I am referring to the price of rye in certain districts of Central Europe. It is a striking example of the complicated way in which things take their course in the economic process. If one hears big farmers or estate owners speaking of their work, one often hears them say: “We make nothing on the price of rye; on the contrary, we lose on it.” What does this really mean? To begin with, it means that these people cannot sell their rye as other things are sold — in the main, at any rate, today — where the price is composed of the costs of raw materials, the costs of production and a certain margin of profit. Taking the actual prices of rye in this way, we should find that they do not correspond to the costs of production plus a certain profit. On the contrary, they fall far short. And if, in balancing his accounts, a farmer were merely to include the actual market prices of rye, the values he would thus insert would undoubtedly influence the balance in a negative direction. As I said, we can follow the matter up and it is absolutely correct; the rye is sold, as we might say, “below cost price.” And yet it cannot be so in reality; it is impossible for this to go on in reality. Yet apparently it does go on. What happens is this: Rye yields not only grain but also straw; and farmers who sell the grain below cost price scarcely sell any of the straw at all. They use it on their own farms; they use it for their cattle and strike a balance in that way. What they lose on the rye is made up for by the manure they get from the animals. For this is the very best manure; there is no better. It is extremely rich in bacteria; it is the best manure a farmer can have. Thus from the standpoint of his accounts he gets the manure thrown in as a free gift and in this way, in the long run, a proper balance is struck.

We are thus obliged to posit an economic concept which, though it is most important, is comparatively little considered in the ordinary literature of Economics. The concept I would here establish is that of “internal economies” within the general economic life. You have an “internal economy” whenever an economic organism, a business, does business within itself — exchanges products within itself. That is to say, it does not sell such products outwardly or buy them from outside, but lets them circulate within the business itself. This I would call an internal economy as against the general social economy. Wherever such an internal economy is in force, it is quite possible for products to be delivered below the price which would otherwise be economically necessary. Needless to say, this implies that the forming of price within any economic domain is an extremely complicated chain of events.

Such connections, as I said, have been observed as matters of pure fact by our economists. There is another chain of events which I have touched upon from a certain point of view and which must now be regarded also from a different aspect. I mentioned a few days ago that we do not take in at a glance all the links in the economic chain. Imagine, for instance, that a cobbler falls ill and has an unskilful doctor to attend him. He remains ill and for three weeks cannot manufacture any boots; and so his products — the boots which he would have manufactured in the three weeks — are withdrawn from economic circulation. And now, I said, suppose he gets a skilful doctor who makes him well within a week, so that he gets an extra fortnight in which to go on making boots as before. Economically speaking, we can now ask: Who manufactured the boots? Economically speaking, undoubtedly — at this moment of the economic process — the doctor did; there can be no doubt about it.

Yet here again we come to another point. For you may ask: Did the doctor also get paid for them? No, in reality he did not; for you can make the following calculation. Reckon it up, according to the market: What did the boots the doctor manufactured amount to? And now if you draw up a rather full statement of account (it would have to be a very full one) you can set this off against what had to be spent on his training. And you will find, in all probability, that what was spent on his training was not so very different from the value of all the boots he manufactured and all the stags he shot; for it is not regarded as universally characteristic of doctors that they withdraw from economic life, for one week only, patients who would otherwise be withdrawn for three. Be that as it may — however the final balance emerged, we should not make a true calculation in the wider economic sense if we did not strike the balance in this way, setting off against the cost of his training the boots he manufactures, the stags he shoots (assuming that he cures the huntsman quicker than would otherwise have been the case), the corn he garners in, and so forth. Only, of course, the economic process is very complicated, and so the payment also proves extremely complicated.

