The Value of Capital and the Interest on Capital. I --Discounting Capital receives its value from its fruits. If, then, we are calculating the final return of any production, and, for that purpose, deduct from the value of these fruits the capital consumed, with its value, the result will be zero, inasmuch as, sooner or later, all capital is consumed in production. The deduction made must always amount to the value of the fruits, --indeed, that value measures the deduction -- and consequently the value calculation leaves no net return whatever. Not only is interest not explained; it is absolutely excluded. And, if we consider that means of production renew themselves again and again indefinitely, and yield results indefinitely, we come across another contradiction of experience, for experience shows that the value of capital is not infinite but always finite and limited.
These are the problems which lie before us for solution when we now go on to examine the value of capital and the interest on capital.
For their solution we may avail ourselves of the results of our analysis of the physical productivity of capital. All capital transforms itself in the last resort into gross return. In this gross return the capital reproduces itself with a physical surplus, the net return. These two facts, which we have already established, will suffice us to deduce the value-productivity of capital, and to solve all the contradictions with experience.
First: all capital transforms itself in the last resort into gross return; it follows from this that the value of the capital can never exceed the value of the gross return. The value of capital is thus a limited finite amount, although the working of the ever-renewed production extends away into an illimitable future. The materials and apparatus out of which, and with whose help, bread is produced, cannot possibly be worth more than the bread itself. And those things from which the materials and apparatus themselves are produced, and which, consequently, are the producers of bread one stage removed, have, in the prospective gross return -- the perishable bread -- a maximum limit of value. So with all capitals, however far their primary products may be removed from direct employment in the satisfaction of want. To put it into figures, -- if a capital transforms itself sooner or later into a gross return of the value of 105, its own value cannot be put at anything above 105.
Second: in the gross return capital reproduces itself with a physical surplus, the net return. It follows that the capital value cannot be credited with the whole value of the gross return. In the reproduction capital represents only a portion of its own gross return, and can therefore absorb only a portion of the value of that gross return. If, from the value of 105, 5 are set aside as fruits which may be consumed without preventing the full replacement of the capital, only the remainder of 100 can be reckoned as capital value. The prospect of having this residual value of 100 transformed once more, at the close of the next period of production, into the gross return of 105 -- by again employing it productively cannot make any change on this valuation; since the expected return of 105 is always divided in the same way, assuming the same conditions; viz. 100 goes to capital and 5 to the increment on capital.
Gross return and net return are thus the two given amounts from which capital gets its value. The whole difficulty of the problem lies essentially in the recognition of the fact that those two amounts are given. For proof of this we refer to our former disquisition upon imputation in general, and the imputation in the case of capital in particular. If physical productivity of capital involves, as we have maintained, the imputation of gross return and the imputation of net return, we have at once a clear and simple principle for the valuation of capital.
There is in common use a definite name for the method of calculating value required by this principle. To fix the present value of a money claim, carrying no interest, which falls due at a future date, we make use, as every one knows, of the method known as "discounting." That is, we deduct the usual interest from the future sum. Now every capital value, -- not alone the value of a sum of money but of every perishable productive instrument -- is calculated by discounting; that is to say, from the value of the future expected sum of products into which the capital will be transformed, the corresponding net return is deducted. Only that, practically, in discounting money claims, a fixed rate of interest -- i.e. a definite relation between capital value and net return -- is always assumed, and always emerges, while we are explaining the formation of this relation by first discovering the principle for estimating capital value.
