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

If, however, we demand an answer to what we have formulated as the true problem of interest, we shall make the discovery that the Productivity theory has not even put that problem before itself. The amount of truth in the theory is that capital is a most powerful factor in the production of wealth, and that capital, accordingly, is highly valued. But to say that capital is "productive" does not explain interest, for capital would still be productive although it produced no interest; e.g. if it increased the supply of commodities the value of which fell in inverse ratio, or if its products were, both as regards quantity and value, greater than the products of unassisted labour. The theory, that is to say, explains why the manufacturer has to pay a high price for raw materials, for the factory buildings, and for the machinery—the concrete forms of capital generally. It does not explain why he is able to sell the manufactured commodity, which is simply these materials and machines transformed by labour into products, at a higher price than the capital expended. It may explain why a machine doing the work of two labourers is valued at £100, but it does not explain why capital of the value of £100 now should rise to the value of £105 twelve months hence; in other words, why capital employed in production regularly increases to a value greater than itself.

Book I,Ch.III

The argument is as follows. The possession of land guarantees the obtaining of a permanent income without labour, in the shape of land-rent. But since movable goods, independently of land, also permit of being used, and on that account obtain an independent value, we may compare the value of both classes of goods; we may price land in movable goods, and exchange it for them. The exchange price, as in the case of all goods, depends on the relation of supply and demand (§ 85). At any time it forms a multiple of the yearly income that may be drawn from the land, and it very often gets its designation from this circumstance. A piece of land, we say, is sold for twenty or thirty or forty years' Purchase, if the price amounts to twenty or thirty or forty times the annual rent of the land. The amount of the multiple, again, depends on the relation of supply and demand; that is, whether more or fewer people wish to buy or sell land (§ 88).


But the possibility of such a purchase is not in itself an ultimate fact, nor is it a fact that carries its explanation on its face. Thus we are forced to inquire further: Why can a person with a capital of £10,000 buy a rent-bearing piece of land in general and a piece of land bearing £500 rent in particular? Even Turgot feels that this question may be put, and must be put, for he attempts to give an answer to it. He appeals to the relation of demand and supply, as at any moment furnishing the ground for a definite relation of price between capital and land. *8


But is this a full and satisfactory answer to our question? Certainly not. The man who, when asked what determines a certain price, answers, "Demand and supply," offers a husk for a kernel. The answer may be allowable in a hundred cases, where it can be assumed that the one who asks the question knows sufficiently well what the kernel is, and can himself supply it. But it is not sufficient when what is wanted is an explanation of a problem of which we do not yet know the nature. If it were sufficient, we might be quite content to settle the whole problem of interest simply by the formula; demand and supply regulate the prices of all goods in such a way that a profit always remains over to the capitalist. For the interest problem throughout relates to phenomena of price; e.g. to the fact that the borrower pays a price for the "use of capital"; or to the fact that the price of the finished product is higher than the price of its costs, in virtue of which a profit remains over to the undertaker. But certainly no one would find this a satisfactory explanation.


We must therefore ask further, What deeper causes lie behind demand and supply, and govern their movements in such a way that a capital of £10,000 can regularly be exchanged for a rent-bearing piece of land in general, and a piece of land bearing £500 rent in particular? To this question Turgot gives no answer, unless we care to look on the somewhat vague words at the beginning of § 57 as such; and if so the answer cannot in any way be thought satisfactory: "Those who had much movable wealth could employ it not only in the cultivation of land, but also in the different departments of industry. The facility of accumulating this movable wealth, and of making a use of it quite independent of land, had the effect that one could value the pieces of land, and compare their value with that of movable wealth."


In explanation it cannot be enough to point in a superficial way to the state of demand and supply. For if demand and supply are at all times in such a position that this remarkable result takes place, the regular recurrence must rest on deeper grounds, and these deeper grounds demand investigation.

"If four bushels of wheat, the net product of an arpent of land, be worth six sheep, the arpent which produced them might have been given for a certain value—a greater value of course, but always easy to determine in the same manner as the price of all other commodities, i.e. first by discussion between the two contracting parties, and afterwards by the price current established by the competition of those who wish to exchange lands against cattle, and of those who wish to give cattle to get lands (§ 57). It is evident, again, that this price, or this number of years' purchase, ought to vary according as there are more or less people who wish to sell or buy land, just as the price of all other commodities varies by reason of the different proportion between supply and demand" (§ 58).
Book I,Ch.V

