Capital cost

“ But capital always costs something; and, therefore, the cost of the Capital enters in as a second constituent into the cost of production of Land-Commodities. But these two costs are all. We shall search in vain for any other onerous element in the cost of producing commodities. There are two variables only in the Cost of Production, which itself is the sum of the two subordinate costs. ”

“ This waste of labor and capital constitutes an addition to the cost of production of the commodity, which raises its value and price in a corresponding ratio, and thus the owners of the capital are indemnified. The loss falls on the consumers; though the capital of the country is also eventually diminished, by the diminution of their means of saving, and, in some degree, of their inducements to save. ”

“ In the interest of conservatism and as producing certain other desirable results which will be brought out as each asset is examined in detail, cost price, if lower than market, is deemed the desirable basis for the valuation of this group. By way of explanation, it should be said that working capital as used here is the difference between current assets and current liabilities and so represents the portion free to be put to the further pursuit of business. ”

“ Inasmuch as this value is measured by earnings, the cost incurred in securing the increase is a very proper and legitimate charge to capital. Against this argument, it may be said that plant or structural changes are always made to improve operation. To make increased earning capacity the sole test is virtually to capitalize all expenditures of this kind—a policy which would soon lead to an unconscionable inflation of assets. Only by a policy of very liberal depreciation can such values if capitalized be kept within reasonable bounds. ”

“ Returns from different outlays are equalized, and a dollar invested in one kind of business then yields as much in a year as a dollar in any other. In a dynamic state the cost standard still prevails, and as the tools of production become cheaper, in terms of labor, it takes more of them to represent the same amount of capital that was originally invested. ”

“ Interest is determined by the equation between the demands of borrowers and the supply of capital offered by lenders. Or, if we take what is given as the law of profits, it is determined by wages, falling as wages rise and rising as wages fall—or, to use the phrase of Mill, by the cost of labor to the capitalist. ”

“ To be properly remunerative to the State, as to a private individual, the price at which a commodity is sold must be sufficient to pay interest on the capital invested in the business, that is to say, to pay for the use of the property which must be used in producing the commodity, as well as to pay the more immediate cost of its production in wages and materials. ”

“ Variable capital, v, is the annual wages bill. Surplus, s, is annual rent, interest, and net profit, so that v + s represents net national income. (In this introduction surplus is used interchangeably with rent, interest and net profit.) Constant capital, c, represents at the same time the contribution which materials and capital equipment make to annual output, and the cost of maintaining the stock of physical capital in existence at the beginning of the year. ”

“ But further, the capitalization theory, as heretofore formulated, like the doctrines of supply and demand and cost of production, assumes money, and a fixed absolute value of money. This assumption must be made if we are to be able to predict, on the basis of the capitalization theory, that a given annual income, at a given rate of discount, will give a specified capital value. ”

“ The account should be charged originally with all such items at full cost. Great care must be exercised in handling repairs and betterments to avoid an inflation of values. The distinction between capital and revenue expenditures as regards all such assets already acquired is usually so slight and uncertain as to justify the establishment of a policy of charging all these to expense. Otherwise, the ease of inflation is apparent. All new purchases should be charged at full cost to the asset. ”

“ The second is that those who own it should no more control production than a man who lets a house controls the meals which shall be cooked in the kitchen, or the man who lets a boat the speed at which the rowers shall pull. In other words, capital should always be got at cost price, which means, unless the State finds it wise, as it very well may, to own the capital used in certain industries, it should be paid the lowest interest {103} for which it can be obtained, but should carry no right either to residuary dividends or to the control of industry. ”

“ Next, the amount of capital investment to be supported out of earnings was computed by estimating the cost of reproduction of track and overhead lines under each franchise and apportioning the cost of land, power-houses, barns, cars, tools, and stores in proportion to car-mileage. ”

“ Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. ”

“ Further argument for the inclusion of interest as an item of cost is the fact that in numerous processes time is an important element. Thus, the smelting of ore, the tanning of leather, the curing of tobacco, the seasoning of lumber, etc., are examples of relatively lengthy processes the cost of which should include interest on the capital invested. ”

“ At the same time that this increased production is taking place, the fixed capital of the country is, as a necessary consequence, augmented; for in the case I have mentioned, of chipping and filing by the hand, when the cost of labour was 12s. per foot, the capital required for tools for one workman was only a few shillings; but now, the labour being lowered to a penny per foot, a capital in planing machines for the workman is required which often amounts to £500, and in some cases more. ”

“ The effect that a series of improvements has on the amount of social capital, if we measure the fund solely on the basis of the cost of the capital goods which embody it, may be represented thus:—The horizontal line measures time and is graduated in years from one to ten. The distance of the point above this base represents the amount of capital as estimated in units of cost, in the possession of the society at the time a particular improvement is made, and would remain unchanged if society were static. ”

“ The necessary cost, and hence the capital charge, of the money embarked recently in utilities, and of that which may be invested in the near future, may be more, as it may be less, than t e prevailing rate of return required to induce capital to enter upon like enterprises at the time of a rate hearing ten years hence. ”