From all this you can see: It can by no means be said with certainty, at any given place, what is the true source of payment for a given thing within the economic process. We must sometimes go far afield to discover what is the real source of such payment. People who look for mere simplicity in the economic process will never arrive at economic concepts coinciding with reality. They will not get far enough. They will not get at that, of which I said that it is really there behind the formulas of Price, Supply, Demand, etc. And these are the very things we must get at. What makes it so difficult to estimate the economic process rightly? It is because outlay and return are often so widely separated. That is why it is difficult to see clearly within the economic process as a whole what it is that is paid for, what it is that is bought, what is lent and borrowed, and what is freely given. For example, assume for a moment that what I advocated a few days ago is realised. Assume that the masses of Capital, arising in one way or another, are withdrawn from the tendency to get congested on the land and are given to the spiritual or cultural life — it may be in the form of Foundations, Scholarships or the like. These are free gifts. And now you will begin to see what happens on the one side of your gigantic ledger, for it must be a ledger that comprises the real economic life in its totality. The boots the doctor manufactures during the extra fortnight may actually contain an item which you must look for on the other side under the heading of “free gifts.” For it may well be that he had a scholarship to help him in his training, or that he benefited by some Foundation. In short, from this point of view you can raise the weighty question: What are the most productive transformations of Capital in the economic process? What are the most productive of all? Follow out such connections as I have just described: follow especially those portions of available Capital which go into Foundations, Scholarships and other spiritual or cultural “goods,” which in the course of time react to fertilise the whole process of spiritual production and enterprise of every kind. You will perceive that free gifts are the most fruitful thing of all in the whole economic process. We cannot arrive at a healthy economic process unless, in the first place, it is made possible for people to have something to give and, in the second place, unless they have the goodwill and intelligence to give what they have. Here, then, we have something which enters into the economic process in a very peculiar way.

It is remarkable, ladies and gentlemen, that this is something which we cannot extract from theoretical notions; it can only transpire from a wide range of experience; and a wide range of experience will give it you — the more so, the more you follow the matter up. Indeed, I would recommend you to keep this question in mind when you are choosing subjects for dissertations: What becomes of the free gifts in the whole economic process? You will find that the free gifts are the most productive of all. Capital freely given, gift Capital, is the most productive; loaned and borrowed Capital is less productive, in the economic process; and the least productive is that which stands directly under purchase and sale. That which is paid for immediately on a transaction of purchase and sale is the least fruitful in the economic process; that which depends on lending and comes into the economic process through the functions of invested Capital is of medium productivity; while that which enters into the economic process through free gifts is of the very greatest productivity — if only for the reason that the work which would otherwise have to be done to earn what is here given freely, or rather the product of that work, is actually saved. We freely give the available proceeds of the economic process, which would only do harm if they were left to congest upon the land.

We see, therefore, that at a given moment of its evolution the economic process gives no real information of itself. The “before and after” must always be taken into account, but the “before and after” cannot be taken into account unless it is based on the judgment of men who join together in association and who gain a corresponding insight into the past and the future. We have to build the economic process on the insight of those whose feet are planted within the economic process. Once more, we come to the same conclusion: It is, generally speaking, a difficult and lengthy business to estimate how the several factors in the economic process play their part in the whole of human life — I mean the material life.

From a certain point of view we can speak of Trade Capital, Loaned Capital and Industrial Capital within the economic process. Circulating Capital is more or less covered by these three categories: Trade Capital, Loaned Capital and Industrial Capital. Moreover, these three are contained in the economic process in the most varied ways. You must remember that such “internal economies” as we exemplified at the beginning of today's lecture are scattered everywhere throughout the economic process. And where you have an economic process taking place within a larger whole, it is really extremely difficult to say what are the respective contributions, quantitatively speaking, of Loaned Capital, Industrial Capital and Trade Capital to the general economic welfare. Yet it is possible to arrive at reliable concepts, if we extend our survey to a wide enough horizon.

Let us, to begin with, turn our attention to the economic life of entire nations, or State-economies as we must call them, according to the economic life of recent times. Take France, for instance; I take it only as one example. The world-economic connections of France, especially as they were before the War, and as they revealed themselves in their effects during the War, are a good example of how Loaned Capital works in the economic process on a larger scale. France always had a certain inclination to invest Capital in loans — that is, in effect, to treat “Loaned Capital” (investment Capital) literally as Loaned Capital, You are probably aware how these things penetrated into the political sphere, clearly illustrating the harmful effects of the coupling together of the economic life and the life of rights (that is, the political life), how it came out in the extensive loans made by France to Russia and Turkey. France exported a very large amount of Loaned Capital to Russia and to Turkey. Even in Germany, though Germany was not exactly in her good books, French Capital found a home — for instance, when the construction of the Baghdad Railway was begun. England withdrew, but France did not withhold her Capital from those who stood at the head of the undertaking — Siemens & Gwinner, for example. France, therefore, was in the main a lending country. In France one could see how Loaned Capital becomes involved in the whole economic process.

