XIX. The General Conditions of Equilibrium

This transition to a set of assumptions which are some what more closely related to real phenomena does not, however, mean that we shall undertake to explain the actual process on a competitive market. Stlll a study of equlli As was indicated in the introductory sec-brlum relationships tion, this study will in the main be confined to an analysis of equilibrium relationships. The transition from the study of equilibrium in a " simple" economy to the study of equilibrium in a competitive economy here means passing from the analysis of the plans of an individual to the analysis of the compatibility of the independent plans of a number of individuals. The question of how 247 248 Capitalistic Production under Competition PT. III and when such a state of competitive equilibrium will come about does not directly concern us here and will only be touched upon incidentally. But, as will be remembered, this does not mean that our discussion has to be confined to stationary conditions. In fact, this part of the book will deal largely with the readjustments of the economic system which would be necessary if an unforeseen change were to be met by the immediate establishment of a new position of equilibrium.

This will not exclude us from speaking in places, for illustrative purposes, of successive movements which will lead to an equilibrium position. This, however, will not be meant as an explanation of the actual causal process which in the real world may bring about a position of equilibrium. The successive approaches are rather to be conceived, like the tdtonnements in Walras' analysis or Edgeworth's construction of re-contracting, as success ive attempts of the individuals to find out what the equilibrium position is. We are, in other words, de liberately discussing changes which can be brought about only through the mechanism of money and competition, yet disregard for our present purposes the exact role these two factors play. The reason for this is that we are here really not interested in the process which brings about equilibrium but merely in the conditions of a state of equilibrium, and when we are considering positions other than equilibrium positions it is merely to show why they are not equilibrium positions. And the approach to equilibrium of which we shall occasionally speak is not meant as a description of a process but merely as a conceptual tool which leads us, as it were, as spectators from positions which are more removed from equilibrium to positions which are closer to it, and finally to the equilibrium position itself.!

1 The nature of the causal processes involved can be considered, in so far as this will be done at all in this volume, only after we have explicitly introduced money at the beginning of Part IV.

CH. XIX The General Cond1:tions of Equilibriwin 249 In discussing equilibrium in such a society we shall have to take account of the following new data. In the first place we shall have, instead of a single system of preferences, and particularly time preferences, h 1 h T e data 0 t e probas many independent and probably different lem: (1) Individual t f th d·ff . d· tastes sys ems 0 wants as ere are 1 erent In 1viduals. Each of these systems can be represented by an indifference map similar to that used in the preceding chapters to describe the attitude of the single dictator. In the present chapter, however, not much attention will be paid to these time preferences. At the beginning of this discussion we shall once again, and for the last time, make use of the assumption that everybody aims at a constant income stream. We shall postpone the explicit discussion of what happens when people aim at increasing or decreasing income streams.

In the second place, the resources available for the satisfaction of these wants will be unevenly distributed between the individuals. As a rule, we shall find that most individuals do not command all the (2) the distribution 01 resources which, with the technique actu-resources ally in use, are required to carry on the continuous pro duction even of a single commodity. Usually we shall find that the resources required for anyone process of production are divided between a number of persons. In most cases equipment belonging to different stages of one process of production will be in different hands. And some at least of the permanent resources whose services are required in the different stages, certainly human labour if no others, will be under the control of persons other than those who own the material equipment and direct and organise production. In consequence it will be necessary to exchange not only different final products but also intermediate products and the services of resources of all kinds.

It will be convenient to start by considering a society which has been working on these lines in the past, but to 250 Capitalistic Production under Competition PT. m consider it at a point of time without inquiring how the direction of production has been determined hitherto. We may assume that at the moment at which we begin to look at this society, considerable changes in the data have just occurred, so that a new equilibrium has to be found. We can then speak of the different purposes for which the various resources had been intended before the change occurred, without begging any of the questions which are raised by the determination of the new equilibrium. The most significant way of classifying the different resources in this connection is according to the date or dates when they can be made to yield a consumable ClasslftcatlonofavalI-product. Everybody, or nearly everybody, able resources based will, of course, normally be in command of on nearness of date when they can bring a some resources which can be made to serve return his needs in the immediate future. His own labour at least will as a rule fall in this category, even if no other of his resources do. But this does not mean either that this is the most profitable use tha,t can be made of these resources or even that it could enable the individual to produce enough to keep himself alive. In modern societies, where in consequence of the accumula tion of capital the growth of population has been stimu lated far beyond the figures which could be maintained without that capital, it will frequently be impossible for a single individual to produce with his unaided labour even enough to subsist on. And the other resources in the possession of many individuals will often not be capable of yielding consumables until a distant date, or if they are used for immediate consumption, will bring only a small fraction of what they would yield at that later date.

