Capital and Delayed Gratification

marshmallow

There is a tale told about how to teach children about delayed gratification–“depriving” one in the short term in order to reap longer term rewards.  In this tale it is suggested to offer a child a marshmallow (or some other modest treat that they enjoy).  Only, if they can wait just one minute (it’s for a child after all) they can get not one but two marshmallows.

A little bit of patience, simply waiting, can get them more than if they grab the benefit right now.

Now, go back to my earlier post on “the plane”, Bastiat’s argument why interest is justified.  A moment’s reflection will show that John, in taking the time and effort to make that carpentry plane, exercises delayed gratification.  He is putting off benefits he could make “now” (by engaging in rough carpentry) in return for the possibility of future benefits by being able to do fine carpentry using that plane.

Resources spent in the present–in John’s case, the time and effort he could have spent otherwise–in return for a future payoff.  Whether it’s simply the “resource” of sitting on ones hands not to eat that marshmallow in front of one, or the time and effort to manufacture capital goods (that plane) in return for better income in the future, or simply investing in a business hoping that it grows.  All of these are exercises in delayed gratification.

A common criticism socialists make of business is that the profits paid to investors, to managers and executives, is “taken” from the workers, the existence of profits payed to executives or shareholders is pure exploitation of the labor that in a “fair” system (by which they invariably mean some form of socialism) labor would share all the income from the sale of goods and services and the “parasites” of stockholders and others would be eliminated.

The problem is the labor would be far less valuable without the capital* brought to the table by those stockholders and their proxies who accumulate the finances to acquire the capital equipment and who have the human capital to organize and run the business.  They may not be on the factory lines turning out widgets but their contribution makes it possible for the workers to turn out more widgets for a given amount of time and energy and makes sure that the widgets they turn out are something people want enough to be willing to pay enough to both keep the employees paid and provide a profit for the investors.  If they fail to do that, they’ll either need to change or they’ll go out of business to free up the resources for somebody who will. (Or, these days, a third “option” is to be declared to be “too big to fail” and have the government bail you out.  That this leads to the continuation of uncompetitive enterprises that use more resources than the value they produce to the detriment of the long-term health of the economy as a whole should be readily apparent.)

Socialist and Communist philosophies tend to discount the value of bringing capital to the enterprise, organizing it, and managing it.  They just kind of assume the capital is there.  They don’t concern themselves with where the capital came from and how to create more of it.  At most, they claim that “you didn’t build that.  Labor built that” and so the capital is simply the product of a previous round of labor.

Well, I didn’t build my shoes either but I still own them.  Don’t think shoes are capital?  Try doing any job that involves a lot of time on ones feet, or out in inclement weather.  I can produce a lot more under those circumstances with good shoes than without.  Or my car.  I might, possibly be able to make a pair of shoes (for sufficient value of “shoes), but there’s no way that I’m making a car by myself.  I may not have built it.  I may not be able to build anything like it.  But I still own it and even discounting its value in getting me to work every day, should I choose to work at Uber or Lyft, or simply hire out as a courier to haul small packages it’s definitely capital.

My car and my shoes were both built by labor.  And that labor was paid to do so in order to make shoes and cars available for sale to people like me.  Similarly the people that made the shoes and built the car used machine tools in factories that other people were, other labor was, paid to produce.

This capital wasn’t produced because labor spontaneously got together and decide to produce capital.  Oh, at some point you get back to someone like John, making a piece of capital equipment to improve his own productivity, but as soon as you get out of the level of handicrafts, you get beyond such things.  Someone had to decide to hire people to manufacture the capital equipment that others would use to make either finished goods or still more capital equipment.  And the people they hired would need to be paid.

Let’s go back to John and his plane.  Suppose instead of making the plane for himself he hired someone to do it.  The person making the plane would certainly expect to be paid for it.  So he and John come to an arrangement.  For X dollars (or, since Bastiat, who originated the example of the plane was a Frenchman, we should use Francs) the workman would make a plane for John to use.  Now, John is still depriving himself to some extent because instead of spending his income on things to make his life nicer now (better cuts of meat for his dinners, nicer clothes, more fuel for heating his house, whatever) he’s instead paying the other guy to make the plane in the hopes of making more income later.

