§4. Investment Opportunity for Society as a Whole

In modern society hermits and self-supporting ranches are so rare that we cannot find any important cases where investment opportunities exist in pure primitive form and apart from the alloy of trading. In fact, the most typical investment opportunities are not only full of such alloys but are tied up with market financing operations. Almost every big investment opportunity is married to a productive loan.

The best picture on a big scale of investment opportunity, divested so far as may be of all ancillary market features, is to be found by considering society as a whole instead of the individual.

Society as a whole cannot borrow or lend as an individual can. This world can, for instance, add nothing to this year's income by a loan from elsewhere and subtract this amount with interest from future income. Yet it can and does vary and control the total income stream according to investment opportunity.

This picture, in the large, of society arranging, modifying, adjusting its total income stream as between this year and later years is the most important picture we can draw of investment opportunity not only because it automatically leaves out borrowing and lending, or buying and selling, but also because it automatically reduces the picture of income to its fundamental terms of real or, as I prefer to call it, enjoyment income and its obverse, labor pain. We do not have to think so vividly, as we do in the case of an individual, of money items and intermediate processes. We can without difficulty fix our attention on the final consumption. Society is like Robinson Crusoe picking and eating his berries, however complicated Edition: current; Page: [501] may be the apparatus which intervenes between the labor of picking and the enjoyment of eating.

Society may add to or subtract from its income stream at will at any period, present or future. But beyond a certain point every addition at one period must be at the cost of a subtraction at some other period. If future income is added, the increment so added is a return on and at the cost of a decrement in less remote income. The rate of return over cost is thus a social phenomenon of great significance. There are two and only two ways in which society may effect the present cost and the future return. It may effect the present cost by exerting more present labor or by abstaining more from present consumption; and it may realize the future return over that cost either in the form of more future consumption or of less future toil.

Both the present and the future adjustments are effected by changing the use made of capital instruments including land and human beings. That is, the labor, land, and other capital of society may be used in many optional ways and in particular may be invested for the early or remote future.

If the capital instruments of the community are of such a nature as to offer a wide range of choice, we have seen that the rate of interest will tend to be steady. If the range of choice is narrow, the rate of interest will tend to be variable. If the range of choice is relatively rich in future income as compared with the more immediate income, the rate of interest will tend to be high. If the range of choice tends to favor immediate income as compared with more remote future income, the rate of interest will tend to be low.

Thus, for the United States during the last century, Edition: current; Page: [502] its resources were of such a character as to favor future income. This is true, for a time at least, in every undeveloped country, and, as we have seen, gives the chief explanation of the fact that the rate of interest in such localities is usually high. The same is true of countries recovering from war. Today, for instance, Germany resembles a pioneer country. Her present income is necessarily low, but her prospect of a higher and increasing income in a few years is very great. The range of choice is dominated by "low today and high tomorrow."

The range of choice in any community is subject to many changes as time goes on, due chiefly to one or more of three causes: first, a progressive increase or decrease in resources; second, the discovery of new resources or means of developing old ones; and third, change in political conditions.

Under the first head may be noted the impending exhaustion of the coal supply in England, as noted by Jevons and other writers. This will tend to make the income stream from that island decrease, at least in the remote future, and this in turn will tend to keep the rate of interest there low. Under the second head, the constant stream of new inventions, by making the available income streams rich in the future, at the sacrifice of immediate income, tends to make the rate of interest high. This effect, however, is confined to the period of exploitation of the new invention, and is succeeded later by an opposite tendency. During the last half century the exploitation of Stephenson's invention of the locomotive, by presenting the possibility of a relatively large future income at the cost of comparatively little sacrifice in the present, tended to keep the rate of interest high. As the period of extensive railroad building is drawing to Edition: current; Page: [503] a close, this effect is becoming exhausted, and the tendency of the rate of interest, so far as this particular influence is concerned, is to fall.

On the other hand, the invention of the automobile, and the inventions and discoveries in electricity and chemistry have succeeded the railroads as a field for investment and have required new sacrifices of immediate income for the sake of future income. Thus, as fast as the first effect of any one invention, tending to raise interest, wears off and is succeeded by its secondary effect in lowering interest, this secondary effect is likely to be offset by the oncoming of new inventions.

As to the third head, political conditions which affect the rate of interest, such as the insecurity of property rights which occurs during political upheaval, as in Russia recently, tend to make the pure or riskless rate of interest low. At the same time it adds an element of risk to most loans, thereby diminishing the number of safe and increasing the number of unsafe loans. Hence the commercial rate of interest in ordinary loans during periods of lawlessness is likely to be high. Reversely, during times of peace and security, the riskless rate of interest is comparatively high, while the commercial rate tends to be low.