In consequence of the (vertical) division of labour by far the larger part of the resources most suitable to provide consumables for the immediate future will be under the control of a comparatively small section of the members of the society. Only a relatively small proporCH. XIX The General Oonditions of Equilibrium 251 tion of the society's resources will be in the form of actual consumers' goods, ready for immediate consumption; by far the greater part will consist of other resources which, either because they were originally intended to serve consumption at later dates, or because of the changed circumstances, are best suited to serve consumption in the more distant future. It becomes necessary here to give a more precise formulation of this distinction which was implicit in most of what has been said up to this point. There may on the one hand be input which can be used only S 18 I d pee c Iy an versain one particular "stage" of production Illllyofdinorenlkinda or only so as to give a product at a definite of Input and invariable interval after its investment. Such input we shall call completely specific input. Specificity in this extreme form will probably be of very rare occur rence, but it will evidently be possible to distinguish between lesser and greater degrees of specificity accord ing as the use of particular kinds of input is confined to a longer or shorter range of periods.

Most kinds of input will, however, be not specific, but more or less "versatile", 1 in the sense that they can be used in a great many if not in nearly all stages of production. But in. their case a further dis-Th I I I e wo respec s n tinction of degree is necessary, which is which specIHcity or h 1· d h h versatility varle. somew at more comp lcate t an t e one based on the absolute possibility or impossibility of using certain resources in particular stages. If we consider two kinds of input which can be used over the same range of " stages", they may still differ with regard to the change in the size of the products consequent upon a change in their investment period. If we start from a given dis position of the input, the necessity of shifting some part of one kind of input to another stage may involve a greater loss of product than would be the case with another 1 This term has been suggested by Mr. G. L. Shackle as a substitute for the clumsy" non-specific ".

252 Capitalistic Production under Competition PT. III kind of input, and in this sense the former would have to be regarded as less adaptable than the latter. This dis tinction is, however, very much more complicated than the former one, which was based on the absolute mobility or immobility of the different kinds of input. For the change in the product which is due to any such transfer will depend not only on the proportions in which the two kinds of input in question have already been distributed between the stages but also on the use that is made of all other input. The question resolves itself into the question of the elasticity of demand for the different kinds of input at the different stages, and the answer ultimately depends on, and can only be appropriately discussed in terms of, the complete productivity function of invest ment for all kinds of input and the elasticities of substitu tion which could be derived from it.

How the versatile kinds of input (which can be used to produce income either in the nearer or in the more distant future) will actually come to be used, will The factors deter-evidently depend on the relative prices ml~lng the use to which they will fetch in the different u~P~ which resources are -,.,. put .A.nd for any particular individual the relative magnitude of the return \vhich he can obtain will depend on the way in ,vhich all the other people intend to distribute their total resources between present and future uses. If all the others devoted the greater part of their resources to acquiring income for the immediate future, the product which he could obtain from his resources in the near future would become relatively more valuable and would induce him to choose this use, and vice versa. But the same is, of course, true of all the other people, so that it is impossible to treat this willing ness of people in the aggregate to divide their resources in certain proportions between the present and the future as a datum from which we can derive the way in which they will use the different individual resources.

The difficulty which arises here can be stated in slightly CR. XIX The General Condition8 of Equilibrium 253 different terms as follows. Whether in any individual case it will be more profitable to use given resources to produce income in the nearer or in the more distant future, will depend on the proportion in which Tbe danger of a clr the community in the aggregate decides to cular argumont distribute its total resources between use for the present and use for the future. But this proportion in which the total resources are distributed evidently will depend not only on the willingness of the different individuals to distribute their resources in particular ways, but also on the value of the resources in their possession. On this value of the resources in the possession of every person there will depend not only the way in which he will want to distribute them between present and future, but also the weight which attaches to his decision in making up the aggregate proportion for society. But this value depends in turn on the similar decisions of all others, and it seems therefore as if the whole argument were moving in a circle.

