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Capital and Interest: A Critical History of Economical Theory; Böhm-Bawerk, Eugen v.
24 paragraphs found.
Translators Preface

It is of course a familiar expression of everyday life that interest is the price paid for the "use of capital," but most writers seem to have accepted this formula without translating it. If the formula, however, is considered to contain a scientific description of interest, we must take the word "use" in something like its ordinary signification, and consider the "use of capital" as something distinct from the capital itself which affords the use. The loan then will be a transfer and sale of this "use," and it becomes intelligible how, at the end of the loan period, the capital lent is returned undeteriorated in value; it was not the capital that was lent, but the use of the capital. To put it in terms of Bastiat's classical illustration: James, who lends a plane to William, demands at the year's end a new plane in place of the one worn out, and asks in addition a plank, on the ostensible ground that over a year William had the advantage, the use of the plane.

Book III,Ch.IX

It may be the good fortune of these pages to break the spell under which the custom of centuries has laid our conception. It may be that the net Nutzung of capital will be relegated finally to that domain from which it never should have emerged—the domain of fiction, of metaphor, which, as Bastiat once remarked with only too much truth, has so often turned the science from the right path. With it many a deeply rooted conviction will have to be given up—not the Use theory only, in the narrower and proper sense of the word, which makes the Nutzung the chief pillar in the explanation of interest, but a number of other convictions also, which are commonly accepted outside the rank of the Use theorists, and which employ that conception along with others. Among other things will go the favourite construction of the loan as a transfer of uses, as having its analogue in rent and hire.

Book IV,Ch.II

None of these writers have added any essentially new feature to Senior's Abstinence theory, and it is not necessary to go minutely into what they have said on the subject But I must make more careful mention of a writer whose theory made a great stir in its day, and maintains an important influence even yet; I mean Frédéric Bastiat.

Book IV,Ch.III
Bastiat's Statement

Book IV, Chapter III

Bastiat's much discussed theory of interest may be characterised as a copy of Senior's Abstinence theory forced into the forms of Bastiat's Value theory, and thereby much deteriorated. The fundamental thought in each is identical. The postponement of gratification, which Senior calls Abstinence, and Bastiat calls sometimes Delay, sometimes Privation, is a sacrifice demanding compensation. But beyond this they diverge from each other in some respects.


Senior, who deduces the value of goods from their cost of production, simply says that this sacrifice is a constituent element of the costs, and is done with it. Bastiat, who bases the value of goods on "exchanged services," elevates the postponement also to the rank of a service. "Postponement in itself is a special service, since on him who postpones it imposes a sacrifice, and on him who desires it confers an advantage." *13 This service, according to the great law of society, which runs "service for service," must be specially paid. The payment takes place where the capitalist has borrowed his capital from another person by means of loan interest ( intérêt).


But even outside of loan interest this service must be compensated; for, speaking generally, every one who receives a satisfaction must also bear the collective burdens which its production requires, including the postponement. This postponement is looked upon as an "onerous circumstance," and forms therefore, quite universally, an element in the valuation of the service, and at the same time in the formation of the value of goods. This is, in a few words, the substance of what Bastiat says with rhetorical diffuseness and copious repetitions.


I called this doctrine a deteriorated copy of Senior's. If we put on one side all those defects that belong to Bastiat's interest theory not as such, but only in virtue of its being embodied in his value theory—which to my mind is exceedingly faulty—the deterioration shows itself chiefly in two respects.


The first is that Bastiat confines his attention and his arguments almost entirely to a secondary point, the explanation of contract interest, and for that neglects the principal thing, the explanation of natural interest. Both in his Harmonies Economiques and in the monograph which he specially devoted to the interest problem, Capital et Rente, he is never tired of discoursing by the page on the interpretation and justification of loan interest.


The results of this negligence make themselves felt principally in this, that the chief thing in the exposition of interest, the sacrifice of postponement, is not nearly so clearly put by Bastiat as by Senior; for when Bastiat opposes the owner of capital to the borrower of capital, the sacrifice which he speaks of as made by the owner is generally that of doing without the productive use that meantime might have been made of the capital lent. *14 This has quite a good signification if it means nothing more than what Salmasius had once tried to prove against the canonists, that, if by employing capital a man can make a natural profit, there is both reason and justification for claiming an interest on the capital when loaned. But to point to that sacrifice is evidently quite inappropriate as an explanation of natural interest, and the phenomenon of interest in general is not satisfactorily explained thereby, the existence of natural interest being already assumed in it as a given fact.


