Capital and Interest: A Critical History of Economical Theory

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
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William A. Smart, trans.
First Pub. Date
London: Macmillan and Co.
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Book IV, Chapter II

Criticism of Senior


Since the first formulation which the Abstinence theory received from Senior is still the best, we shall be able to form a critical judgment on the whole subject most suitably by taking up Senior's theory. Before stating my own views, I think it advisable to mention certain other criticisms which have obtained a wide currency in our science, and in which, I believe, Senior's doctrine has been judged much too harshly. To begin with a late critique. Pierstorff, in his able Lehre vom Unternehmergewinn, expresses himself in terms of extreme disapprobation of Senior's theory. He goes so far as to declare that Senior's way of looking at things, in contrast to that of his predecessors, indicates a degeneration, a renunciation of earnest scientific research; and charges him with having "substituted for the economical basis of phenomena an economical and social theory cut to suit his purpose" (p. 47).


I must confess that I scarcely understand this expression of opinion, particularly as coming from a historian of theory who should know how to estimate excellence even when it is purely relative. Senior's theory of interest is infinitely superior to that of his predecessors in depth, systematic treatment, and scientific earnestness. The words "renunciation of earnest scientific research" into the interest problem might apply to the methods of such men as Ricardo or Malthus, M'Culloch or James Mill. These writers sometimes do not put the problem at all; sometimes solve it by an obvious petitio principii; sometimes solve it by peculiarly absurd methods. Even Lauderdale, whom Pierstorff unfortunately has not discussed, notwithstanding an earnest attempt at its solution, remains standing in the outer courts of the problem, and by a gross misunderstanding entirely fails to explain the interest phenomenon by his value theory. Unlike him, Senior, with deep insight, has recognised not only that there is a problem, but also the direction in which it is to be solved, and where the difficulties of the solution lie. Setting aside all sham solutions, he goes to the heart of the matter, to its foundation in the surplus value of products over expenditure of capital; and if he has not found the whole truth, it certainly is not for want of scientific earnestness. One would have thought that the pointed and well weighed critical observations which Senior so plentifully intersperses with his text should have protected him from so harsh a judgment.


Just as wide of the mark seem to me the well-known words in which Lassalle, twenty years ago, in his tumultuously eloquent but absurdly rhetorical way, jeered at Senior's doctrine: "The profit of capital is the 'wage of abstinence.' Happy, even priceless expression! The ascetic millionaires of Europe! Like Indian penitents or pillar saints they stand: on one leg, each on his column, with straining arm and pendulous body and pallid looks, holding a plate towards the people to collect the wages of their Abstinence. In their midst, towering up above all his fellows, as head penitent and ascetic, the Baron Rothschild! This is the condition of society! how could I ever so much misunderstand it!"*7


This brilliant attack notwithstanding, I believe that there is a core of truth in Senior's doctrine. It cannot be denied that the making, as well as the preservation of every capital, does demand an abstinence from or postponement of the gratification of the moment; and it appears to me to admit of as little doubt that this postponement is considered in, and enhances the value of those products that, under capitalist production, cannot be obtained without more or less of such postponement. If, e.g. two commodities have required for their production exactly the same amount of labour, say 100 days, and that one commodity is ready for use immediately that the labour is finished, while the other—say new wine—must lie for a year; experience certainly shows that the commodity which becomes ready for use later will stand higher in price than that which is ready at once, by something like the amount of interest on the capital expended.


Now I have no doubt that the reason of this enhancement is nothing else than that there must be in this case a postponement of the gratification obtainable from the labour performed. For if the commodity immediately ready for use and that ready later on were to stand equally high in value, everybody would prefer to employ his 100 days in that labour which pays its wages immediately. This tendency is bound to call forth an increased supply of the goods immediately ready for use, and this again must bring down their price as compared with that of the goods ready later on. And as the wages of labour have a tendency to equalise themselves over all branches of production, in the end there is assured to the producers of these later goods a plus over the normal payment of labour; in other words, an interest on capital.