This apparent impasse can, however, be overcome if we focus attention on the peculiar key position held by the owners of resources which can be made to yield con sumers' goods in the immediate future, and Tb e koy position of if we begin by studying the effects which tbo own~rs of ready th ' d .. 'II h th 't' f eonsumers' gooda elf eClSlOns WI ave on e POSl IOn 0 all others, If everybody decided to consume himself all the consumable goods which he could possibly command during, say, the next month, and did not care what happened afterwards (e,g, because tl;te belief in some millennium made people expect the end of the world to come at the end of this month), then, clearly, all " resources" which could not be made to give a con sumable return before that date would be completely valueless and would not be used at all. And all those other resources which, in different circumstances, would have been invested for more than a month will now be used to produce the much smaller and in some cases 254 Capitalistic Production under. Competition !'T. III almost negligible amounts which they can produce within the month. If the society in question has previously used a great deal of capital, this will mean that by far the greater part of the consumers' goods which can be made available during the month will be in the command of a comparatively small section of the society, while the rest of the society have little more than what their bare hands can produce during that period.

What is to be regarded as the amount of ready con sumers' goods over which command is held at the time in question, largely depends of course on the period which The U command over we take as the basis of our distinction. If ready consumers' instead of a month we had taken a week goods" or a day as our period of reference, a still smaller part of the total resources could have been turned into consumers' goods during that period, and the greater part of the " supply of ready consumers' goods" w0ll:ld probably have been in the hands of a still smaller section of the community. As we shall see 1 later, there are several traditional concepts, such as those of circulating capital and the liquidity of capital, the exact meaning of which depends entirely on what we choose as our period of reference. For present purposes we ought, strictly speaking, to begin with the supply of consumers' goods which could be made available during the smallest con ceivable interval. But though this would be more exact, it would give the whole analysis a somewhat unrealistic complexion. It will therefore be better if we choose as ~)Ur starting point some definite period of reasonable length, and there is no reason why we should not take the month which we have already used as a representative period.

Apart from the purely hypothetical case referred to above, it is, of course, very improbable that those who have direct command over the ready supply of consumers' goods will ever want to consume all of it themselves. 1 cr. Chapter XXIII.

OK. XIX The General Oonditions of Equilibrium 255 For the effect of this would be that after the period in question had elapsed they would be reduced to exactly the same position as everybody else. This is It will be in the in80 because, while everybody else was en-terest of the owners of ready eon.umen' gaged in turning all that they had into goods to give up part consumers' goods, no other resources would of them be advanced nearer to consumption, since those who were in possession of the resources best adapted for use in those earlier stages would be compelled to strain - In order to secure all their energies to produce enough con-replacement of tbelr sumers' goods, with means ill suited to the stock purpose, in order merely to keep themselves alive. It will consequently be in the interest of those who command considerable quantities of ready consumers' goods 'to offer part of them to those who are willing to provide them, on the most favourable terms, with new capital goods to replace those which are used up.

On what principle will the owners of consumers' goods distribute that part of those goods which they decide not to consume themselves between the different types of capital goods in which they have the possi-Principles determln bility of investing ~ One might be inclined Ingeholeeofresources . (or which consumen' to assume that at first, and so long as only goods will be offered relatively small quantities of ready consumers' goods are available for investment, only capital goods that will bring a return in the comparatively near future will be demanded, e.g. that at first only resources which will bring a return during the month immediately succeeding the current one will be wanted, and that o~ly after all investments which will yield a return in the second month are actually taken up will any body be willing to invest in goods which will not yield a return until the third month, and so on.

