The Value of Capital and the Interest on Capital (continued). III-- The Law of the Uniform Calculation of the Interest Rate A capital which, in a one year's production period, transforms itself into a gross return of ?05, will be valued at ?00 if the general rate of interest be 5%: the residue ? is net return. If the gross return should rise suddenly and greatly, say, e.g., to ?26, -- the general rate of interest remaining unaltered -- it appears at first sight that the rise must affect the net return, and cause it to be calculated at ?6 instead of at ? as formerly. But, as a matter of fact, is the return so calculated? It is in one particular case; that, namely, where the rise is regarded as a solitary instance. But if it is regarded as permanent the calculation will be different. The owner certainly reckons the entire increase of ?6 as gain, but he distributes it by putting ?0 to capital and ? to net return. From this time onward he will reckon his capital, and consequently his consumption of capital, at ?20, and his net return at ?; so that he does not assume an increment of 26%, but only of 5%, corresponding to the general rate of interest.(1*) In the same way, should the gross return of a capital sink permanently, while the rate of interest remains unaltered, a portion of the loss will be written off the capital value, in such a manner that the relation between capital value and net return shall again correspond to the general rate of interest.
In this way it comes about that, where transferences from production to production are no longer permissible, the individual percentages of increment on individual capitals are, by calculation, regulated according to the general rate of interest.
The rate of interest which obtains in the particular productive group, or in the particular market to which the capital in question belongs, is the rate that decides.
The meaning of this act of calculation is easy to understand.
A capital yielding 26% interest and one yielding 5%, are not equivalent to one another, although both may be expressed in the same figures. Only equal capitals bearing equal interest are equivalent. Capitals, then, can be calculated off-hand -- i.e.
without consideration to the interest they bear -- only where the rate of interest is the same. That is the reason why, when the rate of interest cannot be made equal, it is at least calculated as such, by means of shifting the differences to the capital value, and giving them expression there.
A 3% capital and a 6% capital of ?00 are not equivalent to one another; they are put into terms fit for comparison by calculating the 3% capital at 6%, and so reducing the capital to ?0, or by calculating the 6% capital at 3% and raising capital value to ?00.
As a means of simplifying calculation, it might be exceedingly desirable that the rate of interest should be the same in all markets, and in all productive groups. The rate, however, is not the same, and the fact must be reckoned with. If the rate of interest on bonds amount to 4% and the bank rate to 3%, it is a consequence of the fact that the two loan markets are separated from one another, and that demand and supply in the one do not approximate to demand and supply in the other, or, at all events, approximate only in trifling degree. This want of touch, however, which renders impossible the equalisation of rates of interest, also renders it less necessary; it is only when capital is transferred from one market to the other that the difference in rates of interest has any practical importance for the valuation of capital. It is different where one and the same market is concerned. Here capitals are continually valued against each other, and here, therefore, differences in percentage of increment could not be put up with. They are overcome either by regulation of production, or, where that is not practicable, by calculation. In the communistic state, where all capitals would be under a uniform administration, it would be an obvious expedient of calculation to regulate all individual percentages of increment according to the prevailing rate of interest.
We now proceed to further applications of the fundamental proposition that the rate of interest, when possible, should be uniformly calculated.
NOTES:
1. In the above example I assume (1) circulating capital, and (2)circulating capital whose value is not depressed to a lower level by cheaper costs of production; -- say, a scarce raw material.
Suppose there is an increased demand for articles made from amber, while amber cannot be obtained in greater quantities; it will rise in value. Those undertakings which work with amber certainly obtain thereby a rise in their gross returns; but there is, on the other hand, a similar rise in the amount deducted for consumption of capital, and this must be taken into consideration in their estimate of gain. In the long run there remains a higher net return, but it is only relatively to the increased outlay of capital.
A much more complicate calculation has to be made as regards fixed capital, as also as regards capital whose value is influenced by the costs of production. I must leave the reader to think out for himself -- in the light of the principles now to be discussed -- the corresponding modifications in the valuation of fixed capital and in the influence of costs.