This appears to me due to two peculiarities of his doctrine. The first of these lies in the extraordinary vagueness of his conception of capital. Capital, in its original and primary sense, he takes to mean "circulating power." It is only in a "secondary and metaphorical sense" that it is applied to commodities. But when so applied it embraces things so incongruous as tools and commodities, skill, capacities, education, land, and good character, *58—a collection which, we must admit, makes it difficult to class the incomes that flow from all those different kinds of things under one category, and explain them by one definite theory. The second of these peculiarities is the exaggerated opinion he entertains of the theoretical value of the formula of supply and demand to explain the various phenomena of price. When he has succeeded in tracing back any phenomenon of value whatever to the relation of supply and demand,—or, as he likes to express it in his own terminology, to the relation between "the intensity of the service performed and the power of the buyer over the seller,"—he thinks that he has done enough. And thus, perhaps, he really thought it sufficient to say of interest on capital: "All value arises exclusively from demand, and all profit originates in the value of a commodity exceeding its costs of production." *59

Book II,Ch.II

There are certain natural agents that do not become private property, and these render their productive services gratuitously—the sea, wind, physical and chemical changes of matter, etc. The services of the other factors—human labour-power, capital, and appropriated natural agents (especially land)—must be purchased from the persons who own them. The payment comes out of the value of the goods produced by these services, and this value is divided out among all those who have co-operated in its production by contributing the productive services of their respective funds. The proportion in which this value is divided out is determined entirely by the relation of the supply of and demand for the several kinds of services. The function of distributing is performed by the undertaker, who buys the services necessary to the production, and pays for them according to the state of the market. In this way the productive services receive a value, and this value is to be clearly distinguished from the value of the fund itself out of which they come. *11


This distinguished economist, whose most signal merits do not, I admit, lie in the sphere of acute theoretical research, has unfortunately given but little care to the systematic working out of the doctrine of interest. This shows itself, even on the surface, in many remarkable misconceptions and incongruities. Thus in § 179 of his great work *20 he defines interest as the price of the uses of capital, although evidently this definition only applies to contract and not to "natural" interest, which latter, however, Roscher in the same paragraph calls a kind of interest on capital. Thus also in § 148 he explains that the original amount of all branches of income "evidently" determines the contract amount of the same; therefore also the amount of the natural interest on capital determines the amount of the contract interest. Notwithstanding this, in § 183, when discussing the height of the interest rate, he makes its standard not natural interest but loan interest. He makes the price of the uses of capital depend on supply and demand "specially for circulating capitals"; the demand again depends on the number and solvability of the borrowers, specially the non-capitalists, such as landowners and labourers. So that from Roscher's statement it seems as if the height of interest were first determined by the relations of contract interest on the loan market, and then transferred to natural interest, in virtue of the law of equalisation of interest over all kinds of employment; while admittedly the very opposite relation holds good. Finally, in the theoretic part of his researches Roscher does not take up the most important question in point of theory, the origin of interest, but touches on it only slightly in his practical supplement on the polities of interest, where he discusses its legitimacy.


Literally to ascribe to capital a power of producing value is thoroughly to misunderstand the essential nature of value, and thoroughly to misunderstand the essential nature of production. Value is not produced, and cannot be produced. What is produced is never anything but forms, shapes of material, combinations of material; therefore things, goods. These goods can of course be goods of value, but they do not bring value with them ready made, as something inherent that accompanies production. They always receive it first from outside—from the wants and satisfactions of the economic world. Value grows, not out of the past of goods, but out of their future. It comes, not out of the workshop where goods come into existence, but out of the wants which those goods will satisfy. Value cannot be forged like a hammer, nor woven like a sheet. If it could, our industries would be spared those frightful convulsions we call crises, which have no other cause than that quantities of products, in the manufacture of which no rule of art was omitted, cannot find the value expected. What production can do is never anything more than to create goods, in the hope that, according to the anticipated relations of demand and supply, they will obtain value. It might be compared to the action of the bleacher. As the bleacher lays his linen in the sunshine, so production puts forth its activity on things and in places where it may expect to obtain value as its result. But it no more creates value than the bleacher creates the sunshine.

Book II,Ch.III

This phenomenon, however, Lauderdale explains, should not mislead us. It simply arises from the fact that the profit obtainable for the use of any machine must be regulated by the universal regulator of prices, the relation of supply and demand. "The case of a patent, or exclusive privilege of the use of a machine... will tend further to illustrate this.


