How things might work (but don't)...
IT SHOULD be obvious, writes Sean Corrigan for the Cobden Centre, that one lone farmer, toiling unaided in his field, must have enough food in store to maintain his strength through to the next harvest, or the ripening corn will be left to rot in the ground after he has expired from inanition.
That store of food is nothing other than a key component of his capital. We can say that it 'binds' to the other, more durable items of capital which he possesses—such as his harrow and his scythe—as well as to his labor input and that it is 'released' again (much like an enzyme 'binds' to a substrate in organic chemistry) when the grain is safely in the barn, on which happy day the farmer can draw his immediate reward, replenish his seed corn, and set aside a cache in anticipation of his own needs for the succeeding year.
Replace our single farmer with a chain of workers all bent on exploiting the bounty of the earth in order that each of them will be fed, no matter what their individually specialized contribution to the endeavor, and matters still remain comprehensible enough. The already-finished ration of food they will eat while they are working to produce the next batch forms an indispensable portion of the capital of each. If their joint venture is to be successful, they must 'release' at least the same number of calories as they have consumed along the way, for that is the minimum they require in order to be able to continue their co-operation over the next cycle.
Next, widen the net, so that the food providers decide they need clothes for their backs, but know that they are either wholly unversed in the necessary skills or simply too proficient at what they already do to dream of sacrificing their time to that secondary pursuit. Other men can now set up a parallel chain of their own and so combine to furnish both themselves and the food manufacturers with hats and coats, swapping some of their wares for the groceries they, too, cannot do without, but at whose production they are less correspondingly less accomplished. Ricardians will note a story of comparative advantage at work here.
At once, we notice the question of 'capital' has taken on a new dimension, for now not only must those in the alimentation business provide their own fund of subsistence, but they must be both productive enough and abstemious enough to provide one for the clothiers, too, while these latter beaver away, spinning, weaving, and tailoring. While the finished item may take many weeks, even months to be turned from raw cotton, or a crude oil derivative, into a saleable piece, hanging neatly on a suit rack, those working on this metamorphosis must nevertheless be fed on a daily basis. That advance outlay of presently-consumable, nutritional goods is effectively what the capital means involved in the work must be able to purchase in sufficient quantities while the future good in question is slowly transformed, over time, into a present one, viz., a pair of jeans or a plaid shirt which can be sold to an agricultural worker.
For their part, the food growers, packers, and processors will not be turning up to work naked (one hopes) until such times as they are able to bring in a crop, crush it, purify the resulting oil and bottle it, ready for exchange in its turn. In like manner, then, the advance issue of gumboots, dungarees, and overalls in which they are clad is also something on which some of their capital means must be spent.
Of course, we cannot stop at just two chains, their members each satisfying their own needs before exchanging an added quotient in the market for the others' tradable surplus. There will be builders of shelter and assemblers of furniture besides; suppliers of computers, crockery, caravans, and cameras; of books and biros, biscuit tins and bicycles; shopping baskets, ski boots and shaving foam, and so on and so on and so on to encompass all the rich profusion of the modern industrial economy.
All will need to be supplied with the full disposition of necessities with greater or lesser frequency, depending upon durability and taste, even before the exchangeable, end-consumer product for whose genesis, development, and maturation they themselves are responsible has been brought to market and sold. (Note here that many of them will be contributing to the provision of a wide range of differing end goods at one and the same time). All of them therefore require not only the funds—the capital means—with which to buy such products, but they actually require that the products pre-exist in sufficient quantities to tide them over to the moment of final sale.
As we have emphasized above, it should not be hard to grasp that the workers in an industry constantly require food, shelter, clothing, as well as the means to pay the bus fare to work, even if they are as far removed from the realization of such end products as it is possible to conceive (the professor educating the geophysics interns on day release who will one day deliver an improved sensor into the hands of a mining prospector mapping out a previously uncharted wilderness perhaps?). For the human 'machinery' of production, these inputs are loosely analogous to the diesel fuel with which we must replenish the factory generator, or the water which cools the cutting tool as it works.
But, despite our emphasis on such basic necessities, Man does not live by bread alone – at least not in a world where Lasalle's nihilist 'iron law of wages' does not apply. So, in order to persuade him to overcome his natural aversion to labor, he may also require a steady, advance supply of fripperies – beer, bowling, and baseball tickets – which will therefore perform no less a part of the consumables which must be made available to him if he is ever to be inveigled into turning up for work.
If the disproportion between the two sectors of the economy – the higher and the lower, the future and the present – grows too great, people in command of the means to purchase—i.e., their previously earned, grudgingly set aside money—but stymied by the fact that no ample stock of what it is they want to buy has been made (or is being made) available through the saving of the fruits of prior (and/or technologically-enhanced, concurrent) output, the irresistible tendency will be toward a rearrangement of the productive chains in a manner which promises to accommodate this newly emancipated demand. The pressure to buy consumer goods which are not being offered on the scale required, at the instant required, will tend to push their prices higher, both in absolute terms and relative to the prices of more temporally-distant goods, especially where these latter seem unlikely to make any imminent contribution to filling today's lack.
This widening price gap between current and future goods thus pushes the natural rate of interest (expressed time preference) higher while, in addition, the distress borrowing being undertaken as a desperate attempt at completion of plans which are now rapidly unraveling means the market rate may well soon follow its ascent. Simultaneously, the more astute of those fortunate few who have the flexibility to make a change in the thrust of their activities will abandon their existing role in the structure of production and set about supplying what now looks like a much more profitable – certainly a more readily identifiable – demand by catering at last to the long-disgruntled end-consumers' wants. In shifting their focus, they will drain complementary factors away from their old pathway, and so greatly compound the difficulties of the malinvested who never foresaw that possibility.
As Ludwig Lachmann explained it:
'Investment decisions are not merely irreversible in time… they are also irrevocable in kind… If all capital were homogenous… the advance would not be halted until all resources had become equally scarce—Keynes' point of 'full employment'… As it is, capital is heterogeneous and the first sub-ceiling reached will necessitate not merely the revision of plans for the construction of new capital, but also the revision of plans for the use of existing capital.'