XXIV. The Mobility of Capital

CHAPTER XXIV THE MOBILITY OF CAPITAL IN the preceding chapter we have seen that competition will enforce, without respect for existing capital values, such a reorganisation of production as will, under the given circumstances, make the most profit-01 t reums ances on able use of all available resources. This, which preservation h d 11 h b h of capital will depend owever, oes not te us muc a out t e circumstances that will determine how useful the results of past accumulation will prove to be at any moment. In general, however, it will be obvious from what has already been said that two factors are of decisive im portance in this connection: first, the foresight of the entrepreneurs; and secondly, and particularly where this foresight is of necessity imperfect, the degree of mobility or versatility of the existing capital assets. We shall begin with the consideration of the second of these two factors and reserve the discussion of the role of foresight to the end, since it leads on to the problems with which we propose to conclude this part of our in vestigation.

The one distinction in general use which refers to differences of mobility between different capital goods is that between fixed and circulating (or" working ") capital. But although this distinction seems to aim .. Fixed" and .. clr at what is at least one important difference, culating" capital the two kinds of capital are usually so defined as to stress only one, and perhaps not the most important cause of the different degrees of mobility. And, in addition, any simp~e dichotomy like this probably does almost more harm than good, by suggesting what appears to be almost a difference in kind instead of stressing the continuous 323 324 Capitalistic Production under Competition PT. ill variation over a wide range of the relevant attributes of the various capital goods. The customary definition identifies "fixed" capital with durable goods and "circulating" (or" working ") capital with what have here been described as goods in process. But parallel with this distinction, Conflicting dellnltlons h' h' b d th I th f th . d w 1C IS ase on e eng 0 e perlO during which a good will retain a particular physical shape, runs another distinction based on the time during which a particular good will remain within the precincts of a particular enterprise. 1 According to this distinction one and the same good, for instance a machine, would have to be regarded as circulating capital in the factory of its maker but as fixed capital in the factory where it is used. 2 The first of these two distinctions, if it were strictly adhered to, would give us a classification based on one of the reasons why different capital goods are of different lIelther of the tradl-mobility, but not a classification based on tional distinctions Is the degree of mobility itself since this as based on the mobility "

of capital we shall see, depends on other factors besides the mobility of the individual capital good. The second distinction is based on the essentially accidental degree to which the complete process of production of any commodity is divided between a number of separate enterprises. This is a distinction which is highly important from the point of view of the individual entrepreneur, 1 Cf. Machlup, 1932, p. 272. 2 The first distinction mentioned in the text is that of Ricardo, the second that of Adam Smith. Of. D. Ricardo, Principles of Political Economy (3rd ed.), chap. i, sec. 4 (Works, ed. McCulloch), p. 21, where he says that "according as capital is rapidly perishable and requires to be frequently reproduced, or is of slow consumption, it is classed under the heads of circulating or of fixed capital ", and he adds in a footnote, " A division not essential, and in which the line of demarcation cannot be accurately drawn". Adam Smith, Wealth of Nationa, Book II, chap. i,' ed. Cannan, vol. i, pp. 262 et seq. The illfference between the two authors is discussed at some length in N. W. Senior, Political Economy, p. 62.

CR. XXIV The Mobility of Capital 325 but need not have the same,significance from the point of view of society as a whole. The" period of ci:t~culation " at the end of which the individual entrepreneur expects to recover his capital in a " free" form, that is as money, need by no means be identical with the period for which the investment in question remains committed to a par ticular purpose. In many instances the possibility of " turning over" the capital of one enterprise will depend on the willingness of some other entrepreneur to invest in the product of the first enterprise. But the use made of this distinction by nlany of the classical writers shows that, although it was arrive~ at and defined from the point of view of the individual entre preneur, what they really had in mind was Circulating capital a distinction from the point of view of and the income fund society as a whole. This, however, would coincide with the distinction as actually drawn only under very special assumptions. This is particularly evident where the concept of circulating capital is used as equivalent to the " fund" out of which incomes, and particularly wages, will be paid during the current period. In most dis cussions of these problems the term" circulating capital"

is used to describe the part of the existing capital stock which during the current period will be turned into con sumers' goods.1 It is clear that what is circulating capital from the point of view of the individual entre preneur would be identical with circulating capital in this social sense only if production were completely inte grated, that is if different entrepreneurs bought no pro ducts from one another but carried out the complete process of production of any commodity they produced, including the manufacture of any tools, etc., in their own enterprise. Since in this case all sales would be sales to 1 This meaning of the term comes out particularly clearly in the protracted discussion on the effects of a conversion of circulating capital into fixed capital which began with the celebrated chapter on Machinery which Ricardo added to the third edition of his Principles. A short sketch of these discussions will be found in Appendix II.