This conclusion would, however, be erroneous. If the owners of the consumers' goods want to keep their income permanently above the level that would be possible if they were to consume their whole stock now 256 Capitalistic Production under Competition PT. III without making any provision for its replacement, they will have to plan for regular reinvestment of similar amounts during every future period. And if direct investment for a later date will yield a product that is larger than what could be obtained by reinvesting the equivalent of the product that is obtainable from the same input at an earlier date, it will be profitable for them to invest for the longer period from the start. Those who command ready consumers' goods will then use such part of them as they do not want to consume themselves in the immediate future, to engage such other Part 01" command input as will yield the relatively highest of ready consumers' t f t t t goods that will be per annum ra e 0 re urn on presen cos.

transferred What part of their consumers' goods they will be willing to invest in this form will partly depend on the return to be obtained. The cost of the investment on the other hand will depend on the return which the input to be invested for longer periods would have yielded in the immediate future. This means that at first, so long as only a relatively small proportion of the total of ready consumers' goods is invested, that input which would help to add to the return only by very little or which would help to add to it only at a very distant date, will fetch no price at all. All the cost that is then involved is the remuneration which has to be offered in order to induce input, which could also be used to produce con sumers' goods currently, to be applied instead to the provision of consumers' goods in the more distant future. It will therefore be the input which brings the lowest present return, compared with the return it might bring in the more distant future, that will be first withdrawn from current use and invested. It will be noticed that this will always mean a reduction of current output below the potential maximum.

If we assume that the people who have direct command over the greater part of the ready consumers' goods at first offer only a relatively small part of them to others, CH. XIX The General Conditions of Equilibrium 257 they will probably find that the amount of resources they can obtain in return is insufficient to replace those which they are using up. It will therefore fail to assure them of a supply of consumers' goods in the future Ellect of successive equal to that which they command in the transfers of increasIng parts of com present. And if they want to maintain mand over ready their available income at an even level they consumers' goods will have to increase the share of the consumers' goods in their possession which they cede to other members of the community. We may therefore proceed to consider the effects which follow if they gradually increase the share of their ready consumers' goods which they are willing to exchange against resources with a more distant return.

One effect will evidently be that the rate of return on the investments will fall as the amount invested increases. The first small quantity of consumers' goods available for investment would have been shared out Fall of rate of return among investments of different lengths but on investments all bringing the same maximum rate of return. A larger quantity would similarly be distributed among invest ments of different lengths, but all yielding a somewhat lower rate of return. B6hm-Bawerk has described this process by saying that investments. would have to be spread along contour lines corresponding to lower and lower rates of return as the amounts available for invest ment increased. 1 Closely connected with this is the effect on the prices (in terms of consumers' goods) of the various resources. At first the prices which the owners of the ready consumers' goods would have to pay to obtain Ch I I I anges n re at ve input for production for the more distant prices of dille rent I . d h I resources future would on y Just excee t e very ow returns which the kinds of input least suitable to the direct production of consumers' goods could obtain in that use. But as more and more consumers' goods are used to remunerate input whose services are going to I Cf. Positive Theory of Capital, p. 405.

IS 258 Capitalistic Production under Competition PT. III be invested, two things will happen. The alternative current returns of this input will increase and, in addi tion, competition between the owners of the consumers' goods will drive up the prices of the resources of lower present productivity to a figure corresponding to its actual return discounted at the lower rate of interest now ruling. And in all cases where the additional supply of consumers' goods is used, not to invest input which had not been invested at all previously, but to lengthen the investment period of input which, with a smaller supply of consumers' goods, would have been invested for some shorter period, it will be necessary to pay a price higher than the (discounted) return from the shorter investment period. Both the last two considerations apply both to resources which would have brought some return if used directly, and also to resources which would have been quite unusable, and valueless, if those in command of the ready consumers' goods had consumed all of those goods them selves. At first, indeed, such resources (which will be largely of the nonpermanent kind like machines) will always be put into operation when nothing more than the remuneration of the less specific co-operating input (i.e. the" prime cost" of using them) is covered. But as the demand for capital goods in general (or, what is the same thing, the share of the command over ready consumers' goods devoted to investment) increases, these resources will gradually gain value and will fetch a price (in terms of consumers' goods). As more and more present consumers' goods are offered in return for the expectation of future consumers' goods which the possession of such resources warrants, the price of these resources will go on rising.

