The Law Of Accumulation Of Capital

Adam Smith and many others have noticed that the growth of capital

varies with the intelligence and the foresight of a population. It

should therefore increase in rapidity as intelligence increases. A

high valuation of the future is a mark of intelligence, and there is

no reason why an entirely rational being should value a benefit

accruing to himself in the future any less than he does a benefit

accruing at once. Perf
ctly rational estimates of present and future,

if there are no influences affecting the choice except these mere

differences in time, mean that the two stand at par. It was once

supposed that the disposition to save from one's present income varies

directly as the rate of interest of the capital which is thus accrued,

and in the main this is still regarded as a nearly self-evident

proposition. Abstinence imposes a present cost on anybody that

practices it. Whosoever saves a dollar misses the gratification which

that dollar might bring. He may regard that sacrifice as fixed. It

causes him to go without his marginal gratification, whatever that may

be. If interest for a year amounts to twenty-five cents, the man has

at the end of the year one dollar and twenty-five cents, with which to

do whatever he may choose. He may spend it, if he will, and get all

the gratification that a dollar and a quarter can bring. If interest

stands at five per cent per annum, his abstinence will bring him only

one dollar and five cents a year, and that, or whatever he can get by

means of it, is a smaller benefit than the one he could get for one

dollar and a quarter. If it is barely worth while to go without

something now in order to have a dollar and five cents in the future,

it is more than worth while to do it in order to have a dollar and a

quarter at the same future date. If a man is induced to save only a

dollar, for the sake of having a dollar and five cents at the end of

the year, why should he not save two dollars, in order to have two

dollars and a half at that time? Why should not the amount of his

present privation increase, when the surplus of benefit he can gain by

it at a future date grows greater? Such is the reasoning, and it seems

entirely plausible, if we assume that what the man loses is the

gratification he might have by spending his dollar, and that what he

gains is the benefit of spending it and its accumulation of interest

at the end of the year. The assumption is that the man proposes at a

certain future date to spend the principal or the capital which he

acquires by saving in the present, together with whatever it may have

earned as interest; that he measures the personal benefit which he can

get by this spending, and finds the larger benefit better worth a

fixed sacrifice in the present than a small one.

The Actual Purpose of Abstinence

Most capital is saved with no

expectation of ever spending the principal. The motive is a perpetual

income, which the capital will earn. What the man appraises in his own

mind is not the personal benefit he can get by spending a dollar and

five cents at the end of the year; it is the benefit that will come

from spending five cents at the end of the first year, another five

cents at the end of a second, and a more or less similar amount at the

end of every year that shall follow. It is a perpetual income, and as

the man's life is limited, the greater part of it must accrue to

others than himself. The satisfaction which he will get from it near

the close of his own life comes altogether from the prospect of

passing the principal unimpaired to others and in assuring to them and

to their successors the perpetual income which the foundation yields.

Even on this basis it might be supposed that a large perpetual income

would offer a greater inducement to save than a small one, and

therefore that the amount of saving would be greater when the rate of

interest was higher. This would be true if the importance of the

perpetual income could be estimated in this simple way by the mere

amount of it.

Conditions affecting the Importance of a Future Income


importance of a future income may be large because of the prospective

helplessness or poverty of the one who expects to enjoy it. A workman

may save at a great present cost to himself in order to provide for

old age or sickness, in which case the income from the savings, and

often the savings themselves, would be the means of averting a great

calamity. To make one's self secure against privation in the future is

worth more than to add to one's comforts in the present. If a certain

minimum amount were needed to avert starvation at the end of a man's

life, he should secure that amount at all hazards, however much that

may trench on his present comforts. Now, as the amount which he can

have at the end of his life depends largely on the rate of interest

which his savings will earn, during such time as they may remain in a

productive shape, it will take more positive abstinence on his part to

keep himself from starvation when the rate of interest is low than it

will when the rate is high. If there were no interest at all, he would

have to put by from his income his entire old-age fund. If the rate

were a hundred per cent per annum, taking a very small part of the

fund out of the income of his active years would suffice, since the

fund itself would earn the remainder. Is the income which is provided

for the future to be treated as a variable amount in addition to some

other income, or is it to be regarded as a fixed amount, which is

needed for some definite purpose? On the answer to this question

depends the entire issue as to whether a low rate of interest or a

high one affords the larger incentive for saving.