In that variation of the illustration where Lauderdale assumes that unrestricted competition ensues, it is true that we might consider the value of the machine as fixed (relatively at least) by the amount of its cost of production. But here again we are met by the doubt as regards the other determining factor, the amount of the gross use. Say, e.g. that the machine has cost £100, and that £100 is presumably its capital value, then whether there is any net interest over or not will depend on whether the daily gross return of the machine exceeds £100/365 or not. Will it exceed that? All that Lauderdale says on this point is that the claim of the capitalist "must be regulated on the same principle as everything else," the relation of supply and demand. That is, he says nothing at all.


In the most complete of these Malthus, quite in the style of Lauderdale, points to the productive power of capital. "If by means of certain advances to the labourer of machinery, food, and materials previously collected, he can execute eight or ten times as much work as he could without such assistance, the person furnishing them might appear at first to be entitled to the difference between the powers of unassisted labour and the powers of labour so assisted. But the prices of commodities do not depend upon their intrinsic utility, but upon the supply and the demand. The increased powers of labour would naturally produce an increased supply of commodities; their prices would consequently fall, and the remuneration for the capital advanced would soon be reduced to what was necessary, in the existing state of society, to bring the articles, to the production of which they were applied, to market. With regard to the labourers employed, as neither their exertions nor their skill would necessarily be much greater than if they had worked unassisted, their remuneration would be nearly the same as before.... It is not, therefore," continues Malthus, making his point of view more precise by a polemical remark, "quite correct to represent, as Adam Smith does, the profits of capital as a deduction from the produce of labour. They are only a fair remuneration for that part of the production contributed by the capitalist, estimated exactly in the same way as the contribution of the labourer" (p. 80).


And just in this way does Malthus act. In page after page of research he inquires why wages are high or low. He is never tired of controverting Ricardo, and proving that the difficulty or ease of production from land is not the only cause of a high or a low wage, but that the abundance of capital which accompanies the demand for labour has also its influence on wage. In the same way he is never tired of asserting that the relation of supply and demand for products, by fixing their price higher or lower, is the cause of a high or a low profit. But he forgets to put the simplest question of all—the question on which everything hinges, What power is it that keeps wage of labour and price of product apart in such a way that, no matter what be their absolute level, they leave a space between them which is filled up by profit?


Finally, Malthus's explanation loses any force it had through the fact that, to determine the prices of products—price being one of his two standard factors—he cannot bring forward anything more substantial than the relation of supply and demand. *35 Here the theory finds a conclusion where it is, I grant, incontrovertible, but where at the same time it ceases to say anything. That the rate of interest is influenced by the relation between the demand and the supply of certain goods is, considering the fact that interest is itself a price, or a difference in price, a little too obvious. *36

"...the latter case shows at once how much profits depend upon the prices of commodities, and upon the cause which determines these prices, namely, the supply compared with the demand" (p. 334).
Book III,Ch.II

The fund of productive capital provides productive services. These services possess economical independence, and are the objects of independent valuation and sale. Now as these services are indispensable for production, and at the same time are not to be obtained from their owners without compensation, the prices of all products of capital, under the play of supply and demand, must adjust themselves in such a way that, over and above the compensation to the other factors in production, they contain the ordinary compensation for these productive services. Thus the "surplus value" of the products of capital, and with it interest, originates in the necessity of paying independently for this independent sacrifice in production, the "services of capital."


"If the amount of capital increases, more uses are offered for sale, more equivalent values are sought for them. Now these equivalent values can only be labours or uses. So far as, in exchange for the increased uses, other uses of capital are demanded, a greater amount of equivalent values is actually disposable. Since then supply and demand are equally increased, the exchange value of the uses cannot alter. But if, as is here assumed, the quantity of labour, on the whole, is not increased, the owners of capital find, for the increased amount of uses which they seek to exchange against labour, only the amount of labour they got before—that is, they get an unsatisfactory equivalent value. The exchange value of uses will therefore sink in comparison with labour; with the same exertions, the labourer will buy more uses. In the exchange of use against use the capitalists now receive the same equivalent value as formerly, but in the exchange of uses against labour they receive less. The amount of profit, therefore, in proportion to the total capital—that is, the rate of profit—must fall. The total quantity of goods produced is indeed increased, but the increase has been divided among capitalists and labourers.

"If the productiveness of capital increases, or if in the same time it furnishes more means of satisfying needs, the owners of capital offer for sale more useful goods than before, and ask therefore for more equivalent values. They obtain these so far as each one seeks other uses in exchange for his own increased use. Here the supply has risen with the demand. The exchange value must therefore remain unaltered—that is, the uses of equal capitals for equal times exchange with each other—although the character of these uses as regards usefulness is higher than before. But under the assumption that labour is not increased, all the uses with which the capitalist wishes to buy labour do not obtain their former equivalent value; this must raise the competitive demand for labour, and must lower the exchange value of uses as against labour. The labourers now receive more uses for the same amount of labour as before, and find themselves therefore better off; the owners of capital do not themselves enjoy the whole fruit of the increased productiveness of capital, but are compelled to share it with the workers. But the lowering of the exchange value of the uses does not cause the owners of capital any loss, since the reduced value can obtain more means of enjoyment than the higher value formerly obtained."