326 Oapitalistic Production under Oompetition PT. III the final consumer, the part of the capital stock which would be sold within any given period and the part which would become available for consumption within that period would necessarily be identicaL It is obvious that a classification of this sort, based on the remoteness from ultimate consumption of a particular capital good, is of considerable importance in any dis Significance of dls-cussion of the mobility of capitaL And it lance from consump-will also be clear that the durability of lion particular goods will be one of the factors, but not the sole factor, which will determine how remote from the date of consumption are different parts of the existing stock of nonpermanent resources. Part of the services to be obtained from a very durable good can not accrue until some distant date. But obviously the services to be expected from some material which can be used only in the production of that durable good are even more remote from consumption, and the material in question, although less durable than the product made from it, would have to be regarded as more "fixed".

Bricks, e.g., would in this sense have to be considered as being more fixed than the houses built with them. Similarly, if a machine were used to make a second machine which in turn were to serve in the production of a third machine, and if each of these three machines lasted for two years, the capital represented by the first of the three machines would be considerably more fixed than the capital represented by another machine which lasted for six years but served consumption more directly, and pro duced an even stream of consumable services. The reason why the rapidity with which a given capital good can be converted into consumers' goods is so important in connection with the question of how a given capital structure can be adapted to an unforeseen change, is that it is, as we have seen (see Chap. XII), only via the income stream which a concrete capital good will produce that it is possible to replace it by a capital good CR. XXIV The Mobility of Oapital 327 of a different sort. And, if the unforeseen change occurs not suddenly, but gradually, a substantial part of the income stream expected from a particular nonpermanent good is more likely still to be obtained if the good will yield this income within a comparatively short time than if it yields it over a rather long period stretching into the distant future.

It becomes necessary here, before we proceed further, to introduce two distinctions which are essential to the understanding of the effects of different types of change. The first concerns the nature of the change Further faetors alreot considered On the one hand there may be Ing mobility: (a) '. mobllHy between lines changes, such as certain shifts in demand of production between different products, which do not in themselves make it desirable for the consumable returns of the existing resources to become available earlier than would otherwise have been the case, but ONY for them to become available in a different form. This will be so if no more profitable uses for investment exist under the new conditions than under the old. If in these circum stances the equipment formerly used in the branch of production from which demand has shifted is equally useful in the branch to which it has shifted, this mobility of the concrete instruments between the different lines of production may in itself enable the necessary adjust ment to the new conditions to take place.

The situation is, however, different if the change evokes an additional demand for capital which tends to attract capital to an industry more than in proportion to the relative increase in demand for the (b) possibility of product of that industry, and consequently speecllng up amon to drive up the rate of interest. It will Isallon then be necessary to withdraw capital to some extent from all the other lines of production. In so far as this cannot be effected by transferring concrete instruments from those other industries to the industry which now needs more capital, the possibility of a withdrawal will 328 Capitalistic Production under Competition PT. m be limited to the amount of the nonpermanent resources used in those other industries which can be turned into consumers' goods sooner than was originally intended. We have seen before that where this possibility is excluded because the nonpermanent equipment concerned is com pletely specific, the value of the equipment will simply be adjusted to the new rate of interest, and it will not be possible to withdraw any capital at all.