But it is just as certain—and on this ground Lassalle is for the most part right as against Senior—that the existence and the height of interest by no means invariably correspond with the existence and the height of a "sacrifice of abstinence." Interest, in exceptional cases, is received where there has been no individual sacrifice of abstinence. High interest is often got where the sacrifice of the abstinence is very trifling—as in the case of Lassalle's millionaire—and low interest is often got where the sacrifice entailed by the abstinence is very great. The hardly saved sovereign which the domestic servant puts in the savings bank bears, absolutely and relatively, less interest than the lightly spared thousands which the millionaire puts to fructify in debenture and mortgage funds. These phenomena fit badly into a theory which explains interest quite universally as a "wage of abstinence," and in the hands of a man who understood polemical rhetoric so well as Lassalle they only furnished so many pointed weapons of attack against that theory.


After much consideration I am inclined to think that the actual defects from which Senior's theory suffers may be reduced to three.


First, Senior has made too sweeping a generalisation on an idea quite right in itself, and has used it too much as a type. There is no doubt in my mind that the element, postponement of gratification, which Senior puts in the foreground, does as a fact exert a certain influence on the origination of interest. But that influence is neither so simple, nor so direct, nor so exclusive as to permit of interest being explained as merely a "wage of abstinence." More exact proof of this is not possible here, and must be left for my second volume.


Second, Senior has expressed that part of his theory which is substantially correct in a fashion at all events open to attack. I consider it a logical blunder to represent the renunciation or postponement of gratification, or abstinence, as a second independent sacrifice in addition to the labour sacrificed in production.


Perhaps the best way of treating this somewhat difficult subject will be to put it in the form of a concrete example, and then try to grasp the principle.


Take the case of a man living in the country who is considering in what kind of labour he should employ his day. There are, perhaps, a hundred different courses open to him. To name only some of the simplest—he could fish, or shoot, or gather fruit. All three kinds of employment agree in this, that their result follows immediately,—even by the evening of the same work-day. Suppose that our country friend decides on fishing, and brings home at night three fish. What sacrifice has it cost him to obtain them?


If we leave out of account the trifling wear and tear of the fishing gear, it has cost him evidently one day's work, and nothing else. It is possible, however, that he looks at this sacrifice from another point of view. It is possible that he measures it by the gratification he might have got if he had spent his work-day otherwise, which gratification he must now do without. He may calculate thus: If I had spent to-day in shooting instead of fishing I might have shot three hares, and I must now do without the gratification obtainable from these.


I believe that this way of reckoning sacrifice is not incorrect. Here the man simply looks at work as a means to an end, and taking no notice of the mean—the primary sacrifice of work—fixes his attention on the end which was sacrificed through the mean. It is a method of calculation very common in economic life. Say that I have definitely set aside £30 for expenditure, but am hesitating between two modes of spending it. In the end I make up my mind to spend it on a pleasure trip instead of the purchase of a Persian carpet. Evidently the real sacrifice which the pleasure trip will cost me may be represented under the form of the Persian carpet which I have to do without.


In any case it appears to me obvious that, in reckoning the sacrifice made for any economic end, the direct sacrifice in means—that sacrifice which is first made—and the indirect sacrifice, which takes the shape of other kinds of advantage that might have been obtained in other circumstances by the means sacrificed, can be calculated only alternatively and never cumulatively. I may consider the sacrifice of my pleasure trip to be either the £30 which it has directly cost me, or the Persian carpet which it has indirectly cost me, but never as the £30 and the carpet. Just in the same way our rustic may consider, as the sacrifice which the catching of the three fish costs him, either the day's work directly expended, or the three hares indirectly sacrificed (or, say, the gratification he gets from eating them), but never the day's work and the gratification obtained through shooting the hares. So much I think is clear.


But besides these occupations, which recompense him for his day's work at the end of the day, there are others open to our labourer which produce a result that cannot be enjoyed till a later date. He might, e.g. sow wheat, getting the produce of it after a year's time; or he might plant fruit trees, from which he could have no return for ten years. Suppose he chooses the latter. If we again leave out of account the land and the trifling wear and tear of tools, what has he sacrificed to obtain the fruit trees?


To me there seems no doubt about the answer. He has sacrificed a day's work, and nothing more. Or, if the indirect way of computation be preferred, instead of the day's work he may calculate the other kinds of gratification that might have been got by spending the day in other ways—say the immediate enjoyment of three fish, or of three hares, or of a basket of fruit. But at all events it seems to me obvious in this case also, that, if the gratification which might have been got through the work is reckoned as sacrifice, then not the smallest portion of the work itself can be reckoned in the sacrifice; while, if the work is reckoned as sacrifice, there cannot be added to that in the calculation the smallest fragment of the other kinds of enjoyment that were renounced. To do otherwise would be to make a double reckoning, which would be just as false as if the man in our former illustration had reckoned the cost of the pleasure trip as the £30 actually paid, and besides as the Persian carpet which he might have bought with the £30.


