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.