The usual answer in the affirmative seems to involve two further assumptions: I. That if interest is not forthcoming in addition to the wages of management the accumulation of capital will be checked, that as a consequence, the diminished supply will eventually give capital a greater proportionate share in the joint product of capital and labour, and thus interest will again emerge. II. That if by lending any form of capital, the owner can obtain interest, he will not retain it for his own use unless he also obtains the same rate of interest. The first of these assumptions is the basis of the theory, that in any society there is a certain necessary minimum of profits (variable, it is true, according to different conditions); the second is the basis of the theory of the tendency of profits to equality in both instances of course, so far as profits consist of interest, the consideration of other elements being for the present deferred.

§ 5. The Minimum Rate of Interest as an Element of Profits. Mill regarded the minimum rate of interest, considered as an element of profits, as an equivalent to the owner of capital for forbearing to consume it, which then and there' must constitute a sufficient motive to him to persist in his abstinence.' "How much will be required to form this equivalent depends on the comparative value placed in the given society upon the present and future."1 On this view, the minimum rate of interest is just that rate which is sufficient to induce people to save, rather than to consume. It is, however, at once clear that this is a very variable rate, even in the same country, at the same time. Some accumulation would go on, even with negative interest, and Adam Smith has observed that a high rate of profit seems everywhere to destroy that parsimony which, in other circumstances, is natural to the character of the merchant.2 Accordingly, we

1 Bk. II., Ch. XV., § 2.

cannot

2 Bk. IV., Ch. VII. He is discussing the evils resulting from the high rate of profit due to the monopoly of the colonial trade, and this check

strictly speak of a particular minimum rate in any society, at any time, as necessary to accumulation in general; and if Adam Smith's opinion is well-founded, we cannot even say that a rise in the rate of interest will increase, or a fall check, accumulation. The truth is, as already ex

plained at length in the first Book,1 the growth of material capital depends upon a number of variables, of which the rate of interest is only one, and is, furthermore, indeterminate in its effect.

It is, however, quite a different thing to say that, in any industrial society in which competition is approximately perfect, a person who wishes to borrow on first-class security must pay a certain minimum rate, and that any one who is willing to lend can lend at this rate.2 But the question still remains: when the left hand lends to the right, does a minimum rate of interest accrue? In other words, does the theory of equality of interest extend to interest as an element of profits? Or, more specifically, is loan interest equal to profit interest?

§ 6. The Equality of Interest considered as an Element of Profits. It follows from the general principles of industrial competition that, after making due allowance for any differential risk or trouble in employing capital in different ways, if one industry gives a net return, in the shape of interest above the general level, the attraction of capital will tend to lower the rate; and if it is below that level, the revulsion of capital will tend either to raise it, or to destroy the industry.

We may, then, accept the common theory that, so far as the interest element is concerned, the tendency of profits is to equality, if we mean by it that other things being the same, rates above or below the average are unstable. It

to accumulation he regards as more fatal than all the other evils put together.

1 Bk. I., Ch. XI.

2 The problem of interest on loans as a question of value is discussed in Bk. III.

does not follow, however, that in the long run, or in any more definite period, the rates actually earned in different employments will correspond with this average. A very short period of prosperity may induce sufficient competition to cause a prolonged depression, and the converse is also possible though less probable. It does not follow, either, that, from individual to individual, the rate will not vary, or that the degree of instability will not be very different in different cases, even in the same industry. It appears, then, on a very rough analysis, that the tendency to equality of profit-interest is a very different thing from the tendency to equality of loan-interest. The common fool will obtain, for forbearing to sell his consols, the same interest as the wisest financier, but people of equal wisdom who embark their capital in businesses of equal difficulty will by no means obtain equal interest on their money. The equality, as Mill said of profits generally, is an equality of expectation.

If, however, the equality of profit-interest in different employments is so imperfect, how can we say that, on the average, profit-interest tends to be equal to the loan-interest of the particular time and place? In a modern industrial society, the interest obtained from first-class securities, in which both the risk and the trouble of investment may be neglected, flows on in a constant stream; the rate varies, it is true, but comparatively slowly. For a long period. the yield to consols has varied between very narrow limits, and the same is true of first-class mortgages and the like. Whatever the explanation may be, there is no question as to the fact.

Can we affirm that over a similar period there has been present in the profits of the great staple industries of the country a corresponding constant element? On the contrary, do we not rather expect the rate of profit to vary with the periodic inflations and depressions of trade? and

A single day might ruin a great many banks, but the creation of new banks is difficult.

is it not usual to contrast the uncertainty of profits with the sweet simplicity of the three per cents?

§ 7. The Inter-connection of Profit-interest and Loaninterest. There is, however, undoubtedly a connection. between the rate of interest attainable on loans and that element in the profits of industry which is usually looked upon as the pure interest on the capital employed. In the analysis of general wages we saw that we might consider the distribution (between wages and profits) of the joint product of labour and capital as depending ultimately on the reciprocal demand for the services of one another, that is to say, under a system of industrial competition. But the same idea may be expressed by saying that capital is lent to labour, that labour must return it, or its equivalent, to the owners at the end of a certain time, and that something must be paid by way of interest. To the owner of capital it is a matter of indifference whether it is lent to productive or unproductive consumers. And the analogy may be carried much further when, instead of assuming perfect competition, we look at the historical development of industry. Just as in early usury the necessities of the borrower gave undue power to the lender, so, also, in the early relations of labour to capital, the power of the latter was generally excessive.

The difficulties that are found in detecting the element of interest in profits, arise from the fact that the other two elements, until recently, were in general inextricably combined with it. The tendency of modern industry, however, is more and more to separate this so-called pure interest from the insurance against risk and the wages of superintendence. The owner of capital is being differentiated from the employer of labour, and the former alone receives interest.

§ 8. Insurance against Risk. "In all the different employments of stock," says Adam Smith, "the ordinary rate of profit varies, more or less, with the certainty or uncertainty of the returns. It always rises, more or less,

with the risk. It does not, however, seem to rise in proportion to it, so as to compensate it completely. Bankruptcies are most frequent in the most hazardous trades." The insufficiency of the compensation is accounted for by the gambling spirit in human nature; but, making allowance for this, we may assume that the effect of industrial competition is, on the whole, to equalise the element of risk in different employments. The development of insurance societies, especially in modern times, has tended still further to make profits independent of particular risks. But, although the question is simple when we are considering the equality of profits in different industries in any given society, the same difficulty arises as in the case of interest, when we look upon "compensation for risk” as an element in general profits.

Just as interest is generally regarded as remuneration for abstinence, or for forbearing to consume, so insurance, as a part of gross profits, is supposed to be a reward for undergoing the danger of losing the capital. If the security is at all imperfect in the case of a loan, an additional charge is naturally made; and it may be similarly argued that when capital is lent to labour there is always some risk that the principle with interest will not be returned. Unlike a government, that may pledge its taxes, or a landowner, who may pledge his land, the labourer, as such, has nothing to pledge. In former times he pledged his body, and the creditor, in case of default, sold it alive or used it to "bait fish withal," according to his fancy. Under present conditions, whenever money is subscribed for any new industrial undertaking, however promising, in which the only security lies in the success of the undertaking, there is a considerable element of insurance; and, to some extent, in all industries that use borrowed capital the same influence is felt.

Most economists, however, have considered that the element of risk operates still more generally. They em1 E.g., Mill, Bk. II., Ch. XV., § 2.