It is a double calculation of this kind that Senior has made. He has not done so, I admit, in the gross way of calculating, in addition to the labour, the entire gratification he might have had from the labour; but in reckoning the postponement or abstinence from gratification independently of the labour he has gone farther than was allowable. For it is clear that in the sacrifice of labour is already included the sacrifice of the whole advantage that might have been got from employing the labour in other ways,—the whole advantage, containing all the partial or secondary shades of advantage that may depend on the principal advantage. The man who sacrifices £30 on a pleasure trip sacrifices, not in addition to but in the £30, both the Persian carpet that he might have bought with it and the satisfaction which he might have found in its possession; sacrifices too, among other things, the special advantage he might have had in the durability of this possession, and the length of time over which the gratification was spread. And just in the same way the labourer who sacrifices one day of work of the year 1889 in the planting of trees, makes a sacrifice, in and not in addition to, this day of work, not only of the three fish which he might have caught by the day's labour, but also of the peculiar enjoyment which he has, say, in a fish-dinner; as also of the advantage which springs from the fact that he might have had this gratification in the year 1889. The special reckoning of the postponement of gratification, therefore, contains a double calculation.


It is not perhaps too much to hope that most of my readers will agree with the foregoing arguments. Nevertheless I cannot consider the subject yet threshed out. There is no doubt that Senior's way of putting the matter has something very fascinating and persuasive about it, and if the case made use of in our illustration is put in a certain light favourable to Senior's conception, the argument against me may appear absolutely convincing. This argument I have still to reckon with.


Put parallel cases as follows. If I employ to-day in catching fish, these fish cost me one day of labour. That is clear. But if I employ to-day in planting fruit trees, which will not bear fruit for ten years' time, then not only have I "taken it out" of myself (to use a significant colloquialism) for a whole day, but, over and above that, I have to wait for ten years for any result from my labour, although that waiting perhaps costs me much self-denial and mental pain. Therefore it would seem that in this latter act I make a sacrifice which is more than a day of labour; it is the exertion and toil of one day, and besides that, the burden of postponing the result of my work for ten years.


Plausible as this argument is, its basis is none the less fallacious. Let me first show, by following it out to some of its conclusions, that there is a fallacy, and then point out the source of the fallacy. Later on I shall have another opportunity of reviewing all that has been said and reducing it to principles.


Imagine the following case. I work for a whole day at the planting of fruit trees in the expectation that they will bear fruit for me in ten years. In the night following comes a storm and entirely destroys the whole plantation. How great is the sacrifice which I have made, as it happens, in vain? I think every one will say—a lost day of work, and nothing more. And now I put the question, Is my sacrifice in any way greater that the storm does not come, and that the trees, without any further exertion on my part, bear fruit in ten years? If I do a day's work and have to wait ten years to get a return from it, do I sacrifice more than if I do a day's work, and, by reason of the destructive storm, must wait to all eternity for its return? It is impossible to make such an assertion. And yet Senior would have it so; for while in the first case the sacrifice is stated to be a day's work and nothing more, in the second case it is a day's work plus a ten years' abstinence from its result! What a singular position too, according to Senior's view, must the progression of sacrifice attain as the time of use recedes! If labour immediately pays its own wages the sacrifice is only the labour expended. If it pays them in a year, the sacrifice is labour plus a year's abstinence. If it pays them in two years, the sacrifice is labour plus two years' abstinence. If it pays them twenty years afterwards, then the sacrifice grows to labour plus twenty years' abstinence. And if it never pays them at all? Must not, then, the sacrifice of abstinence reach its highest conceivable point, infinity, and form the climax of the upward progression? Oh no! Here the sacrifice of abstinence sinks to zero; the labour is the only thing counted as sacrifice, and the total sacrifice is not the greatest, but the least in the entire series!


I think that these conclusions plainly indicate that in all cases the only real sacrifice consists in the labour put forth, and that, if we thought ourselves compelled to acknowledge a second sacrifice besides that, viz. the postponement of gratification, we must have been misled by a specious presentation of the case.


But I must confess that the mistake is one we are very apt to fall into. What is it that misleads us?