For the deeper explanation of interest it is evident that that other sacrifice on which Senior dwells is the only one that has any importance,—the sacrifice that consists in postponing the satisfaction of needs. Now Bastiat of course speaks of this sacrifice also, but by confusing it with the former sacrifice he gets his doctrine into a tangle; indeed it seems to me that he not only confuses his readers, but himself. At least there are to be found in his writings, especially in his Capital et Rente, not a few passages in which he starts with his Abstinence theory, but comes suspiciously near the standpoint of the Naïve Productivity theorists. The course of explanation suggested, in the often quoted passage in the Harmonies, was to show how under capitalist production the surplus value of the product arises from the necessity of buyers of the product paying for the "onerous circumstance" of the postponement of gratification, as well as for the labour embodied in the product. Instead of following out this line of explanation, he not unfrequently looks upon it as self-evident that capital, in virtue of the productive power that resides in it, must give its owner an "advantage," a "gain," an enhanced price, and a bettering of his lot; in a word, a profit. *15 But that, as we know already, is not to explain. interest, but to assume it.


As a fact, Bastiat has often been accused of having entirely missed the chief point, the explanation of natural interest; the accusation is not, I think, quite justified, but, as we can see, it is very easily explained. *16


This is the first point in which Bastiat's theory does not improve on Senior's. The second consists in a wonderful addition he makes. Besides the explanation of interest just stated, he gives another—of so different a nature, and at the same time so evidently mistaken, that I cannot even make a guess as to how Bastiat saw any relation between it and his principal explanation.


Bastiat now raises the question, How, according to the great law of "service for service," are these two categories of efforts to be estimated or rewarded? As regards the first category, he finds this very simple. These services must be compensated, on the whole, by those who profit by them. But that does not apply in the case of the second category, those services which lead to the formation of a fixed capital; for the number of those who profit by this capital is indefinite. If the producer were to get paid by the first consumers it would not be just; for, in the first place, it is unreasonable that the first consumers should pay for the last; and in the second place, there must come a point of time when the producer would have at once the stock of capital not yet consumed, and also his compensation, which again involves an injustice. *18 Consequently, Bastiat concludes with a mighty logical salto mortale, the distribution among the indefinite series of consumers is only managed thus: the capital itself is not distributed, but the consumers are burdened with the interest of the capital instead—a way of getting out of it which Bastiat explains to be the only conceivable one for the solution of the problem in question, *19 and one which, offered spontaneously by the "ingenious natural mechanism of society," saves us the trouble of substituting an artificial mechanism in its place. *20 Thus Bastiat explains interest as the form in which an advance of capital is redistributed over a sum of products: "C'est là, c'est dans la répartition d'une avance sur la totalité des produits, qu'est le principe et la raison d'être de l'Intérêt" (vii. p. 205).


It must have occurred to every one while reading these lines that, in this analysis, Bastiat has fallen into some errors almost inconceivably gross. It is, first, an error to say that it is not possible to distribute the capital itself over the purchasers. Every business man knows that it is possible; and knows too that it is done, and how it is done. He simply calculates the probable duration of the capital laid out, and, on the basis of this calculation, charges every single period during which the capital is employed, and every single product, with a corresponding quota for wear and tear and replacement of the capital sum. When the purchasers pay the quota for replacement of the fixed capital in the price of the finished commodities, "the capital itself" is of course distributed over them. Perhaps not with absolute "justice," because there may be an error in the calculated duration of the capital, and in the calculated quota for wear and tear which is based on that; but, on the average, the prices successively paid will, in any case, cover the capital sum that is to be replaced.


And it is a second gross error to assume that the producers receive interest instead of receiving back the capital itself, which, he says, cannot be distributed. The fact is, as every one knows (1), that, in the quota for replacement, they receive back the capital itself, and (2) so long as a part of this capital lasts they receive interest besides. Interest, therefore, rests on an entirely distinct foundation from the replacement of capital. It is really difficult to understand how Bastiat could make a mistake in such simple and well-known matters.


In conclusion, I may note in passing that Bastiat has borrowed his practical law of interest from Carey: the law that with the increase of capital the absolute share obtained by the capitalist in the total product increases, and the relative share diminishes. *21 In his attempts to prove this law—which from the point of view of theory are quite worthless—like Carey he carelessly confuses the conception of "percentage of total product" with the conception of "percentage on capital" (rate of interest).


On the whole, Bastiat's interest theory seems to me to be quite unworthy of the reputation which it has, at least in certain circles, so long enjoyed.