Further — and I am not defending or attacking anything, but simply describing things objectively — there is one historical phenomenon in which you can truly recognise what are the interests of Loaned Capital. When we turn our attention, say, to private “economies” or businesses, we shall always find, as any Bank will tell you, that the private business man is a peace-loving man. For he knows very well that his interests and dividends will be upset if, just as his Capital is nicely invested, a war begins to sweep through the economic connections of the world. Political economists always reckon with the fact that lenders are peace-loving people. That is the reason why it is always possible to say that France was innocent of the. War. For, the moment we want to prove that the War was not desired in France, we need only point to the interests of the numerous small investors and not to the interests of those who urged on the War. In France you always have in the background those who decidedly did not want the War. This fact of history may show us on a large scale what is equally true on a small scale. The man who lends — the man who is the happy possessor of Capital available for investment — is essentially the man who would like to see the economic life protected, if possible, from disturbance either by events outside it or by catastrophic upheavals within it. And the investor is all the fonder of tranquility because it saves him the trouble of having to form an independent judgment. He likes to be able to rely on the assurance of someone else that such and such is “a good thing.” In our age, though public opinion has a very good conceit of itself, there is really very little public opinion in the sense of judgment. We may say that in our time the possession of Capital available for investment is generally connected with a very strong faith in authority, both in the economic life and also in other respects. This, again, clouds the economic judgment to no small extent. Those, for example, who are in any way officially labelled very easily get money lent them. Personal credit is readily given to anyone with a title or some other official label. This is often the decisive factor. And according as this principle of authority is more or less cultivated, we see the consequences. For, in the one case, those who really have the stronger personal faculties will be enabled to enter productively into the economic process, while in the other case it will be simply men with a handle to their names — members of Chambers of Commerce and so forth — and often men who have got the name, not by reason of genuine ability but for some quite extraneous reason. It is one thing if such people are given the opportunity to work into the economic life, and quite another if a man has to depend on his genuine faculties being recognised by an untainted public judgment. Here, once again, something elusive enters into the economic life. (In a certain community it has recently become far too common a practice to use a certain word whenever one fails to keep pace with things with one's clear thinking. In many places recently, I have far too often heard this word, the imponderables. I wish to emphasise that I desire to avoid this word. All that I wish to point out is how these things, which we would like to take straightforwardly, become complicated, so that we may presently have to follow them up by somewhat curved and winding paths. It is unnecessary, as soon as this begins to happen, to have recourse to the convenient term “the imponderables,” which we have heard ad nauseam in certain quarters.) So much, at the moment, for Loaned Capital.

We will now go on to Industrial Capital. If we wish to study the essence and function of Industrial Capital we shall be able to do so especially well by observing the quick rise of industry in Germany in the decades before the War — though its history here is hardly an edifying one. We can study it here especially well, because, under the influence of the “enterpriser” spirit, Industrial Capital arose by direct transformation out of Loaned Capital to a greater extent in Germany in the last decades before the War than in any other part of the world. What I said in the first lecture is most decidedly true; In England, for example, Trade Capital was transformed gradually into Industrial Capital. For in England industrialism evolved out of trade, and it evolved far more slowly than in Germany, where it shot up with immense rapidity. Industrialism exists in its pure form where it transforms not Trade Capital but Loaned Capital into Industrial Capital. It can therefore be best studied in its pure form in the life of Germany.