Future Incomes More or Less Fixed usually Needed

Recent writers

have called attention to the fact that in many cases saving has the

providing of a definite future income in view. The owner of a landed

estate, who intends to leave it to a son, may try to provide from his

rents an endowment which will save from want or from an unhappy

approach to want his daughters and his younger sons. He might

accomplish this, indeed, without any present saving by putting rent

charges or mortgages upon his land, but that would trench on the

income which his heir can derive from it. It would reduce the

establishment which the heir can maintain and cause him to fall out

of the class to which his father has belonged. Rather than do this,

the present owner will usually reduce the present standard of living

of the entire family and try to make sure that its future standard

shall not fall below the one thus established. It seems better to

maintain the somewhat lower standard through a series of generations

than to make the present mode of living more luxurious at the cost of

unclassing one's self and one's heirs at a later date.

This Fact heretofore Underestimated

To the writers who have cited

this familiar fact it appears to require merely a partial amendment of

the general proposition that a high rate of interest insures more

saving than a low one, and the inference which one naturally draws

from this supposed fact is that growing wealth, as is still supposed,

reduces the incentive for the accumulation of more wealth. Such an

accumulation is an essential part of general progress and is

practically necessary for sustaining the rate of wages. Here, then, if

this supposition is true, we might see an important influence tending

to bring progress to a standstill. Great wealth as the result of

progress, a reduced motive for acquiring still further wealth, a

retarding of progress--such would be the sequence. Dynamics would thus

be, in a very important respect, self-retarding if not self-halting.

Future Standards of Living the Important Element

The actual fact,

as we may venture to affirm, is that the standards of living which

need to be maintained in the future are the all-important element in

the case. To the laboring man it is necessary to avoid starvation or

the workhouse; to the well-paid artisan it seems necessary to do this

and to make for his children a provision which will keep them in the

same class with himself. To the capitalist who by successful business

has raised himself above the artisan class it seems necessary to keep

his children above the rank from which he has lifted the family; and

the same principle applies to all the wealthier classes. The tenacity

with which a man holds to a station in life outweighs his desire to

add to his own present luxuries, and his ambition to keep his children

in a certain station far outweighs his desire to add to their present


The Importance of Future Standards not affected by the Fact that Men

differ in Altruism

This does not at all raise the question how many

people care as much for their children as they do for themselves. That

is not the principle at issue. In so far as men do care for their

children the end they seek for them is to enable them to avoid what

seems like a disaster, rather than to make positive gains in the way

of comfortable living. Even in the case of those who have little

altruism, such provision as they make for descendants is inspired by

the desire to keep them within a certain class more than by any

computation of how many comforts or luxuries a surplus income of any

amount might give them. Whatever provision for children a selfish or

dull person makes is dictated by the same motive that incites him to

make provision for his own future, and in both cases it is chiefly the

maintenance of a standard that he usually has in mind.

The Principle not invalidated by the Fact that Forethought is often


All the motives for saving may be unduly weak. The man may

care far less for the future than he should do, and may make an

unreasonably small provision for it. Incapacity to estimate the

importance of this provision, as well as the degree of selfishness

which excludes the exercise of self-denial for the benefit of others,

are not the only reasons for this disregard of the future. There is an

optimism which is natural; and a religious faith which bids one not to

take unduly anxious thought for the morrow may occasionally be carried

to the harmful length of justifying a neglect of coming years and

their needs. An intelligent trust in Providence, however, incites a

man to do his own full duty, and it is the better men who do the most

to avert future evils from their families. The principle that we are

maintaining applies as completely in the cases of those who make small

provision for the future as it does in any others. In the majority of

cases whatever they do save is set aside chiefly for the maintenance

of some standard of living by those who get the benefit of it; and to

maintain any standard whatever, whether high or low, requires a larger

fortune when interest is low than it does when interest is high.

Forethought limited in the Length of Time it Covers

There is

little danger that we make any mistake in ascribing to the dread of

falling below a standard of living more influence on the accumulation

of capital than any other motive exerts. This will be clearer if we

look at the actual manner in which present and future are estimated

and compared. The fact is not that most people care unduly little for

all future benefits as compared with present ones, as it is that they

throw off responsibility for all the future beyond a limited period.

