Up to this point we have discussed the case in which the owners of land and labour, that is, of the original factors, restrict their possible consumption and invest their factors in a production process, which, after a certain time, produces a consumers’ good to be sold to consumers for money. Now let us consider a situation in which the owners of the factors do not own the final product. How could this come about? Let us first forget about the various stages of the production process and assume for the moment that all the stages can be lumped together as one. An individual or a group of individuals acting jointly can then, at present, offer to pay money to the owners of land and labour, thus buying the services of their factors. The factors then work and produce the product, which, under the terms of their agreement, belongs to the new class of product owners. These product owners have purchased the services of the land and labour factors as the latter have been contributing to production; they then sell the final product to the consumers.
What has been the contribution of these product owners, or “capitalists”, to the production process? It is this: The saving and restriction of consumption, instead of being done by the owners of land and labour, has been done by the capitalists. The capitalists originally saved, say, ninety–five ounces of gold which they could have then spent on consumers’ goods. They refrained from doing so, however, and, instead, advanced the money to the original owners of the factors. They paid the latter for their services while they were working, thus advancing them money before the product was actually produced and sold to the consumers. The capitalists, therefore, made an essential contribution to production. They relieved the owners of the original factors from the necessity of sacrificing present goods and waiting for future goods. Instead, the capitalists have supplied present goods from their own savings (that is, money with which to buy present goods) to the owners of the original factors. In return for this supply of present goods, the latter contribute their productive services to the capitalists, who become the owners of the product. More precisely, the capitalists become the owners of the capital structure, of the whole structure of capital goods as they are produced. Keeping to our assumption that one capitalist or group of capitalists owns all the stages of any good’s production, the capitalists continue to advance present goods to owners of factors as the “year” goes on. As the period of time continues, highest–order capital goods are first produced, are then transformed into lower–order capital goods, etcetera, and ultimately into the final product. At any given time, this whole structure is owned by the capitalists. When one capitalist owns the whole structure, these capital goods, it must be stressed, do him no good whatever. Thus, suppose that a capitalist has already advanced eighty ounces over a period of many months to owners of labour and land in a line of production. He has in his ownership, as a result, a mass of fifth–, fourth–, and third–order capital goods. None of these capital goods is of any use to him, however, until the goods can be further worked on and the final product obtained and sold to the consumer.
Popular literature attributes enormous “power” to the capitalist and considers his owning a mass of capital goods as of enormous significance, giving him a great advantage over other people in the economy. We see, however, that this is far from the case; indeed, the opposite may well be true. For the capitalist has already saved from possible consumption and hired the services of factors to produce his capital goods. The owners of these factors have the money already for which they otherwise would have had to save and wait (and bear uncertainty), while the capitalist has only a mass of capital goods, a mass that will prove worthless to him unless it can be further worked on and the product sold to the consumers.
When the capitalist purchases factor services, what is the precise exchange that takes place? The capitalist gives money (a present good) in exchange for receiving factor services (labour and land), which work to supply him with capital goods. They supply him, in other words, with future goods. The capital goods for which he pays are way stations on the route to the final product — the consumers’ good. At the time when land and labour are hired to produce capital goods, therefore, these capital goods, and therefore the services of the land and labour, are future goods; they represent the embodiment of the expected yield of a good in the future — a good that can then be consumed. The capitalist who buys the services of land and labour in year one to work on a product that will eventually become a consumers’ good ready for sale in year two is advancing money (a present good) in exchange for a future good — for the present anticipation of a yield of money in the future from the sale of the final product. A present good is being exchanged for an expected future good.
Under the conditions of our example, we are assuming that the capitalists own no original factors, in contrast to the first case, in which the products were jointly owned by the owners of these factors. In our case, the capitalists originally owned money, with which they purchased the services of land and labour in order to produce capital goods, which are finally transformed by land and labour into consumers’ goods. In this example we have assumed that the capitalists do not at any time own any of the cooperating labour or land factors. In actual life, of course, there may be and are capitalists who both work in some managerial capacity in the production process and also own the land on which they operate. Analytically, however, it is necessary to isolate these various functions. We may call those capitalists who own only the capital goods and the final product before sale “pure capitalists”.
Unit Fifteen
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