Now the point is that Industrial Capital, if I may put it so, is really placed between two buffers. The one buffer is the raw product; the other is markets. Industrial Capital is obliged, on the one hand, to look around as far as possible for the sources of raw products and, on the other, to arrange for markets. This is not quite so easy to study in the example of German industry. In German industrialism you can rather study economically how Industrial Capital functions in itself. Still, the emergence of industrialism is evident in all countries during the nineteenth century and on into the twentieth, and so you can observe this standing “between two buffers” everywhere. Only you must search out the true facts. As I have said, it is a good thing to control the necessary direction — orientation — of our ideas, by taking things that can be surveyed as a whole; but you will find, if you are considering smaller economic territories, that extraordinarily difficult paths must sometimes be traced out. It is better to get your orientation and to derive your calculations from wide comprehensive regions. The paths grow easier if you observe economic organisms on a very large scale. Then, for example, you will perceive how as a rule the concepts of Force or Might (which often appear masked under the guise of Right or Justice) are realised most strongly where it is a question of opening up new sources of raw products. We can study this on a large scale, for instance, in the Boer War, where it was mainly a question of opening up the sources of precious metals. The Boer War was a real war for raw products. Of course it always showed itself in a kind of mask; nevertheless it was a war for raw products. Again, you have an example of how the economic life unfolds in a political way, playing over into the domain of political power — you have an example of this, for instance, in the military enterprises of Belgium which had the ivory and rubber of the Congo as their object. Thus you can see how the opening-up of sources of raw products takes place in the economic life. Or again, take the case of North America, which annexed the Spanish possessions in the West Indies, because it was looking for sources of raw products — sugar in this instance. In every case we can see how the search for raw products very easily drives the purely economic life into the political, towards the development of might or force. This is the one side — the one buffer, if I may say so.

With the search for markets it is different. For, it is easy to demonstrate from history that the search for markets does not lead into the political life in the same way. In this case the plain fact is that human nature does not tend so much to the use of force. We should have to go to the nineteenth century for a rather glaring example — I mean the so-called “Opium War,” whereby England conquered for herself the Chinese opium market. Even there it did not go quite so easily by purely military means; even there — if I may put it so — peaceful persuasion, peaceful politics, had not a little to say. For when things began to grow uncomfortably hot, a hundred and forty-one doctors were found to pronounce an expert judgment to the effect that opium is no more harmful than tobacco or tea. Here, then, politics — peaceful politics — played a certain part. Politics in any case are always difficult to keep out. You know the saying of Clausewitz: “War is the continuation of politics by other means.” Such definitions are all very well, but by the same method we could establish the proposition: “Divorce is the continuation of marriage by other means.” The relationships of life can always be represented in a particular light by using this kind of logic, and people admire it! Curiously enough, everyone sees through it at once if I say: “Divorce is the continuation of marriage by other means,” but when it is everywhere proclaimed that “War is the continuation of politics by other means,” they do not notice the absurdity, but on the contrary they admire it. In point of method, I should like to say: If we employ this sort of logic in Political Economy, we shall not advance a step. Speaking of this second buffer, of the hunt for markets, we must undoubtedly admit that a far greater part is played by human cleverness, which fluctuates between the extremes of slyness, astuteness, and wise economic guidance. In the arranging of markets a great deal could be seen at work of all three — particularly in the way they were arranged in those large economic domains which the States themselves had become as Politics and Economics coalesced. The States themselves did very much in this direction, by way of wise guidance, and also by way of deceit, cleverness, slyness and the like. Thus, the concepts which we require to form in respect of smaller economic domains, concerning the relation, say, between the single industrial undertaking and its sources of raw products and its markets, can only be made clear and palpable by considering these matters on a large scale.