The perspective does not reduce the size of remote objects unduly as

often as it cuts off the view of them altogether. In looking through

coming years a man is subject to a certain economic myopia. One might

compare what he sees with what a man sees in a foggy atmosphere, if it

were not for the fact that the view of comparatively near objects is

clear. It is as though a circle of fog surrounded him and cut off

somewhat abruptly the view of everything that was far away. For a

short distance the man sees everything with comparative clearness, but

the limitless spaces that lie beyond he sees not at all. We have seen

that the amount of abstinence he will practice now for the sake of

what he or others will gain later varies as he is rational or foolish,

unselfish or selfish, and it is also true that the length of his

outlook into the future varies in the same way. There are all

gradations of far-sightedness among those who create capital; but even

comparatively near-sighted ones usually provide for the maintenance of

some standard or other during the period that falls within their range

of vision, and this requires that they should save more when interest

is low than they do when interest is high.

Marginal Capitalists

In this connection, however, it is to be

noted that economic myopia may go to the extreme length of making men

nearly indifferent to all future standards. In this case they

constitute an exception to the general rule, since whatever they save,

if they save at all, is likely to be more when interest is high than

when it is low. They are marginal capitalists, who are not influenced

by any benefits except immediate ones and only inquire how much an

investment will, from the day when it is made, add to their own

incomes. The higher rate is then the greater lure. Moreover, other

capitalists, who are influenced mainly by regard for future standards

of living, are somewhat affected by the immediate benefit which

marginal savers have exclusively in view. To the extent that they are

so, the higher the rate of their immediate returns, the more strongly

are they impelled to "abstain" and accumulate. The essential fact is

that marginal capitalists are few numerically, and their savings count

for little as they enter into the general fund, and that most

capitalists, including nearly all who save great amounts, do it

chiefly from a desire to maintain themselves and their descendants on

an established level of living. In the main the social motives for

saving are those we have described.

Enjoyment largely Teleological

There is a special reason why a

rational man, if offered an enjoyment now or later, at his option, is

quite likely to take it later. Enjoyment is mainly teleological. It

consists in a conscious approach to a desirable end. The knowledge

that one's efforts to attain a desired goal are successful and that

the good thing is really coming, sheds a light on the present. Indeed,

it is anticipation and memory which prolong any enjoyment, and of

these anticipation is the more effective. The knowledge that one is at

a certain time to sail for a foreign tour confers before the sailing

an enjoyment which is often more than a foretaste. It often rivals the

pleasure that is consciously taken in the trip itself. A man may be

happy for years in the prospect of a business success or a prospect of

election to a public office, and many years of hard labor in

scientific investigation may be illuminated by the expectation of the

ultimate discovery and its consequences. There is a good reason why

even an average man, as well as a wise one, will wish to distribute

his expenditures over the different periods of his life, and to give a

preference to the future whenever that is necessary in order to enable

him to hold through his earlier years the comfortable assurance that

his later ones are well provided for.

If the line AB represents by its distance above CD a fixed

standard of living during a period of ten years, the highly rational

man will prefer to take something from the enjoyments of the first

five and bestow them on the second five. The consciousness of

improvement, of the fact that every year will bring a new enjoyment

never before experienced, makes the whole life brighter than it could

be with any other disposition of the available means of pleasure. The

man's standard of living during the whole ten-year period will be

represented by the rising dotted line EF.

The Effect of Robbing the Future

If a man pursued the opposite

course, of taking something from the future to add to the

desirableness of the present, thus establishing a falling standard of

living, he would have to relinquish every year something to which he

was accustomed, which would cause him a keen pain. The very excessive

gains of the present would thus become sources of unhappiness at a

later period, while the anticipation of the later unhappinesses would

throw a shadow over the present. The men who in spite of all this live

recklessly and waste their present substance do so, not so much

because they undervalue so much of the future as falls within their

purview, as because they are so extremely short-sighted that over

nearly all of the future they have practically no vision at all.

The Actual Conduct of a very Reasonable Man

The real fact in the

case of a reasonable man is represented by the following figure:--

Line EF measures fifty years and line FG another fifty. The heavy

line AB, rising toward the right, represents the rising standard of

living which the man's reason makes him maintain during the period

over which his vision is clear, while the dotted line BC represents

the standard for which, in an imperfect way, he makes provision during

the next fifty years. Over later periods his vision does not extend at

all. It loses clearness after the point B is passed, and in the same

proportion it loses influence over the man's conduct. He therefore

reconciles himself to whatever standard may prevail, even though it

were a stationary one during the latter part of the time. Very seldom,

however, would the man consciously lower the standard even during

this later period.

