Spencer Heath Archive

Item 1086

New York City

February 16, 1937

Dear Mr. Kendal:

Say a man owns (or receives the earnings of and therefore virtually owns) capital. The potential past labor stored in that capital can be brought out only by administrative services (labor) applied to the capital. When it is so brought out the product is the joint product of the past stored labor in cooperation with the present administrative labor. This joint product can be used all for income, in which case the capital gradually disappears and with it all that part of the joint income that was due to the cooperation of past and present labor, which is administrative earnings, and the erstwhile administrator would be reduced to carrying on without capital, and he would have no income but what he could create or earn by performing non-administrative services. He has, in fact, used up his capital by converting it into income and he now has this accumulated income — all that he received above non-administrative earnings while the capital was being used up as income — in place of the original capital.

If this amount of income that he has accumulated above non-administrative earnings is greater than the original capital, he is in position to replace or, in case it was borrowed, to repay, with interest, the original capital and still have remaining to him a portion of his accumulated income above non-administrative earnings. This, taken with what would have been his non-administrative earnings, makes up the superior income and earnings that he has by reason of his employing capital and performing administrative services in connection therewith. If this superior income for this superior service does not come to him it is because his services have not been superior, and such a man will either improve his services or he will cease using and administering either his own capital or any capital that he might borrow from another for that purpose. In the latter case, he resumes his rank as a wage or salary worker and receives in wages only the value of his non-administrative services under the supervision of another person who is a more successful (let us hope) administrator of either his own or his borrowed capital.

In the foregoing instance all matters of depreciation and obsolescence have been taken care of in the fact that the accumulated administrative income does or can replace, with interest, the original capital. And it does and must then also provide a superior income, earnings or wage (I prefer to say profit) to the administrative services above what non-administrative services can earn. If it did not, in general, do this, then there would be no inducement for persons having administrative capacity to use and administer capital, and capital would not be administered or used. Happily, there is a superior reward for administrative services and that is why capital is used.

It is true that wage workers also use capital, but they use it under supervision and not as responsible owner-administrators. It is true that a part of the increase of production that comes from the use of capital goes to the wage workers, but it goes to them, not as a separate fund or income, but in the higher wages that competing employers (administrators and owners of capital) must offer to their wage workers when their total production is increased by reason of the capital they administer being in the hands of skilled wage workers (skilled in the use of but not in the responsible administration of capital) under their supervision.

If and when (happy day) land owners abolish the taxation that now so nearly cancels their rents and take over the responsible administration of public services, their gross income of rent will be adequate to include: All wages and other ordinary costs of doing the public business, the necessary accumulation (reserves) with interest for replacement of capital as it is used up, and an income to them for their administrative services, depending upon the value of these services and being what they earn. If, in their replacement of capital, they are not able to replace it physically in such manner as to ward off obsolescence, then the replaced capital will, in time, cease to have any value, and they must then replace it out of their own accumulated earnings or out of the accumulated earnings of others who would lend it to them.

But at no time will capital continue to be employed in public service or in any other service unless it can replace itself and yield current interest to the owner or to the lender of the capital so employed, besides yielding administrative income to administrative services. It is this capital that (if it is owned and not borrowed) can be sold by a retiring owner-administrator to a new administrator who purchases his “land” at a price that is determined chiefly by the present and prospective earnings contained in its rent above all ordinary and all administrative costs. This margin above all costs will be the interest earned, and the capital sales value will be (roughly) this annual amount divided by the current interest rate,

What I have said about the administration of capital earning a superior income, I believe, applies to all capital at all times and under all conditions so far as the conditions permit the capital to be successfully employed. To the extent that seizing property by taxation (and the anti-social use of the property seized) slows down and prevents the operation of the general system in which services and commodities must be exchanged (if they are to be performed and produced), to that extent both capital and labor will be disemployed and the whole phenomenon of the responsible administration of capital and the supervision of wage and salary workers will be distorted and debauched with those distresses and irregularities which, existing under present conditions, make my description of their normal functioning, for many people, difficult to understand.

Most of what I have written in this letter is the result of recent thinking that has been stimulated and suggested by you. I am not at all certain that there are no errors in it, but it seems to stand up under all the criticism that I, myself, am able to give it. I will be very glad to have you go over it carefully and let me know if your mind is able to travel along the same lines. I do not think I have expressed anything that is contrary to your own line of thought.

With best wishes,

Sincerely,