If it is the functions of Trade Capital which we desire to study, we should take England, especially in the period when England made her great economic progress. This she did by means of trade; and consequently her Trade Capital continued to increase in such a way that England entered quite gently and imperceptibly into the new industrialism. At the time when industrialism was transforming the world, England already had her Trade Capital. In this early period, therefore, we can study Trade Capital most readily in England. In more recent times England has been chosen by Marx as a means of studying the economic functions of industrialism; but in the earlier period — the period immediately preceding the creation of modern industrialism — going back, that is to say, to the last decades of the eighteenth century, it is the functions of Trade Capital which we can best study in the light of England's economic destiny. Now it cannot be denied that here, either in the open or behind the scenes, the essential thing is always competition. Whether on the large scale, in the economic life of the nation as a whole, where it is mainly based on trade, or within trade or commerce itself, competition is the essential thing. Of course by the introduction of various ideas of what is decent and proper conduct, it may become very fair, but it is competition none the less. Productivity in trade — such productivity as to enable Trade Capital to be treated in the economic process so that it eventually takes effect as Industrial Capital — such productivity depends in the last resort on the tendency of Trade Capital to accumulate. And that is impossible without competition. Thus we shall study the functions of Trade Capital best of all by considering the function of competition in the economic life.

At the same time these things are connected with historical changes. This is indeed the case. Right up to the first third of the nineteenth century, if we are considering the world-economy which was gradually coming into being as a single whole (such as it was in a high degree before the War) — up to the first third of the nineteenth century, the economic processes of trade and industry still played the most important part in the economic life. The blossomtime — the classical age, if I may put it so — of Loaned Capital only began in the nineteenth century — indeed only towards the second third of the nineteenth century. And it is at this point that we notice the rise of those institutions which more especially serve the process of lending — I mean the banking system. The classical age of Loaned Capital, and with it the evolution of the banking system, falls into the last two-thirds of the nineteenth century and the first decades of the twentieth. With the evolution of the banking system, borrowing and lending develops on an ever larger scale — enters more and more as a prime factor into the economic process. But, at the same time, precisely in connection with lending, a remarkable phenomenon appears. Through the instrumentality of lending on a large scale, and accompanying the expansion of the banking system, the control of the circulation of money is withdrawn from man himself. The circulation of money has gradually become a process taking place — I can find no other word to express it — impersonally. Thus, as I said in my first lecture, the time has actually come when money does business on its own account, and human beings fluctuate up and down according as they are drawn into this whole stream of money economics, money business. They are drawn in far more than they imagine. Precisely during the last decades of the nineteenth century, the circulation of money has become objectified — it has become impersonal. This brings me to a peculiar phenomenon of the nineteenth century, particularly the end of the nineteenth century. In Economics, everything depends on an open-minded consideration of life as a whole; we must gain a clear vision of the whole of life. The phenomenon to which I refer appears, to begin with, in the psychological sphere, but afterwards plays a great part in the economic life. It is this: Conditions which were brought about in the first place by very real forces afterwards continue rolling on by a kind of social inertia, just as a ball will do when you have given it a certain momentum. They go rolling on and on, even after the original impulses have ceased to be active in them. Down to the first third of the nineteenth century, there were true economic impulses present in the whole system of loan and investment. Then, through the instrumentality of the banking system, these economic impulses began to change into purely financial ones; and in this process the whole thing became not only impersonal but unnatural. Everything was drawn into the stream of money, as it moved itself along. Pure money business, without any natural or personal subject — that is the end towards which, as the nineteenth century drew to a close, everything which had originally been upheld by a personal and natural subject was gravitating.

Strangely enough, this “subjectless” economic life, this “subjectless” circulation of money, was accompanied by another phenomenon. It was this: Political States themselves began to do business out of economic impulses; it was out of such impulses, for example, that they began to colonise. We shall see later what influence colonising has; de-colonising, too, will have to be considered in this connection. We can observe very well, as a real economic process, the significance of colonisation in the case of England. Fundamentally speaking, England scarcely ever went beyond the kind of colonisation which we may perhaps describe as “Imperialism with an objective content.” Such Imperialism, I mean, as contains a real economic substance — economic meaning. But if, on the other hand, you take the case of Germany, you need only look at the colonial accounts and you will see that German colonisation was burdened from the start with an adverse balance. There were at most tiny areas which showed a favourable balance. And in other countries too the tendency crept in, merely to enlarge themselves by acquiring colonies. Isolated people — Hilferding, for instance, in his book Finanzkapital, published in Vienna in 1910 — actually called this process “objectless Imperialism” — Imperialism without an object.