Eventually, the plane is made, John gets it, and turns his hand to finer carpentry (or rents it out to George as described in the above linked article). John starts reaping the benefits of delayed gratification.  Because he was willing to deprive himself somewhat in the short term, he gains longer term benefits.

Do we argue “you didn’t build that” because someone else built the plane from which he is benefiting?  He paid to have it built.  The person who built it got paid for his labor.  What John brought to the table was the foresight to see that having a plane would lead to greater rewards down the road.  And he brought the willingness to sacrifice what else he could have done with the money used to have the plane built.  As result, the plane maker benefited by being hired to make a plane.  The public benefited by their being more fine carpentry made available from that plane being made and put into use.  George benefited by being able to use that plane, rented from John, for his own work allowing him to make more money.

But suppose John had been wrong, that the market for finer carpentry wasn’t as strong as he thought it was?  Well, the plane maker would still have been paid.  There would still be the plane available increasing the availability of finer carpentry for the public.  George might end up defaulting on the terms of the loan through not being able to use that plane to its fullest advantage.  And John?  Well, John’s sacrifice would not lead to the future benefits he expected.

So, whether he “built that” or not, John is the one taking the risk that comes with delayed gratification.  If John has an idea of the risk, then the return he will expect before he’ll be willing to make that sacrifice, to produce the capital that can be used for future production, must also be sufficient to compensate for the risk.  If it doesn’t, he doesn’t make the sacrifice, the investment, and the capital is not produced.

And that is why those who bring capital to the table are deserving of a return on that investment.  Whether they “built that” or not, they paid for it, they made the sacrifice of present benefit in return for future returns.  Denial of that future return by “seizing the means of production” (nationalizing, confiscating, or simply taking control while leaving an on-paper private ownership) removes the incentive to make the immediate sacrifice, and stifles economic growth.


*Capital, as I use it here, means the means of production.  Money is not capital, although it can be used to acquire capital.  Capital includes the machinery and facilities used to manufacture goods.  It also includes, as “human capital” the particular skills involved in producing goods and services, in making sure that the raw materials are available in sufficient quantity, in ensuring that the goods and services can get from where they’re produced to the people that use them.

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3 thoughts on “Capital and Delayed Gratification”

  1. The least well understood element in all of economics is time: its value, which is always personal and contextual; its role in choosing among contending opportunities; the difficulty of knowing how long any particular mechanism must run before it provides a return; and other aspects of the thing. It’s because of the analytical indeterminacy of time in the economic context that economics is not the same sort of science as physics (i.e., a science in which predictions with deadlines are possible). While economic predictions of certain kinds are possible and, to a degree, reliable, it does not permit the sort of calculation that characterizes the hard sciences. It’s more telling than words could express that socialists refuse to accept this, especially as regards the importance of capital and the profits of the capitalist.

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  2. Most commies, including Stalinists and the current crony capitalist Chinese commies, understand the reality of the need for productive capital, fixed investment. A huge amount of Chinese growth since Deng , after Mao dead and it was ideologically safe, was in producing capital.

    You mention organization but I believe it’s actually the strongest Real Economic argument in favor of market capitalism. who have the human capital to organize and run the business.

    Venezuela shows how important running the business is, much less getting a successful one started.

    Finally, in order to run the business well, one must have good information. Which is where profit is so important — real monetary costs on inputs taking away from real monetary revenue from sales. If you’re making profit, your business plan is sustainable. Otherwise it’s not. Economic growth in a society comes from firms with profitable businesses.
    Profit is the key signal to help decision makers run the business in a successful, wealth creating way.
    Profit is also a reasonable proxy for how much wealth has been created for society.

    The stifling of economic growth happens when there is not enough profit incentive for the decision makers to make the decisions which result in wealth being created, rather than just consumed.

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    1. Venezuela shows how important running the business is, much less getting a successful one started.

      Not a new thing at all. Thomas Sowell, several times in his books, describes how Lenin, after seizing power in what would become the Soviet Union, apparently believed that organizing and managing economic enterprises had been reduced to simple accounting. Plug in the numbers, get the results out. That “managers” and “executives” required no more specialized knowledge than secretaries and, therefore, justified no more pay than secretaries.

      The result was disaster such that Lenin had to (with appropriate spin) “invite” former businessmen back into the running of enterprises to try to dig out of the hole Lenin had dug them into.

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