This is my own telling of one of Frederic Bastiat’s essays. I like it because it makes clear, why those to provide capital–the means of production–are entirely justified in receiving ongoing recompense for providing that well beyond.
Suppose there was a rough carpenter, let’s call him John. He makes a certain amount of money in a year from his work. John, however, decides that if he could do finer, more finished, work he could make more than he has before with which he can provide his family with a few more luxuries. The key that John needs to do this is a plane for smoothing his work and preparing it for the more exacting tasks of sanding and the like. A tool something like this:
So, this being the case, John sets out to make himself a plane (for purposes of this exercise we’re presuming that everything is done by individual craftsmen, there are no factories. We’ll get to what factories do to the situation in another post). To do this, he takes some time off from his carpentry, foregoing the income he could otherwise be making but he grits his teeth and accepts that because once the plane is done he’ll be able to make more money and putting off a bit now for future gain is worth it to John who understands the concept of deferred gratification.
So, after some days, call it ten, John has his plane. That plane has cost him what he could otherwise have made in those 10 days. He is out ten days of income, but in return for that he has a plane.
Before John another rough carpenter, call him Karl, comes up to John and sees that plane. He has the same idea as John, that with it he could make more money. So Karl asks John to loan him the plane for a year. At the end of that year Karl will return the plane–with any damage completely repaired so it’s in exactly the same condition as when he received it–for John to use.
Sounds fair, right? At the end of the year John is out nothing.
Except John is out something. He is out what he could have made with his carpentry if he had use of the plane. The deferred gratification of working for something that will make him more down the road is one thing. Deferring gratification still further for nothing? That’s a whole different ballgame.
There is only one way that Karl can get the use of that plane for a year (I mean, other than stealing it): that’s to offer John not just the plane back at the end of the year, but something additional to recompense John for not having use of the plane for that year. Now it need not be all that John could have made using the plane. After all, John isn’t having to do the work with it either. And, of course, if Karl is just giving to John all the extra the plane provides to him, well, he’s not going to want to make that deal. But somewhere between those two extremes they can come to an agreement.
The plane, in this case is Capital. It is a means of production, specifically a means to produce finer, more “finished” carpentry than that provided just by hammers and saws. And the one providing the Capital receiving compensation for providing it is only right and proper.
Now, let’s continue a bit. Once John makes the deal with Karl, instead of going back to his rough carpentry, he makes another plane. Because he’s done it before, the new one only takes him eight days to make. When he’s done with this one, another carpenter, call him Edward, approaches him to make a deal like Karl’s. John, of course, is willing, on the same terms as his deal with Karl. Now, this might seem unfair since it only took him eight days to make this one while it took ten to make the one he rented to Karl but there are two things: by loaning out the plane he’s giving up the same value from what he could do with the plane and Edward is gaining the same value from having use of it. Indeed, the cost of producing the plane was completely left out of the deal with Karl, only the loss of use of that plane was considered. So the deal is made and John goes back to making his next plane.
In the end, if there are enough rough carpenters out there looking to upgrade to doing more fine work, John soon finds that he is making his income entirely by providing planes to these other carpenters. And everyone benefits from it. John benefits because his return from providing means of production to the carpenters supplies his income. The carpenters benefit from producing more value because they have access to these means of production. They could produce their own planes as well, sure, but that would involve that up-front expenditure of time and effort and, well, it’s just easier and cheaper for them to continue paying rent to John. And, finally, there’s more fine carpentry work available for people to obtain and appreciate.
And, when their yearly rental is done, Karl et al still want to do their fine carpentry so they continue the rentals.
And, of course, if John decides to charge too much for plane rental, why then Karl, or Edward, or any of the other carpenters (or even not carpenters) decides to make their own plane and before you know it John has a competitor.
Now, in the end, John dies and passes the ownership of all these rented out planes to his son John Jr. After all, they’re his property and he can do what he wants with it. John Jr., who never was a carpenter to begin with, continues to rent out the planes to all the carpenters. And even though the person who is providing the means of production has no personal use for those means (not a carpenter) he is still providing the same value as John Sr. did. The carpenters benefit from having a means of production provided for them rather than have them do that for themselves.
This, then, is the essence of Capitalism.