The Effect of Limited Vision on the Valuation of a Perpetual


This failure of vision, or economic myopia, accounts for the

fact that the infinite series of payments of interest that a sum of

invested capital will earn do not overbalance, in the man's estimate,

the principal which he must refrain from spending in order to get

them. If interest is at five per cent, abstaining from using a hundred

dollars for present pleasure will put into the man's hands, in twenty

years, a sum equal to the principal, in twenty years more another like

sum, and so on ad infinitum. The man who considers whether he shall

save a hundred dollars or spend it might be said to be comparing the

importance of a hundred present dollars with that of an infinite

number of future ones. In his consciousness the number is not

infinite, because his vision does not extend over much of the future.

The fact of most importance, as determining whether low interest

causes small savings, is that in weighing the importance of the

dollars which will be used during the period over which his vision

ranges the average man is influenced by a desire to maintain some

standard of living, which involves the more saving, the lower the rate

of interest.

The Action of the Motive for Saving on Minds of Varying Degrees of


Not only the man who looks a little way forward, but

the man so constituted that he can content himself with a falling

standard, is impelled to save more if interest is low than he is if

interest is high, so long as he deems it necessary to maintain any

standard at all; but much importance still attaches to the question

whether the standard which the man hopes to maintain is a rising, a

stationary, or a falling one. The average man, indeed, does hope to

maintain at least a stationary standard during so much of the future

as he cares much about. This mode of distributing pleasures appears in

matters both small and great. In taking a walk for pleasure one is

more likely to go up a rising grade first and descend afterward than

he is to go down at first and afterward bear the fatigue of climbing.

While there may be those who would rather play in the forenoon and

work in the afternoon, when the choice is presented at the beginning

of the day, there are certainly more among the classes that society

depends on for capital who would put the work in the forenoon and the

pleasure in the afternoon or evening. If a man were taking a canoeing

trip on a swiftly flowing stream, he would paddle his boat up the

stream and then come down with the current, rather than let it float

down with the current and then paddle it back. If it be thought that

this is true of only a specially rational mind, one may say that the

capitalist class represents men who in this respect are more than

ordinarily rational. They are generous, foresighted, and in their

relation to descendants affectionate. The men who really do the saving

for society have more to make them think and act in the intelligent

way we have described than do ordinary men. The miser, the paragon of

abstinence, can hardly be said to be the man who thinks too much of

future enjoyments, for he contemplates no such enjoyments that call

for spending money, for he never means to spend it. He is an abnormal

type and fortunately a rare one. With him there is a standard of

possessions to be maintained, rather than one of enjoyments, and it

is always a rising standard, since he cares for nothing so much as to

see his possessions increasing. To make them increase at any given

rate when the direct earnings of capital are small requires severer

abstinence than it would if the capital yielded a larger return.

The Effect of an Increase in the Number of Persons who seek to

maintain a Rising Standard of Living

While it is true that even the

half-evolved intellects that care little for coming years do, if they

care for them at all, find themselves impelled to save more capital

when interest is small than they do when it is large; it is also true

that minds of a high order save more than minds of a low one. In order

to live during one's latter years just out of danger of the workhouse,

one does not need to trench deeply on the comforts and pleasures which

he is able to enjoy during the greater part of his life; but if he is

determined to live to the end of his days as well as he has done at

any time and to help his children to do the same, he must practice a

severer self-denial and accumulate a larger fund. Still sharper

becomes the abstinence and still greater the accumulated fund where

men provide for a future mode of living that shall surpass the present

one. The importance of this fact lies in this: the condition which

brings with it a low rate of interest does so because of the great

number of men who do thus value a future standard of living that shall

be at least stationary if not positively rising. The growing size of

the social capital implies a more general appreciation of the

importance of future well-being. Because men's economic psychology has

become what it is and because it is still changing for the better

there is a second reason for expecting that the accumulation of

capital will not hereafter be retarded. We make here no extravagant

claim as to the number of persons in a community who take the more

rational views as to present and future. The number of each class is

what it is; but facts show that the maintenance of some standard is

the most efficient motive for saving in the case of each one of them,

and that low interest therefore calls for large accumulations. They do

show that the number who take the more rational views is a growing

class, that they accumulate more than other classes, and that every

addition to their relative number makes for more rapid accumulation

within the society of which they are members. Two decisive reasons,

then, exist for thinking that the growth of capital will never end or

check further growth. There are still further facts, however, which

have a bearing on this problem.