It is clear, then, that the mobility of capital depends not so much on how far distant in the future is the moment when the concrete instruments were originally expected Magnitude of loss to bring a consumable return as on how involved early is the moment when they can be made to give an alternative return. And the question will not be so much a problem of physical possibility as one of the size of the alternative return compared with that of the return which had been originally expected. The mobility of capital, then (like the closely connected concept of liquidity), is a magnitude which can be adequately re presented only in two dimensions, one giving the range of dates at which the alternative returns from a given resource are obtainable and the other the magnitudes of these alternative returns. The problem of mobility becomes, however, still more complex by the fact that, in view of the extremely intricate relationships of complementarity between ConseCiuences of com-different capital goods, it is practically plementarlty impossible to speak of the mobility of a particular capital good in isolation. What effect any particular sort of change will have on its value will always depend not only on the alternative uses to which it can be turned, but also on the degree of mobility of the other resources with which it might co-operate in its former and in its alternative uses. It is really a question not of how, ceteris paribus, the particular unit of resources can be used elsewhere in the system, but of what its significance will be in any of. the different combinations of all the CR. XXIV The Mobility of Capital 329 existing resources which will be most advantageous under the new circumstances.

The lesson to be drawn from all this is mainly that no division based solely on the attributes of a particular good (such as its individual durability or distance from the intended date of consumption) will No simple classillca adequately describe the differences which tion suDIcleDt we have to take into account. It is necessary to consider the position of the good in the whole process, its use in the organisation of production which is most appropriate under the present circumstances, as well as its most appropriate use after a particular kind of change has occurred. There is no way of evading detailed consideration of these complex relationships in each particular case. And probably very few useful generalisations can be made about the problem as a whole, except for DistlnctloDs betwHn the negative statement that any sharp IIxed and circulating capltlll olten mlsdivision into two distinct categories of leadlDg capital goods, such as circulating capital and fixed capital, is likely to do more harm than good. It be comes particularly harmful when it creates the impres sion, as it seems frequently to have done, that the material structure of production may be regarded as consisting of two distinct parts: that we have on the one hand an absolutely rigid skeleton which, for all considerations of a fairly short-run character, must be regarded as given in unalterable form, and on the other hand a completely flexible stream of circulating capital which adapts itself practically instantaneously to any change in conditions and which therefore need not be treated as something separate from the pure input which is required to produce it. It is of course true that, what ever the period considered, some of the more durable equipment will be in the position of a quasi-permanent resource, and will therefore not have to be treated as capital but as a Rentengut. But this means only that for comparatively short-period problems the significant items 330 Capitalistic Production under Competition PT. m are those parts of the capital structure which can be made to yield consumable services during the relevant period.

The division into two separate groups becomes seriously misleading if it treats one part of capital as being per manent, and the other part as involving no waiting what ever: all the problems of capital are then evaded. 1 The fact is rather that even in the shortest of short runs the capital equipment is not given but is eminently variable, since every act of production draws on existing stocks and leads to the creation of new stocks, and that the direction of production is largely determined by the relative quantities of different types of "circulating capital" (in the sense of goods in process) which happen to be available, and by their prices. It is for this reason that we have persistently argued that circulating capital in this ordinary sense of the term possesses the character istic attributes of capital in a higher degree than fixed capital, and that in consequence those theories which tend to stress the importance of goods in process rather than of durable goods have contributed more to the under standing of the important problems in this field.

The second point which now requires consideration is the significance attaching to the foresight of the capitalist entrepreneurs in connection with the maintenance of capital. It will probably be obvious by The rOle of foresight now that the degree of mobility of capital, the extent to which it can be maintained in a changing world, will largely depend on the extent to which entre preneurs correctly foresee impending changes. If we con sider for a moment what would happen if entrepreneurs always acted as if things were going to remain for ever as they are at present, and if they never altered their plans 1 This kind of treatment, widely used by economists of the Cam. bridge School, is evidently an effect of the unfortunate extension of the Marshallian concept of short-period equilibrium from the case of particular equilibria (where it is legitimate enough) to a position of general equilibrium, where it has no meaning. See on this above, Chapter II, p. 14.