All this means that the command over a considerable share of the supply of ready consumers' goods will in the first instance be transferred from those people who directly own them to those people who can offer means of ClI. XIX The General Conditions of Equilibri'u1n 259 procuring future consumers' goods on the lowest terms. I t is, however, not probable that this second group either will want to take out the whole of ,vhat is due to them in the form of present consumers' The sum of the potengoods. As their potential command over tial command over consumers' goods increases, similar con siderations to those which guided the first group will lead the members of the second group to invest, rather than consume, part ready consumers' goods of all indi viduals may be many times the total of ready consumers' goods in existence of the final output which they command. They will, so to speak, pass on to others part of the command over ready consumers' goods which they have received, in return for resources which will enable them to procure a similar comll1and in the future. As an effect of, and parallel with, the increasing demand for capital goods on the part of those who directly command the supply of ready consumers' goods, we shall therefore find that others, who have only a derived command over con sumers' goods, will throw the weight of a part of the in creasing value of their resources on to that side of the scales which favours a further increase in the demand for capital goods. That is to say, once the offer of ready consumers' goods in exchange for as yet inchoate con sumers' goods has given the latter a definite value, these in turn can be used to increase the aggregate demand for capital goods and so to transmit further the value con ferred upon them by the demand from the direct owners of the consumers' goods.

We must now consider more particularly the position of the owners of nonpermanent resources in the different stages of this process. We shall for the most part refer to those nonpermanent resources which Eflects on use and re consist of man-made equipment but the placement of existing , nonpermanent remain conclusions will apply equally well sources to wasting natural resources. The main point to be considered here is the distinction between the conditions which will merely make it profitable to use an existing 260 Capitalistic Production under Competition PT. III piece of equipment and the conditions which will make it possible and profitable to replace it, either by a similar or by some other kind of equipment. For the present we shall again confine ourselves to the" station ary" case and shall assume that every owner of such non permanent resources aims at obtaining from them, or with their help, a permanent income stream of constant volume. The cases where the different individuals de liberately aim at either an increasing or a decreasing in come stream will be taken up systematically in the next chapter.

The equipment existing in our community mayor may not have been designed to produce a constant income stream. But since we assume in any event that immedi ately prior to the moment when we begin to consider this community unforeseen changes have occurred in some material respect so as to upset the original plans, this is really not relevant to our problem. What is important is that equipment is in existence which is, or can be, adapted to certain kinds of processes, whereas the equipment required for other processes (which might require less initial expenditure if the community were starting from scratch) is not in existence. If we begin by considering the position of entre preneurs owning equipment which belongs to a very late stage of a particular process of production, we shall find that it will become profitable for them to Effects of existing i equipment on dlrec-operate the equip~ent as soon as the tion of reinvestment f 'd it d' amount 0 consumers goo s 0 ere In exchange for their product is just sufficient to pay the factors, which have an alternative use in a shorter process, a price slightly higher than what they could earn in that shorter process. But as the total amount of ready consumers' goods available for investment increases, these entre preneurs will be able to extract higher prices which will leave a margin over and above mere operating cost. For those who have ready consumers' goods to offer, the CR. XIX The General Conditions oj Equilibrium 261 opportunity of buying the products of the already existing machinery in comparatively late stages will in the majority of cases (unless the change which has occurred in the rele vant conditions is very great) be by far the cheapest way of securing a supply of future consumers' goods, since at first they will have to pay little more than the mere operating costs of that machinery. And even when, in consequence of the competition between the owners of present consumers' goods, the prices of the products of the machinery rise, these products will probably still continue for some time to represent the most favourable opportunity for investment, since the cost of procuring any new products of similar utility will presumably be much nearer to the total cost (i.e. including the cost of creating the required equipment) than to the mere operat ing cost of the already existing machinery.

The income which the owner of this .existing piece of equipment obtains from it-as the price of its services rises is ofa temporary nature, limited by the duration of that piece of equipment. And if he wants to draw a permanent income from this capital he will have to reinvest part of the gross income and to limit his con sumption to such a figure that the expected return from the reinvested part of the gross income will be equal to his present consumption. How much he will reinvest will depend on the size of this gross income and the rate of return he can obtain from reinvestment. And how he will invest it will depend on where he can obtain the highest return. And while, of course, in view of the changed circumstances, it is not certain that reinvest ment in new machinery of the same kind as that worn out will be the most profitable investment, there is at least a strong probability that in many cases this form will offer very favourable opportunities. The reasons are very similar to those discussed above.