The source of it is simply this, that the element of Time is not really indifferent; only it exerts its influence in a somewhat different way from that imagined by Senior and by people generally. Instead of affording material for a second and independent sacrifice, its importance rather lies in determining the amount of the one sacrifice actually made. To make this quite clear I must run the risk of being a little tedious.


The nature of all economic sacrifices that men make consists in some loss of wellbeing which they suffer; and the amount of sacrifice is measured by the amount of this loss. It may be of two kinds: of a positive kind, where we inflict on ourselves positive injury, pain, or trouble; or of a negative kind, where we do without a happiness or a satisfaction which we otherwise might have had. In the majority of economical sacrifices which we make to gain a definite useful end, the only question is about one of these kinds of loss, and here the calculation of the sacrifice undergone is very simple. If I lay out a sum of money, say £30, for any one useful end, my sacrifice is calculated simply by the gratification which I might have got by spending the £30 in other ways, and which I must now do without.


It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a mean to the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have been obtained as results of the same labour. The question now is, Which is the correct way, in this case, of calculating the sacrifice made for the concrete useful end?


The point we have to consider is, What would have been the position as regards our pleasure and pain if we had not expended the labour with a view to this particular end, but had disposed of it in some other reasonable way? The difference between the two evidently shows the loss of wellbeing which the attainment of our useful purpose costs us. If we make use of this method of estimating difference, we may very soon convince ourselves that the sacrifice made by labour is sometimes to be measured by the positive pain, sometimes by the negative loss of gratification, but never by both at once.


The question then comes to this, Whether, if we had put forth the day's labour otherwise, we could have got a satisfaction greater than the pain which the one day's labour causes us, or not? Suppose we feel the pain of a day's labour as an amount which may be indicated by the number 10. We actually employ the day in catching three fish, and these fish give us a gratification expressed by the number 15. And we ask what is the amount of sacrifice which the catching of the three fish costs us. What we shall have to decide is, whether, if we had not gone fishing, it would have been possible to us to get by a day's work another kind of satisfaction greater than the number 10. If no such possibility is open to us—say that shooting would only bring us a gratification represented by the number 8, while the labour-pain was, as before, 10—then evidently we should either fish or remain idle. What our three fish cost us in this case is the labour-pain indicated by the number 10, which pain we have undergone for the sake of the fish, and which pain we would otherwise not have undergone. There is no question here of any loss of other kinds of enjoyment, for the simple reason that we could not have got them. If, on the other hand, it is possible, by labouring for a day at other kinds of work, to get a gratification greater than the pain represented by the number 10—if we could, e.g. by a day's shooting obtain three hares of the value of 12, then it is quite reasonable to expect that we should not in any case remain idle, but possibly go shooting instead of fishing. What our fish really cost us now is not the positive labour-pain expressed by the number 10—for this we should have undergone at any rate—but the negative loss of an enjoyment which we might have had, indicated by the number 12. But of course we must never calculate the want of enjoyment and the pain of labour cumulatively; for if we had not preferred catching fish, we could not have spared ourselves the pain of labour and yet have had the gratification of shooting. And just as little, if we choose to fish, do we by that choice make a double sacrifice.


What has been said gives us the materials for a general rule which practical men are in the habit of applying with perfect confidence. It may be put in the following words.


If we apply labour to a useful end, the sacrifice made in doing so is always to be reckoned to the account of that one of the two kinds of loss of wellbeing which is the greater in amount; to labour-pain, if there is no kind of gratification in prospect which outweighs it; to gratification, where there is the possibility of such; but never in both at the same time.


And further, since in the economic life of to-day we have an infinite number of possibilities of turning our work to fruitful account, the first of these two cases almost never occurs. At the present time, then, we estimate by far the greater number of cases not by the pain of work, but by the profit or advantage we have renounced.


Here we have at last reached the point where we see the real influence of the element Time on the amount of the sacrifice. It is a fact—the grounds on which it rests do not concern us here—that in circumstances otherwise equal we prefer a present enjoyment to a future. Consequently, if we have to choose between applying a means of satisfaction, say labour, to the satisfaction of a present want, and applying it towards the satisfaction of a future want, the attraction of the immediate gratification will make it difficult to decide in favour of the future use. If, however, we do decide for the future use, in measuring the amount of sacrifice made for it by the greatness of the use foregone, the attraction of the moment which adheres to the use foregone will weigh down the scale, and make our sacrifice appear harder than it would otherwise have appeared. It is not that we make a second sacrifice in this. Whether we have to choose between two present or two future uses, or between a present and a future use, we always make the one sacrifice only, labour. But since, according to our analysis, we usually measure the amount of the sacrifice by the amount of the use foregone, the attraction of the earlier satisfaction is considered and has its influence on this valuation, and helps to make the calculation of the one sacrifice higher than it would otherwise have been. This is the true state of the facts to which Senior in his theory gave a faulty construction.*8