In his first great work, the Gesellschaftliche System der menschlichen Wirtschaft,*35 Schäffle states his entire theory of interest according to the terminology of the Use theory. Profit of capital is with him a profit from the "use ( Nutzung) of capital": loan interest is a price paid for that use, and its rate depends on the supply and demand of the uses of loan capital: the uses are an independent element in cost, and so on. But there are unmistakable signs that he is not far from giving up the theory he professedly holds. He repeatedly gives the word "use" a signification very far from that attached to it by Hermann. He explains the use of capital as a "working" ( Wirken) of an economical subject by means of wealth; as a "using" ( Benutzung) of wealth for fruitful production; as a "devoting," an "employment" of wealth, as a "service" of the undertaker—expressions which would lead us to see in the Use, not so much a material element in production issuing from capital, as a personal element proceeding from the undertaker. *36 This impression is, moreover, confirmed by the fact that Schäffle repeatedly speaks of profit as premium for an economical vocation. Further, he argues positively against the view that profit is a product of the use of capital contributed to the process of production (ii. p. 389). He charges Hermann with having coloured his theory too much by the idea of an independent productivity in capital (ii p. 459). But, on the other hand, he often uses the word "use" in such a way that it can only be interpreted in the objective, and therefore in Hermann's sense; as, e.g. when he speaks of the supply and demand of the uses of loan capital. On one occasion he explicitly admits that in the use, besides the personal element, there may be contained a material element, which he calls the Gebrauch of capital (ii. p. 458). And notwithstanding his condemnation of Hermann, he himself does not scruple now and then to ascribe "fruitfulness" to the use of capital. Thus he neither entirely accepts the ground of the Use theory nor entirely rejects it.

Even in discussing the question of the rate of interest this perversion of the relation of natural and loan interest reappears. On p. 285 Storch makes interest determined by the proportion between the supply of the capitalists having capitals to lend, and of the undertakers wishing to hire these capitals. And on p. 286 he says that the rate of the income of those persons who themselves employ their productive powers adapts itself to that rate which is determined by the demand and supply of loaned productive powers.
Book III,Ch.X
See my Rechte und Verhältnisse, particularly p. 124. See also the acute remarks of H. Dietzel in the tract Der Ausgangspunkt der Sozialwirthscaftslehre und ihr Grundbegriff (Tübinger Zeitschrift für die gesammte Staatswissenschaft, Jahrgang, 39), p. 78, etc. On the other hand, I cannot agree with Dietzel in some further criticisms that he makes on Menger on p. 52, etc. He has two objections to Menger's fundamental definition of economical goods as "those goods the available quantity of which is less than human need." First, he says, in trade generally we must recognise "the tendency to assimilate need and available quantity," on account of which "in every normal case" a number of the most important economical objects must fall out of the circle of economical goods. And second, he says, Menger's definition of his conception is not definite enough, and leaves room for all sort of things that have not the character of economical goods, such, for instance, as useful "technical knowledge." I consider that both objections are based on a misunderstanding. As a matter of fact trade can never quite assimilate the available quantity of economical goods to the need for them; it can of course meet the demand that has power to pay, but never the need. However commerce may flood a market with exchangeable goods, while it will very soon succeed in supplying the amount that people can buy, it will never supply all they wish to possess for the purpose of supplying their wants to the saturation point—that point where the last and most insignificant wish is gratified. As to the second objection, Menger's definition seems to me to mark out the circle of economic goods both correctly and sufficiently. We must not overlook the fact that what determines the conception of the "good" has a share in determining the conception of the "economical good." Things like qualities, skill, rights, relations, cannot, I admit, be economical goods, even if they are only to be had in insufficient quantity; but that is because they are not true goods—that is to say, they are not really effectual means of satisfying human wants, and at best can only be called so by a metaphor. But where we have true goods, such of them as are insufficient in quantity are at the same time economical goods. If, therefore, Menger, in some individual cases, does come into collision with truth—as I maintain he does in regard to the economical good "disposal"—it is not because he has made a mistake in defining the attribute "economical," but only because he has occasionally treated the conception of the "good" a little too loosely.
Book V,Ch.I

The height of this wage is regulated "according to the great law of supply and demand"; it depends, on the one side, on the wish and the ability to expend a sum of capital reproductively; and on the other, on the wish and the ability to save this sum.


