I’m going to steal from Fredrick Bastiat today because he explained the concept so well. This is basically a story, a parable if you will, which illustrates why the owners of capital (means of production) deserve compensation for the use of said means.
A very long time ago there lived, in a poor village, a joiner, who was a philosopher, as all my heroes are, in their way. James worked from morning till night with his two strong arms, but his brain was not idle, for all that. He was fond of reviewing his actions, their causes, and their effects. He sometimes said to himself, “With my hatchet, my saw, and my hammer, I can make only coarse furniture, and can only get the pay for such. If I only had a plane, I should please my customers more, and they would pay me more. It is quite just; I can only expect services proportioned to those which I render myself. Yes! I am resolved, I will make myself a plane.”
However, just as he was setting to work, James reflected further: “I work for my customers 300 days in the year. If I give ten to making my plane, supposing it lasts me a year, only 290 days will remain for me to make my furniture. Now, in order that I be not the loser in this matter, I must gain henceforth, with the help of the plane, as much in 290 days, as I now do in 300. I must even gain more; for unless I do so, it would not be worth my while to venture upon any innovations.” James began to calculate. He satisfied himself that he should sell his finished furniture at a price which would amply compensate for the ten days devoted to the plane; and when no doubt remained on this point, he set to work. I beg the reader to remark, that the power which exists in the tool to increase the productiveness of labor, is the basis of the solution which follows.
At the end of ten days, James had in his possession an admirable plane, which he valued all the more for having made it himself. He danced for joy — for, like the girl with her basket of eggs, he reckoned all the profits which he expected to derive from the ingenious instrument; but more fortunate than she, he was not reduced to the necessity of saying good-bye to calf, cow, pig, and eggs, together. He was building his fine castles in the air, when he was interrupted by his acquaintance William, a joiner in the neighboring village. William having admired the plane, was struck with the advantages which might be gained from it. He said to James:
W. You must do me a service.
J. What service?
W. Lend me the plane for a year.
As might be expected, James at this proposal did not fail to cry out, “How can you think of such a thing, William? Well, if I do you this service, what will you do for me in return?”
W. Nothing. Don’t you know that a loan ought to be gratuitous? Don’t you know that capital is naturally unproductive? Don’t you know fraternity has been proclaimed? If you only do me a service for the sake of receiving one from me in return, what merit would you have?
J. William, my friend, fraternity does not mean that all the sacrifices are to be on one side; if so, I do not see why they should not be on yours. Whether a loan should be gratuitous I don’t know; But I do know that if I were to lend you my plane for a year, it would be giving it to you. To tell you the truth, that is not what I made it for.
W. Well, we will say nothing about the modern maxims discovered by the Socialist gentlemen. I ask you to do me a service; what service do you ask of me in return?
J. First, then, in a year, the plane will be done for, it will be good for nothing. It is only just, that you should let me have another exactly like it; or that you should give me money enough to get it repaired; or that you should supply me the ten days which I must devote to replacing it.
W. This is perfectly just. I submit to these conditions. I engage to return it, or to let you have one like it, or the value of the same. I think you must be satisfied with this, and can require nothing further.
J. I think otherwise. I made the plane for myself, and not for you. I expected to gain some advantage from it, by my work being better finished and better paid, by an improvement in my condition. What reason is there that I should make the plane, and you should gain the profit? I might as well ask you to give me your saw and hatchet! What a confusion! Is it not natural that each should keep what he has made with his own hands, as well as his hands themselves? To use without recompense the hands of another, I call slavery; to use without recompense the plane of another, can this be called fraternity?
W. But, then, I have agreed to return it to you at the end of a year, as well polished and as sharp as it is now.
J. We have nothing to do with next year; we are speaking of this year. I have made the plane for the sake of improving my work and my condition; if you merely return it to me in a year, it is you who will gain the profit of it during the whole of that time. I am not bound to do you such a service without receiving anything from you in return; therefore, if you wish for my plane, independently of the entire restoration already bargained for, you must do me a service which we will now discuss; you must grant me remuneration.
And this was done thus: William granted a remuneration calculated in such a way that, at the end of the year, James received his plane quite new, and in addition, a compensation, consisting of a new plank, for the advantages of which he had deprived himself, and which he had yielded to his friend.
It was impossible for anyone acquainted with the transaction to discover the slightest trace in it of oppression or injustice.
That was Bastiat. My turn for commentary now.
As we can see here, by letting William use the plane James deprived himself of what benefit he could have obtained by using the plane himself. To compensate him for that, William not only provides him back the plane, good as new, at the end of the year, plus the value James could have obtained by using the plane himself. William also benefits because he has the plane which he did not need to make himself. If it happens that James is better at making planes and William is better at using them in carpentry, they both end up ahead in the arrangement.
If, however, the reverse was the case, the price James would charge for the use of the plane (representing what he would have to recoup in order to cover the lost productivity because effort is spent in making the plane in the first place) would be higher than the value William would get from using it and he would not use James’ plane but instead make his own.
So it has to be the other way because otherwise the exchange will not happen without the actual use of force. William benefits because James makes planes available. Yes, William has to pay James for the use of that plane, but because he can use the plane, he can produce more, and be paid more, than if he didn’t.
We could also get into the fact that William could buy the plane from James, but the cost would be much higher since William would not only be depriving James of the year of use of the plane but the value of its use forever after.
The situation does not change if James, instead of going back to work making rough furniture instead makes another plane and rents it out to Charles. Nothing of significance changes if James gives his planes to his son Tom and Tom rents them out. And if James has ten planes or a hundred planes or a thousand planes rented out the compensation he earns is dependent not on the amount of time he spends renting out planes, but on the value of those planes to the people using them. Because every person using one is benefiting from the use of that plane (or is being very foolish which is on them) for which benefit they should expect to pay.
And James (or Tom, if James has passed them on) has a bunch of planes. He might trade some of the planes for hammers and saws and so on. Now he can provide carpenters with the use of a complete kit. And, again, just like with the plane, he’s perfectly entitled to the compensation for that use. (Yes, James could make another plane, but even then he would still have one less plane then he would otherwise have.)
The same principle extends in straightforward, stepwise fashion to providing work facilities, providing knowledge of markets (so you’re not producing bookshelves when chairs are what is needed), and all the other things that go into a thriving economy. The folk providing the means of production are entitled to compensation for making those means available. There is nothing illicit or unethical or venal in that. Those using those means benefit from having them made available. Without those means of production they would not be able to produce or would produce less and thus earn less themselves. If that were not the case they could simply start up their own business providing their own means of production.
And that, right there, is capitalism. All the other things people attribute to it? It’s other stuff. This, right here, is capitalism.