The reader will, I trust, pardon me keeping him so long at this abstract discussion. From the point of theory, however, it contains the weightiest arguments against a doctrine that must be taken seriously,—a doctrine which up till now has often been rejected, but never, in my opinion, refuted. For myself, I hold it the lesser evil to be over-scrupulous in inquiry before passing sentence, than to pass sentence without full inquiry.


Lastly, the third fault of Senior's theory seems to me that he has made his interest theory part of a theory of value in which he explains the value of goods by their costs.


Now, even admitting the correctness of this theory, the "law of costs" avowedly holds only as regards one class of goods, those which can be reproduced in any quantity at will. In so far, then, as Senior makes his theory of interest an integral part of a value theory which is merely partial, it can only be, in the most favourable circumstances, a partial interest theory. It might explain those profits that are made in the production of goods reproducible at will, but logically every other kind of profit would escape it altogether.


Senior's Abstinence theory has obtained great popularity among those economists who are favourably disposed to interest. It seems to me, however, that this popularity has been due, not so much to its superiority as a theory, as that it came in the nick of time to support interest against the severe attacks that had been made on it. I draw this inference from the peculiar circumstance that the vast majority of its later advocates do not profess it exclusively, but only add elements of the Abstinence theory in an eclectic way to other theories favourable to interest. This is a line of conduct which points, on the one hand, to a certain undervaluing of the strength of its position as a theory; its advocates do not hesitate to discredit it rather rudely by piling up along with it a great many heterogeneous and contradictory explanations. And, on the other hand, it points to a preference for that practical and political standpoint which is satisfied if only a sufficient number of reasons are brought forward to prove the legitimacy of interest, although it should be at the expense both of unity and logic.


Thus we shall meet the majority of the followers of Senior among the eclectics. I may name, provisionally, among English economists, John Stuart Mill and the acute Jevons; among French writers, Rossi, Molinari, and Josef Garnier; among Germans, particularly Roscher and his numerous following; then Schüz and Max Wirth.


Among those writers who hold by the Abstinence theory pure and simple, I merely name the most prominent. Cairnes places himself essentially at Senior's standpoint in his spirited treatment of the costs of production.*9 The Swiss economist Cherbuliez*10 explains interest to be a remuneration for the "efforts of abstinence," and so stands on the boundary line between the Abstinence theory and a peculiar variety of those Labour theories which we have to discuss in the next book. In Italian literature Wollemborg has lately followed the lead of Senior and Cairnes in acute inquiry into the nature of costs of production.*11 Among the Germans is Karl Dietzel, who, however, touches on the problem only occasionally and cursorily.*12


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.

Notes for this chapter

Kapital und Arbeit, Berlin, 1864, p. 110.
Even in that minority of cases where the sacrifice of labour is measured in pain of labour, the time element of postponement of gratification cannot form a second and independent sacrifice. For the pain of labour only enters into the valuation, as we have seen, when the pain in question is greater than any kind of use which can be got out of the labour, inclusive of all the attractions of the moment that may happen to be in it; and when, consequently, the choice can only reasonably be thought of as lying between the concrete future uses, towards which the labour would actually be directed, and entire cessation from labour. Since there is here no question of any other kind of earlier enjoyment of goods, such an enjoyment cannot of course be, in any way, an element in the valuation of sacrifice.
Some Leading Principles of Political Economy, 1874, chap. iii.
Précis de la Science Economique, Paris, 1862; particularly vol. i. pp. 161, 402, etc.
Intorno al costo Relativo di Produzione, etc., Bologna, 1882.
System der Staatsanleihen, Heidelberg, 1855, p. 48: "The lender of capital bases his claim on compensation for the using of the capital transferred by him, first, on the fact that he has given up the chance of giving value to his own labour power by embodying it in the object; and second, that he has refrained from consuming it, or its value, at once, in immediate enjoyment. This is the ground on which interest on capital rests; the subject, however, has no further concern for us in this place."

End of Notes

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