What is the reason of this? Why are wages apportioned so differently—differently as between individual classes of saving labourers; differently as compared with the wage payment of muscular labour? What is the reason that the owner of £100,000 gets £5000 for his "year's labour"; that the manual labourer, who suffers pain and saves nothing, gets £50; that the artisan, who suffers pain and saves £50 thereby, gets the sum of £52 for "muscular labour" and "labour of saving" together? A theory which pronounces interest to be wages of labour must undertake to make its explanation more exact. Instead of this, the nice question of the rate of interest is simply dismissed by Courcelle with a general reference to the great law of supply and demand.


Without meaning to be ironical, one might say that Courcelle would have had almost as much justification, theoretically speaking, if he had pronounced the bodily labour of pocketing the interest, or of cutting the coupons, to be the ground and basis of interest. These also are "labours" which the capitalist performs, and if it should be thought strange that, according to the law of supply and demand, this sort of labour is paid at such an unusually high rate, it is scarcely more strange than the fact we have just been considering—that the intellectual labour of inheriting a million of money is annually paid by so many thousands of pounds. One might say of this latter kind of labour, So few people have the "wish and the ability" to lay up millions of capital, that, in the existing demand for capital, the wages of such people must be very high; and similarly it might be said of the former, So very few people have the "wish and the ability" to pocket thousands of pounds in interest. Of "wish" there will be no lack in either case; but of ability—well, that rests in both cases principally on the fact of a person being so fortunate as to possess a million of capital!

Book VI,Ch.II

If the exchange value of the products were to remain unaltered, then an insufficient rate of profit could only be raised to the normal level if the difference were made up at the cost of the labourers' necessary wages. For example, if the product of ten labourers in the jewellery manufacture retained without alteration the value of £1000, corresponding to the amount of labour expended, then evidently a levelling up of the rate of profit to 5 per cent—that is, an increase in the amount of profit from £500 to £1000—is only conceivable if the wages which the ten labourers have hitherto received were to be wholly withdrawn, and the entire product handed over to the capitalist as profit. To say nothing of the fact that such a supposition contains in itself a simple impossibility, I need merely point out that it is equally opposed to experience and to Rodbertus's own theory. It is contrary to experience; for experience shows that the usual effect of a restriction of supply in any branch of production is not a depression of the wages of labour, but a raising of the prices of product. And again, experience does not bear witness that the wages of labour, in such trades as require a large investment of capital, stand essentially lower than in other trades—which would necessarily be the case if the demand for a higher profit had to be met from wages instead of from prices of product. And it is also contrary to Rodbertus's own theory. For that theory assumes that the labourers in the long run always receive the amount of the necessary costs of their maintenance as wages,—a law which would be sensibly violated by this kind of equalisation.

Book VI,Ch.III

But still worse fallacies are involved in the third step of the demonstration. If the use value of commodities is disregarded, says Marx, there remains in them only one common property—that of being products of labour. Is this true? Is there only one property? In goods that have exchange value, for instance, is there not also the property of being scarce in proportion to the demand? Or that they are objects of demand and supply? Or that they are appropriated? Or that they are natural products? For that they are products of nature just as they are products of labour no one declares more plainly than Marx himself, when in one place he says, "Commodities are combinations of two elements, natural material and labour;" or when he incidentally quotes Petty's expression about material wealth, "Labour is its father and the earth its mother." *59


4. A fourth exception to the Labour Principle may be found in the familiar and universally admitted phenomenon that even those goods, in which exchange value entirely corresponds with the labour costs, do not show this correspondence at every moment. By the fluctuations of supply and demand their exchange value is put sometimes above, sometimes below the level corresponding to the amount of labour incorporated in them. The amount of labour only indicates the point towards which exchange value gravitates,—not any fixed point of value. This exception, too, the socialist adherents of the labour principle seem to me to make too light of. They mention it indeed, but they treat it as a little transitory irregularity, the existence of which does not interfere with the great "law" of exchange value. But it is undeniable that these irregularities are just so many cases where exchange value is regulated by other determinants than the amount of labour costs. They might at all events have suggested the inquiry whether there is not perhaps a more universal principle of exchange value, to which might be traceable, not only the regular formations of value, but also those formations which, from the standpoint of the labour theory, appear to be "irregular." But we should look in vain for any such inquiry among the theorists of this school.