CR. XXIV The ~l obility of Capital 331 until after a change in final demand (or any other change) had actually occurred, we can easily see what would be the effect on general productivity. Every change would mean an enormous loss, or rather, the adaptation of pro duction to the change would be so expensive as to make it in many cases impossible. This is not because the loss on old investments would have to be regarded as a cost, but because the capital available for investment in new forms would be so scarce. How rich, on the other hand, should we now be if all past changes had been correctly foreseen from the beginning of things ! But if this dependence on the foresight of entre preneurs of the extent to which society will at any moment be provided with capital is little more than a commonplace, it is certainly a commonplace Main faclor atlectlng to which far too little attention is paid in the supply of capital d· . I b bl at any ilvon moment or mary reasomng. t pro a y means that the amount of capital available at any moment in a dynamic society depends much more on the amount of foresight which has been shown by entrepreneurs than on current saving or "time preference". This is of course only a corollary to the equally obvious but similarly neglected fact that, even in the comparatively short run, " capital" is not a factor the quantity of which is given independently of human action. How great a part of the potential satisfaction to be derived from a given stock of capital goods will still be available some time later will largely depend on how correctly the entrepreneurs foresee what the situation will be at that future moment. Their anticipations in this respect are quite as important a " datum " for the explanation of the dynamic process as the "stock of capital". The latter concept has in fact little meaning without the former. As an enumeration of the individual capital goods existing at the start, the "stock of capital" is of course an important datum, but the form in which this capital will still exist some time afterwards, and how much of it will still exist, 332 Oapitali8tic Production under Oompetition PT. m will mainly depend on the foresight of the entrepreneur capitalists. It would probably be no exaggeration to say that it is the main function of the entrepreneur to attempt to maintain his capital so that it will yield the greatest possible lasting return.

But not only is the size of the productive equipment of society dependent in this sense on the success of the entrepreneur; it is also dependent, in a world of un Capitalised wlndtall certainty, on his capitalising capital gains ralns-anlmportani (" windfall profits "). It should be recog source of capital supply In • dynamlo nised that much of the new formation of sysiem capital equipment (which need not repre sent net additions to capital in the traditional sense) does not arise out of savings proper, but out of those gains of individual capitalists which are part of the process of capital maintenance. This process will, as was shown above, always involve unforeseen profits on the part of some entrepreneurs and unforeseen losses on the part of others. It involves changes on capital account, which are part of a continual process of redistribution of pro perty (not to be confused with the distribution of income}.

The entrepreneur who finds that a risky undertaking succeeds, and for a time makes extraordinary profits because he has restricted the amount of investment so that in case of success it will yield a margin of profit which is proportional to the risk, will not be justified in regarding the whole profit as income. If he aims at a constant income stream from investment, he will have to reinvest enough of his profits to give him continuously an income equal to . the part of his profit which he allocates to immediate consumption, after the rate of profit in what has now proved to be an exceptionally profitable line of business falls to normal,l 1 It is of course possible that he may regard himself as being so much more clever than his competitors that he will count on being able to make supernormal profits of this kind permanently. To this extent he will be quite justified in regarding these profits as income.

OR. XXIV The Mobility of Capital 333 It is in this way that, as a result of changes of demand, technological progress, etc., some capital is newly formed without new saving while other capital is lost. There is of course no reason to assume that the CapItalised wIndfall capital that is lost will correspond in any ,a1ns not savIng quantitative sense to that which is newly formed out of windfall profits. And it is precisely for this reason that the customary concept of a net change in the quantity of capital, which is supposed to correspond in some way to saving, is of little value. There has in this case been no abstention from consumption at a rate which could have been permanently maintained. If anybody can be said to have refrained from consumption which would have been compatible with enjoying the same income per manently, it is not the entrepreneurs, but the consumers who for a time had to pay a price in excess of the cost which the production of the commodity entails after it has proved a success. But this" saving" is of course not deliberate, nor does it represent an abstention from consumption which could have been regarded as per manently possible while the outcome of the venture was still uncertain. It can hardly be questioned that in the actual world a great deal of the equipment which comes to be needed in consequence of some change is financed out of such temporary differences between cost and price. It may appear somewhat paradoxical that where it is provided in this way, its source should be regarded not as saving but as a capital gain, a kind of transfer of capital which means not only that new capital is formed in place of that lost elsewhere, but that it is formed exactly where it is most needed, and placed in the hands of those most qualified to use it. Yet this follows as a matter of course from the only definitions of maintaining capital, and of saving, which have a clear meaning. It will be shown in the next chapter that this use of these terms proves convenient in other connections also.