The Importance of the Character of the Increases which are the

Largest Sources of Accumulation

If one has a doubt whether the

large sums which enter into the capital which is steadily accumulating

are saved under the influence of a desire to maintain a standard, this

doubt will be removed by a consideration of the source from which

great accumulations come. They come most largely from the net profits

of the entrepreneur. Next to that they come from the earnings of

what must be classed as labor, though much of it is labor of a special

and very superior sort. The salary which the head of a corporation

receives, the fees that its lawyers get, the fees that come to eminent

surgeons or engineers, are all payments for labor; and these, taken

together with the earnings of well-paid artisans, successful farmers,

and very many others, constitute the second contribution to

accumulating capital. Savings from simple interest itself constitute

the third contribution.[1]

[1] Gains which come from holding land which rises in value

more rapidly than the interest on the price of it

accumulates, is to be rated as part of net entrepreneur's


Now, of these sources of income, net profits and the wages of superior

labor are transient, and the profits are particularly so. The man

whose mill earns fifty per cent in a particular year would be foolish

in the last degree if he used all that as income. That would mean

brief and riotous enjoyment, followed by a most painful fall from the

standard so established. He will naturally spend some part of the

phenomenal dividend and lay aside enough of it to afford a guarantee

that his future income will not fall below the present one. The man

who during the best years of his working life enjoys a salary or

professional fees amounting to a hundred thousand dollars a year would

be almost equally foolish if he were to spend it all as he earns it,

leaving his family unprovided for and his own later years exposed to

the pains of sharp retrenchment. Transient incomes suggest to every

one who has any degree of reason the need of establishing and

maintaining some future standard of living, and of investing enough to

accomplish this. This is more true, of course, when the rate of

interest is low.

The Importance of the Need of Enlarging a Business

There is a

special reason why legitimate business profits are morally certain to

be to a large extent laid aside for investment. The man would say that

he "needs them in his business." They come at a time when there is an

inducement to enlarge the scale of his profitable operations. The man

who is getting a dividend of fifty per cent per annum must make hay

while the sun shines, and he can do it by doubling the capacity of his

mill. What he makes and what he can borrow he uses for an increase of

his output, which it is important to secure during the profitable

time. All this means a quick increase of the total capital in


The profits of a monopoly are not transient, but are likely to be both

long-continued and large, and it might seem that they would constitute

a larger source of addition to capital than those profits which come

from technical improvement. There are several reasons why this is not

the fact. In the first place, what we are discussing is the addition

that profits make to the total capital of society, rather than to the

capital of any one person or corporation. The monopoly makes its gains

by taking something from the pockets of the general public, and in so

far it reduces the power of the general public to save.

It might be alleged, however, that since a monopoly reduces wages and

interest, adds to profits, and creates enormous incomes for a few

persons, it really diverts income from a myriad of persons who would

save very little of it, and puts it into the pockets of a few persons

who are likely to save a great deal of it. This might conceivably add

to the capital of society were it not for the fact that the more

secure and regular gains of monopolies are made the basis of large

capitalization. A company that earns twenty-five per cent of its real

capital per annum may have its stock diluted with four parts of water

and pay only five per cent in dividends on its capitalization. This

looks like interest and is apt to be treated as such by those who

receive it. It is, therefore, not a more favorable income from which

to make accumulations of capital than is the interest on real

capital. The sudden gains which promoters and manipulators of

consolidated companies make are, indeed, transient gains and may be

largely added to capital. The introduction of a regime of monopoly may

insure a period of much saving by the class that profits by it; but

the later career of the monopoly is unfavorable to the growth of


The Special Effect of a Prospective Fall in the Rate of


If interest which continues steadily at a low rate affords

an especially strong incentive for saving, it follows that a falling

rate, one that begins low and steadily becomes lower, affords a still

stronger one. The average rate during the years of the future for

which a prudent man makes provision is made, of course, lower than it

would be if the rate were stationary. This influence is probably not

as effective as it would be if the remote future were included in the

view of those who are securing capital. On account of the

near-sightedness to which attention has been called, a rate of

interest that begins at four per cent and falls very slowly to three

and a half presents to those who have this defective vision the same

incentive to saving as one that begins at four per cent and remains

steadily at that figure. What is true, however, is that a falling rate

is to be expected, that this fact acts as a stimulus for saving in the

case of the more far-sighted classes, and that the number of persons

in these classes is increasing.

In so far as the increase of capital is concerned society is secure

against the danger of reaching a stationary state. Progress in wealth

will not build a barrier against itself by stinting the resources on

which hereafter labor must rely. When we examine the sources from

which capital mainly comes, we shall further test the probability that

the instrumentalities which add productive power to human effort will

increase through the longest period that science needs to take account


[2] For a somewhat similar view of the effect of a fall

of interest on the accumulation of capital, see Webb's

"Industrial Democracy," Vol. II, pp. 610-632.