The equipment which in the past was used by some other entrepreneur to supply the entrepreneur in the later 262 Capitalistic P'roduction u,nder Competition PT. III stage with his equipment will probably still be in existence, and it will be in the interest of the second entrepreneur to use that equipment (instead of letting it stand idle), as soon as prices cover his operating costs. And as the demand for the equipment which he produces increases, he in turn will be faced with a position exactly similar to that which we have been considering in the case of the entre~ preneur in the succeeding stage, i.e. he will find it neces sary to reinvest the greater part of the excess of his receipts over his operating costs if he wants to draw a constant income from his capital. And he too will prob ably find that the existence of equipment designed to provide him with the kind of intermediate products which he needs in order to replace those which he uses up in production enables him to reinvest in the same sort of equipment on comparatively favourable terms.

In general it may be said that to some extent the kind of equipment already in existence will determine the sort of production that will be undertaken. In this way we see how the gradual increase in the value of the resources which are devoted, not to present consumption, but to the acquisition of means for pro Limits to the prollf~ viding for future consumption (an increase ability of replacement which is initially due to the increased by equipment of same kind amount of ready consumers' goods devoted to this purpose) will gradually make it possible to u~e more and more of the existing equipment. And if no changes in the data had occurred in the meantime, a stationary equilibrium may conceivably be reached at the point where both all the existing equipment has been taken into use and it is also possible and profitable currently to reproduce such quantities of each of the different sorts of equipment as will just replace what is currently used up so that the total stock is maintained intact.

But on the assumption we have made, namely, that conditions have changed in material respects since the existing equipment was created, this is not likely to ClIo XIX The General Condition8 of Equilibriu,m 263 happen. Sooner or later in the course of the process some entrepreneur will. find that in consequence of this change in circumstances it is no longer profitable either to invest the same amount in equipment of the kind he already possesses or to invest anything at all in equipment of that same kind. Wherever under the changed conditions the return obtainable from a given type of equipment, which he can buy at a price which only covers the prime cost of its production, is lower than the returns which could be obtained elsewhere, the owner of the existing equipment of this sort will find it in his interest to reinvest in capital goods of a different sort. And even where at first the existence in an earlier stage of the process of equipment which will be used, provided mere operating costs are covered, enables him to replace his own equip ment at a price which covers little more than these operating costs, the situation will change as soon as that equipment in the earlier stage is worn out. Finally, the successive reinvestment, in different and to some extent new types of capital goods, of funds which it is no longer profitable to use for the replacement of equipment similar to that from the amortisation of which these funds have been obtained, will gradually lead to the building up of a new and different investment structure.

The process by which such a system will tend towards a final equilibrium after any sort of change, will evidently be very slow and gradual. For at any stage part of the data, namely, the character and composi-The asymptotic ap tion of the equipment in existence will be proach towards . 'a stationary equlllthe result of an historical process which, brlum from the point of view of present decisions, must be regarded as an historical accident which will never be repeated in identical form. And since the equipment which will exist at the end of any period will to some extent be influenced by the composition of the equipment which happened to exist at the beginning of the period, what we really have to deal with is a process of con264 Capitalistic Production under Competition PT. III tinuous change. Although the change may, if the ex ternal data (tastes, knowledge, and supply of permanent resources) remained the same, continuously decrease in magnitude, it will probably never cease entirely, so that the system will make only an asymptotic approach to the position of an ideal final equilibrium.

Since, however, the four following chapters· will be explicitly concerned with the analysis of the effects Of different sorts of change, the remainder of the present chapter may be devoted to summarising the conditions which have to be fulfilled for a stationary equilibrium to be possible. The condition of stationary equilibrium in a com petitive society with capitalistic production may be summarised as follows. The members of the society must distribute their total resources between use for present and use for future consumption in such a way as to make the relative values of the different types of resources (lxactly proportional to their relative costs of production, where" cost of production" includes the uniform time rate of return on resources invested. Or, to state the same condition differently, with given supplies of present consumers' goods and future consumers' goods, the values of the future consumers' goods (in terms of present con sumers' goods) must exceed their costs (in terms of present consumers' goods) by an amount which bears a uniform relationship (i.e. that of an exponential function) to the time which will elapse before the future consumers' goods become available.

