The Profits of Capital

We have now sufficiently considered the nature and motive of the interest paid by the borrower to the lender of capital, and, though it appears pretty plainly, that this interest is com- pounded of the rent of the capital, and of the premium of insurance against the risk of its partial or total loss, we have also seen enough, to comprehend the extreme difficulty of severing and distinguishing these two ingredients.

What are the causes of the profit derivable from the employment of capital? , whether

and the inconvenience of a long, perhaps a two years’ dura- tion of one single operation before the returns come to hand, a proportion of the capital is gradually withdrawn from that channel; the competition slackens, and the profits advance, until they rise high enough to attract fresh capital. 72

by a borrower or by the proprietor himself= to which end it will be necessary, in the outset, to sever it from the profit of the industry, that turns it to account; and here again we shall meet with the greatest difficulty, in drawing the line of dis- tinction; though it is easy to perceive, that these two classes of profit, generally speaking, are combined in the recompense or portion of the adventurer. Smith, and most of the English writers on this science, have omitted to notice this distinction; they comprise under the general head of the profit of capital, or stock, as they term it, many items, which evidently belong to the head of the profit of industry. 70

This also explains why the profits, derivable from a new mode of employment, are larger than those of common and ordinary employments, where the production and consumption have been well understood for years. In the former case, competition is deterred by the uncertainty of success; in the latter, allured by the security of the employment.

Perhaps an approximation may be made to the accurate appreciation of that part of the aggregate profit, which apper- tains to the capital, and that, which appertains to the industry employing it, respectively, by comparing the mean ratio of total profit with the mean ratio of the difference of profit in the same line of business, which seems a fair index of the difference of the skill and labour engaged. We will suppose two houses, in the fur trade for example, to work each upon a capital of 100,000 dollars, and to make on the average, an annual profit, the one of 24,000 dollars, the other of 6000 dollars only; a difference of 18,000 dollars fairly referable to the different degree of skill and labour, the mean of which is 9000 dollars; this may be considered as the gains of industry, which, deducted from 15,000 dollars, the mean profit of the trade, will leave 6000 dollars for the profit of the capital embarked in it.

In short, in this matter, as in all others, where the interests of mankind clash one with another, the ratio is determined by the relative demand and supply for each mode of employ- ment of capital respectively.

Adam Smith’s maxim was that human labour was the first price. It was the original purchase-money paid for all things.

He forgot to add, that for every object of purchase, there is paid, the agency and co-operation of the capital employed in its production.

Is not capital itself, they will say, composed of accumulated prod- ucts,-of accumulated labour?

Granted but the value of capital, like that of land, is distinguishable from the value of its productive agency; the value of a field is quite different from that of its annual rent. When a capital of 1000 dollars is lent, or rather lent on hire, for a year, in consideration of 50 dol- lars more or less, its agency is transferred for that space of time, and for that consideration; besides the 50 dollars, the lender receives hack the whole principal sum of 1000 dollars, which is applicable to the same objects as before.

Thus, although the capital be itself a pre-existent product, the annual profit upon it is an entirely new one, and has no refer- ence to the industry, wherein the capital originated.

This example I could suggest as a means, rather of distinguishing those items of profit thus mixed up together, than of estimating their respective ratio with any tolerable certainty.

But, without any index to the precise line of demarkation between the profits of capital and those of the industry em- ploying it, we may take it for granted, that the former will always be proportionate to the risk of partial or total loss, and to the duration of the employment.

In practice, adventurers, having capital at their command, always weigh beforehand the advantages and disadvantages of the different modes of investment, as specified above, 71 and naturally prefer, ceteris paribus, those presenting the smallest risk and the quickest return; so that there is less competition of capital for hazard- ous and longwinded adventurers; indeed, none whatever is embarked in them, unless they hold out a rate of profit so much above the average rate, as to tempt the capitalist to run the risk.

Theory, therefore, leads to the presumption, which is confirmed by the test of experience, that the profit of capital is high, in proportion to the hazard of the adventure, and to the length of its duration.

Wherefore when a product is ultimately completed by the aid of capital, one portion of its value must go to recompense the agency of the capital, as well as another to reward that of the industry, that have concurred in its production.

The portion so applied is wholly distinct from the value of the capital itself, which is returned to the full amount, and emerges in a perfect state from its productive employment. Nor does this profit upon capital represent any part of the industry engaged in its original formation.

From all which it is impossible to avoid drawing this conclusion, that the profit of capital, like that of land and the other natural sources, is the equivalent given for a productive ser- vice, which though distinct from that of human industry, is nevertheless its efficient ally in the production of wealth. When a particular employment of capital, the trade with China, for instance, does not afford a profit proportionate, not only to the time of the detention, but likewise to the danger of loss,

The employment of capital, that tends least to the national advantage, is the carrying trade between one foreign country and another.