Supply and Demand | Page 7

let us
say, as the recently mooted Severn barrage scheme, should or should
not be undertaken. Let us suppose that the costs and future benefits of
the undertaking can be estimated accurately; and that the problem
reduces itself to one of expending now a sum, let us say, of
$100,000,000, with the prospects of obtaining in the future an income
of power, or whatever it may be, worth $5,000,000 per annum. I have
assumed for the sake of simplicity that we shall still be reckoning in
terms of money, though possibly the executive may have substituted
Marxian labor units; but it is quite immaterial to the present argument
what the measuring rod may be. The point to be observed is, that it is
impossible to tackle the problem at all without the conception of a rate
of interest. For suppose that you tried to do without it, and said, "We
shall take a long view. The interests of the future are no less our
concern than those of the present; we shall not discriminate between
them. We shall regard as an enterprise worthy to be undertaken
whatever promises to yield in the course of time a return larger than the
outlay." Where will this lead you? The particular proposal set out above
would clearly pass the test; for in twenty years the resultant benefits
would have added up to a figure equivalent to the initial cost. But
equally clearly, the cost might have been more than $100,000,000; it
might have been $250,000,000, $500,000,000, whatever figure you
care to take, and if you extend the period similarly to fifty or one
hundred years, sooner or later the gains would top the cost. Now there
is no limit to the enterprises which would pay their way on this basis;

and it would be quite impossible to undertake them all. For they would
swallow up all and more than all your labor and your materials, and
would leave you with no resources with which to meet the recurrent
daily wants of men. Clearly, then, in some way or other, you must pick
and choose, you must reject some enterprises as insufficiently worth
while. But how would you proceed to choose? Without a clear principle,
a simple criterion to guide you, you would be plunged in utter chaos.
You could not say, "Let all proposals involving capital expenditure be
submitted to a central committee, who shall compare them with one
another in a sort of competitive examination and, after deciding the
number of applications they can pass on the basis of the volume of
resources which they can devote to the future, award the places to those
which head the list." Such a prospect is a nightmare of officialism and
delay. You would be driven to formulate a simple, intelligible rule or
measure, and leave that rule to be applied by the unfettered judgment of
innumerable men to individual problems, as and when they arose. And
for such a rule or measure, you could not do better than a rate of
interest; you would have to lay it down that only those projects should
be approved which promised a return of 6 per cent, or whatever it
might be. Even in deciding what it should be, the limits of your choice
would be narrowly confined. If, for instance, you fixed on 1 or 2 per
cent, you would probably discover that you had not achieved your
object, that the undertakings for distant returns which passed this test,
still consumed far more resources than you could spare. You would be
compelled then to raise the rate until it had cut these enterprises down
within manageable limits. But, once more, what essentially would you
be doing? You would be using the instrument of the rate of interest to
adjust the demand for and supply of capital, though indeed the interest
might not be paid away as now to private individuals. You would be
reproducing by the method of deliberate trial and error, the adjustments
which occur automatically as things are, in the actual world. Once
again the most perfectly contrived Utopia would be compelled to pay to
the unorganized coöperation of our epoch the sincerest flattery of
imitation.
§6. The Fundamental Character of many Economic Laws. But again
perhaps a word of warning may be desirable. There is much

controversy in these days about something called "Capitalism" or "The
capitalist system." When these words are used with any precision, they
usually refer to the arrangement so prevalent at present, whereby the
ownership and sole ultimate control of a business rests with those who
hold its stocks and shares. There is much to be said upon the merits and
demerits of this system; something will perhaps be said upon the matter
in the fifth volume of this series; but