“ So long as these commodities remain unconsumed, they are called free capital; when they are employed to sustain laborers engaged in building a warehouse, a bridge, or a railway, the capital is said to become "fixed," or sunk in such enterprise. If the investment is a paying one, returning the cost with interest, the capital is in time released; if it loses money, ultimately becoming worthless, then the capital is fixed forever, or lost. And the true cost of these works to the community is correctly expressed by the price paid for them, Mr. ”

“ On the quantity theory, other prices, the prices of producers' goods and services, lands, and securities, would have to come down enough to compensate, in order that the price-level might remain unchanged. For the capitalization theory, however, the prices of lands, securities, and long time capital goods in general would have to rise, since the incomes on which they are based have risen. Wages of labor engaged in making consumers' goods would also have to rise, on the general imputation theory. ”

“ In the same way that the costs of installing machinery in position and ready for use are capitalized by being added to the value of the equipment, so may the organization expenses of a corporation be legitimately capitalized as being the measure of the amount of the greater value which these organized business elements have over the same elements unorganized. Capital has been brought together and set to work, management and plan of operation have been secured, and business is ready to begin. ”

“ Such deficits may be covered either by being regarded as a part of the investment and included in the capital upon which interest is allowed, or they may be carried until they can be written off when the earnings have so grown as to leave a surplus above a reasonable return on the investment that is large enough to permit it. When capitalized, they become a permanent charge on the consumers. ”

“ The fact is that the net income is less than a fair interest on the actual cost of the roads, and perhaps not one per cent. on the nominal value as shown by capitalization. A road has cost five millions; the nominal value is twenty millions; the net income is six per cent. on four millions. Take out a dozen corporations which are wholesomely managed, and the rest of the companies are, in varying degrees, bankrupt as to their nominal capitals and unprofitable as to their actual cost. ”

“ The capitalist who lent $10,000 for five years in April, 1862, at 6 per cent. interest, would be in relatively the same position as the workingman who received no advance in money wages; while his money income remained the same, the rise of prices would decrease his real income in 1864 and 1865 by about one-half. Of course, this loss to the creditor is a gain to the debtor; for to [Pg 40] the business man using borrowed capital the advance of prices means that he can raise his interest money by selling a smaller proportion of his output. ”

“ This is real humbuggery; and for which the industrial classes—the whole working population, have to pay an enormous price. Does any one calculate the cost to the people of banking in our country? how many costly edifices have to be built? what an army of officers have to be maintained? what daily expenses have to be incurred? how many stockholders must get profits? in a word, what a vast sum a bank lays out before it begins to make its half yearly dividend of four or five per centum, leaving a surplus—all to come out of the productive classes of the people? ”

“ But is it nevertheless true that, during the whole of the interval between the creation of the capital of $100 and its reduction to a sum not greater than that of the annual revenue appropriated to its redemption, there will be a greater active capital in existence than if no debt had been contracted. ”

“ After what has been said, it surely must be plain enough that each day's work has involved the consumption of the carpenter's vital capital, and the fashioning of his timber, at the expense of more or less consumption of those forms of capital. Whether the a + b to be exchanged for the chest has been advanced as a loan, or is paid daily or weekly as wages, or, at some later time, as the price of a finished commodity—the essential element of the transaction, and the only essential element, is, that it must, at least, effect the replacement of the vital capital consumed. ”

“ The whole expense of maintaining the fixed capital, must evidently be excluded from the net revenue of the society. Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings, etc., nor the produce of the labor necessary for fashioning those materials into the proper form, can ever make any part of it. The price of that labor may, indeed, make a part of it; as the workmen so employed may place the whole value of their wages in their stock reserved for immediate consumption. ”

“ Now it is conceivable that there might exist, in the hands of persons disinclined or disqualified for engaging personally in business, a mass of capital equal to, and even exceeding, this demand. In that case there would be an habitual excess of competition on the part of lenders, and the rate of interest would bear a low proportion to the rate of profit. ”

“ We found that the gross profit of capital might be distinguished into three parts, which are respectively the remuneration for risk, for trouble, and for the capital itself, and may be termed insurance, wages of superintendence, and interest. After making compensation for risk, that is, after covering the average losses to which capital is exposed either by the general circumstances of society or by the hazards of the particular employment, there remains a surplus, which partly goes to repay the owner of the capital for his abstinence, and partly the employer of it for his time and trouble. ”

“ It is, therefore, absolutely essential that there should be an adequate increase of the amount and efficiency of the capital item requisite to additional employment and production. It is obvious that this may be increased from its own slow growth and accretion in the course of industry; and that for a higher degree of prosperity there must be even additional savings from available fruits or income. People have thus already learned how pernicious excess profit taxes are, and are unanimously seeking their abandonment. ”

“ The money in the hands of lenders, in common with all other money, will be enhanced in value, that is, there will be a greater amount of real capital seeking borrowers; while the real capital wanted by borrowers will be only the same as before, and the money amount less: the rate of interest, therefore, will tend to fall. ”