Thus Bastiat in Capital et Rente, p. 40, assumes that the borrowed sack of corn puts the borrower in a position to produce a valeur superieure. On p. 43 he calls the reader's attention, in italics, to the fact that the "principle that is to solve the interest problem" is the power that resides in the tool to increase the productivity of labour. Again he says, on p. 46, "Nous pouvons conclure qu'il est dans la nature du capital de produire un intérêt." On p. 54, "L'outil met l'emprunteur à même de faire des profits." Indeed it is the aim of the brochure, as we gather from the introduction to it, to defend the "productivity of capital" against the attacks of the socialists.
Book VI,Ch.I
Among his numerous writings, the one in which he expresses his opinions on the interest problem most fully, and which most brilliantly displays his agitator genius, is Herr Bastiat-Schulze von Delitzsch, der ökonomische Julian, oder Kapital und Arbeit (Berlin, 1864). The principal passages are these: Labour is "source and factor of all values" (pp. 83, 122, 147). The labourer does not receive the whole value, but only the market price of labour considered as a commodity, this price being equal to its costs of production, that is, to bare subsistence (p. 186, etc.) All surplus falls to capital (p. 194). Interest is therefore a deduction from the return of the labourer (p. 125, and very scathingly p. 97). Against the doctrine of the Productivity of capital (p. 21 , etc.) Against the Abstinence theory (p. 82, etc., and particularly p. 110, etc.) See also Lassalle's other writings.
Book VI,Ch.II
Soziale Frage, pp. 115, 148, etc. See also the criticism of Bastiat, pp. 115-119.
Book VI,Ch.III

A second circumstance that helped to spread the theory was the weakness of its opponents. So long as the scientific opposition to it was led chiefly by men who adhered to the Abstinence theory, the Productivity theory, or the Labour theory of a Bastiat or M'Culloch, a Roscher or Strasburger, the battle could not go badly for the socialists. From positions so faultily chosen these men could not strike at the real weaknesses of Socialism; it was not too difficult to repel their lame attacks, and to follow the fighters triumphantly into their own camp. This the socialists were strong enough to do, with as much success as skill. If many socialistic writers have won an abiding place in the history of economic science, it is due to the strength and cleverness with which they managed to destroy so many flourishing and deeply-rooted erroneous doctrines. This is the service, and almost the only service, which Socialism has rendered to our science. To put truth in the place of error was beyond the power of the Exploitation theorists—even more than it was beyond the power of their much abused opponents.

Book VII,Ch.I

In Joseph Garnier *89 we find the elements of no less than three different theories eclectically combined. The basis of his views is Say's Productivity theory, from which he even revived and adopted the feature long ago rejected by criticism; that of reckoning interest among the costs of production. *90 Then, in imitation of Bastiat, he calls the "privation" which the lender of the capital suffers through the alienation of it, the justification of interest. Finally, he declares that interest invites and compensates the "labour of saving." *91

Book VII,Ch.II

George's *104 interest theory occurs in the course of a polemic against Bastiat and his well-known illustration of the lending of the plane. A carpenter James has made a plane for his own use, but lends it for a year to another carpenter William. At the end of the year he is not content with getting back an equally good plane, because this would not compensate him for the loss of the advantage he might have had from the use of the plane during the year, and on that account he asks in addition a new plank as interest. Bastiat had explained and justified the payment of the plank by showing that William obtains "the power which exists in the tool to increase the productiveness of labour." *105 This explanation of interest from the productivity of capital George does not consider valid, for various reasons which do not concern us here, and then proceeds as follows: "And I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters—that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes—that interest would be but the robbery of industry, and could not long exist.... But all wealth is not of the nature of planes or planks, or money, nor is all production merely the turning into other things of the inert matter of the universe. It is true that if I put away money it will not increase. But suppose instead I put away wine. At the end of a year I will have an increased value, for the wine will have improved in quality. Or suppose that in a country adapted to them I set out bees; at the end of a year I will have more swarms of bees, and the honey which they have made. Or supposing, where there is a range, I turn out sheep, or hogs, or cattle; at the end of the year I will, upon the average, also have an increase. Now what gives the increase in these cases is something which, though it generally requires labour to utilise it, is yet distinct and separable from labour—the active power of nature; the principle of growth, of reproduction, which everywhere characterises all the forms of that mysterious thing or condition which we call life. And it seems to me that it is this that is the cause of interest, or the increase of capital over and above that due to labour."


To return to Bastiat's illustration: the reason why William at the end of the year should return to James more than an equally good plane, does not rest in the increased power "which the tool gives to labour," for "that is not an element... but it springs from the element of time—the difference of a year between the lending and return of the plane. Now if the view is confined to the illustration, there is nothing to suggest how this element should operate, for a plane at the end of the year has no greater value than at the beginning. But if we substitute for the plane a calf, it is clearly to be seen that to put James in as good a position as if he had not lent, William at the end of the year must return not a calf, but a cow. Or if we suppose that the ten days' labour had been devoted to planting corn, it is evident that James would not have been fully recompensed if at the end of the year he had received simply so much planted corn, for during the year the planted corn would have germinated and grown and multiplied; so, if the plane had been devoted to exchange, it might during the year have been turned over several times, each increase yielding an increase to James.... In the last analysis the advantage which is given by the lapse of time springs from the generative force of nature and the varying powers of nature and of man."