" Costs in terms of present consumers' goods" may mean in this connection the amount of present consumers' goods which might have been obtained directly from the resources which were used to produce the future con sumers' goods. Frequently, however, resources of the kind in question are not used directly to produce present consumers' goods. Then the phrase means the amount of present consumers' goods which these resources would CR. XIX The General Conditions of Equ'ilibrium 265 have helped to produce if, instead of being invested for the period in question, they had been invested for the next most profitable period of shorter length and the other resources had been redistributed in such a way as to secure the greatest net addition to present income, while leaving the rest of the future income stream unchanged. In full stationary equilibrium this coincidence of current value and cost of reproduction of capital goods in terms of consumers' goods will ha ve to hold, both for the stock of capital goods in the Unlikelihood thatsta aggregate and also for every individual tlonary equilibrium , would ever be closely capital good in existence. That this is, approached to say the least, extremely unlikely ever to be the case in the real world, is by now only too evident. It is men tioned here only as a further illustration of the difficulty of saying much that is useful about the general theory of capital so long as we confine ourselves to the analysis of the stationary state. Nearly all the problems which are of importance arise out of the fact that at any moment much of the capital equipment of society exists in a form which cannot or will not be reproduced. And any " equilibrium" that will ever be reached is necessarily transient and limited to the life of the " wasting assets "

which constitute part of the" data" of that equilibrium. But - and this is the final point with which we may conclude the present discussion - in so far as we are justified in speaking of a tendency towards an equilibrium, that tendency is due to the fact that all Uniform rate or in those who could, directly or indirectly, terest a condition of equilibrium even In a command ready consumers' goods which society where there 15 they do not want to consume immediately, no lending of money will be guided in their investment (apart from risk, etc., which does not concern us here) by the single considera tion of obtaining the highest percentage return. And their endeavour to distribute investment in such a way as to bring the highest return will necessarily bring about a uniform rate of return. This will be so quite • 266 Capitalistic Production under Competition PT. III independently of any possibility of lending money, and consequently of obtaining interest on money loans. We might conceive a society where the lending of money (at least at interest) was prohibited and where neverthe less, so long as the possibility of spreading investments by means of partnerships, joint-stock participation, etc., existed, the rate of return on investment would be uniform throughout the system.

The rate of return on investment as determined by the price relationships between capital goods and con sumers' goods is thus prior to, and in principle independent of, the interest on money loans, although, of course, where money loans are possible, the rate of interest on these money loans will tend to correspond to the rate of return on other investments. The fundamental price relation ships are the result of a demand for capital goods in terms of consumers' goods or of an exchange of present con sumers' goods for future consumers' goods. As those who command ready consumers' goods decide to consume less of them themselves and to offer more of them in exchange for future consumers' goods, the prices of future consumers' goods will naturally rise, and the difference between the prices of present and future consumers' goods which corresponds to the rate of interest will correspond ingly fall.

It will be observed that in the determination of these price relationships no separate factor " capital" enters, apart from the concrete resources and the dates for which their owners want to use them. The " supply of capItal U as such not a There is no supply of capital in the abstract, datum of equlllbrium "f d" f" ·t· " " ·t I d· no un 0 walIng or ca pI a lSposal" (or whatever else the terms are by which this mystical quantity has been described), ,vhich would form a datum in the determination of those prices. In par ticular, there is no "real" magnitude called "free capital" which exists in any way apart from the concrete capital goods, and which could be regarded as being CH. XIX The General Conditions of Equilibrium 267 available for investment in, and in this sense constituting the demand for, the capital goods. There is of course the way in which all the individuals use their potential com mand over present consumers' goods. But while under given conditions the magnitude of this potential command is determined for every individual and is equal to the value of (nearly) all his resources, it would, as we have seen, be meaningless to sum up the command over con sumers' goods of all the different individuals. The reason is that the greater part of the command held by anyone person is dependent on the other people not exercising their similar command, and the sum of the potential command over consumers' goods of all the individuals would be far greater than the amount of ready consumers' goods actually available.