes a proportionate share of the risk.[[14]] The nature and work of these corporations are explained in a later chapter.
