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.
Pub. Date
33 of 33



Our attention has been too long fixed on individual theories. Let us, in conclusion, consider the subject as a whole. We have seen the rise of a motley array of interest theories. We have considered them all carefully and tested them thoroughly. No one of them contains the whole truth. Are they on that account quite fruitless? Taken all together, do they form nothing but a chaos of contradiction and error, that leaves us no nearer the truth than when we started? Is it not rather the case that, through the tangle of contradictory theories, there runs a line of development which, if it has not itself led to the truth, has at least pointed the way in which truth is to be found? And how runs the line of this development?


I cannot better introduce the answer to this last question than by asking my readers once more to put clearly before their minds the substance of our problem. What really is the problem of interest?


The problem is to discover and state the causes which guide into the hands of the capitalists a portion of the stream of goods annually flowing out of the national production. There can be no question then that the interest problem is a problem of distribution.


But in what part of the stream is it that the current branches off into different arms? On this point the historical development of theory has brought to light three essentially distinct views, and these views have led to three as distinct fundamental conceptions of the whole problem.


Let us keep for a moment to the figure of the stream: it will serve very well to illustrate the subject. The source represents the production of goods; the mouth the ultimate division into incomes whereby human needs are satisfied; the course of the stream represents that stage between source and ultimate division where goods pass from hand to hand in economic transactions, and receive their value by human estimation.


Now the three views are the following. One view has it that the capitalist's share is already separated out from the first. Three distinct sources—nature, labour, and capital—each in virtue of its inherent productive power, bring forth a definite quantity of goods, with a definite quantity of value, and just the same amount of value as has flowed from each source is discharged into the income of those persons who own the source. It is not so much one stream as three streams, that flow together for a long time in the same bed. But their waters do not mingle, and at the mouth they divide again in the same proportion as when they came out of the separate sources. This view transfers the whole explanation to the source of wealth; it treats the problem of interest as a problem of production. It is the view of the Naïve Productivity theories.


The second view is directly opposed to the first. It finds the division first and exclusively in the discharge. There is only one source, labour. Out of it pours the whole stream of wealth, one and undivided. Even the course of the stream is undivided; in the value of goods there is nothing to prepare the way for a division of them among different participants, for all value is measured simply by labour. It is just at the mouth, just where the stream of wealth is about to pour out, and should pour out into the income of the workers who produce it, that, from each side, the owners of land and the owners of capital thrust out a dam into the stream, and forcibly divert a part of the current into their own property. This is the view of the socialist Exploitation theory. It denies interest any previous history in the earlier stages of the career of wealth. It sees in it simply the result of an inorganic, accidental, and violent taking. It treats the problem as purely one of distribution or division in the most offensive sense of the word.


The third view lies midway between the two. According to it there are two, perhaps even three springs in the source out of which flows the undivided stream of wealth. But in its course this stream comes under the influences that create value, and under these influences it immediately begins to branch asunder again. That is to say, in their calculation of use values (and of exchange values based on these) men put a value on the importance they attach to various goods and classes of goods, taking into consideration the amount and intensity of their needs on the one hand, and the quantity of means available to satisfy them on the other, and thus come to make division between goods and goods; they raise one kind and lower another. Thus emerge complicated differences of level, complicated tensions and attractions, under the influence of which the stream of goods is gradually forced asunder into three branches, of which each has its particular mouth. The one mouth discharges into the income of the owners of the land; the second into that of the workers; the third into that of the capitalists. But these three branches are neither identical with the two or three springs, nor do they even correspond with them in force. What decides the force of each branch at its mouth is not the strength of each spring at its source, but the amount which the formation of values has forced from the united stream into each of the three branches.


This then is the view in which all the remaining theories of interest agree. They find the final division already suggested in the stage of the formation of values, and therefore they consider it their duty to carry back their theory into this sphere. They supplement and widen out the distribution problem of interest into a problem of value.


Which of these three fundamental conceptions is the right one? To any moderate and candid observer the answer cannot remain doubtful.


It certainly is not the first view. Not only is capital not an original source of wealth,—since it is at all times the fruit of nature and labour,—but, as we have sufficiently proved, there is no power whatever in a factor of production to turn out its physical products with a definite value attached to them. In the production of goods neither value in general, nor surplus value in particular, nor interest on capital comes ready-made into the world. The problem of interest is not a simple problem of production.


But neither can the second conception be the correct one. The facts are against it. It is not for the first time in the distribution of goods, but before that, in the formation of value, that a foreign element intrudes itself by the side of labour. An oak tree a hundred years old, which during its long growth has only required the attention of a single day's labour, has a hundred times higher value than the chair which another day's labour has made out of a pair of boards. In this case the oak trunk, the product of one day's labour, does not at once become a hundred times more valuable than the chair which costs one day's labour. But day by day, year by year, the growing value of the oak diverges from the value of the chair. And as it is with the value of the oak, so is it with the value of all those products the production of which costs, not only labour, but time.


Now it is the same quiet and stubborn working forces as, step by step, separated the value of the oak from that of the chair, that have at the same time produced interest on capital. These forces, effective long before goods come to division, have marked out the future limiting line between wage of labour and interest on capital. For labour can be paid on no other principle than "like wages for like work." But if the value of goods produced by similar labour becomes dissimilar through the action of these forces, the similar level of wages cannot everywhere be maintained and coincide with the dissimilar rise in the value of goods. It is only the value of goods not thus favoured that falls in level, and is appropriated by the general rate of wages which it determines. All goods that are favoured rise above this level in proportion as they have been favoured by the formation of value, and could not be appropriated by the general rate of wages. When then the final division comes, after all the workers have received like wages for like work, these favoured goods must of themselves leave something over which the capitalist can and may appropriate. They leave this something over, not because at the last moment the capitalist, by his sudden snatch at the spoil, artificially forces down the level of wages under the level of the value of goods, but because, long previously, the tendencies of the formation of value had raised the value of those goods which cost labour and time above the value of those other goods which cost only labour producing its result at once;—the value of which latter labour, as it must be sufficient to satisfy the labour of its production, forms at the same time the standard for the general rate of wages.


So speak the facts. The conclusions which they force us to draw are clear. The problem of interest is a problem of distribution. But the distribution has a previous history, and must be explained by that previous history. The sums of wealth do not start away from each other on a sudden; the diverging lines which they follow were quietly and gradually cut out in previous stages of their career. Whoever wishes really to understand the distribution, and truly to explain it, must go back to the origin of the quiet but distinct grooving of these lines of division, and this will lead him to the sphere of value. This is where the principal work is to be done in the explanation of interest. Whoever treats the problem as a simple problem of production breaks off his explanation before he has come to the principal point. Whoever treats it as a problem of distribution, and distribution only, begins it after the principal point is passed. It is only the economist who undertakes to clear up those remarkable rises and falls of value, where the rises are surplus value, who can hope, in explaining them, to explain interest in a really scientific way. The interest problem in its last resort is a problem of value.


If we keep this in view we shall easily find the order of merit into which these various groups of theories fall, and we shall ascertain where runs the upward line of the development.


Two theories have entirely mistaken the character of the interest problem; together—the one forming the counterpart of the other—they constitute the lowest step in the development. These are the Naïve Productivity theory and the socialist Exploitation theory. It may seem strange to mention these two in the same breath. How widely the two diverge in the results at which they arrive! How much superior the adherents of the Exploitation theory consider their arguments to the naïve assumptions of the Productivity theorists! How proudly they proclaim their own advanced critical attitude! The association, however, is justified. First, the two theories agree in what they do not do. Neither of them touches on the distinctive problem. Neither of them wastes words in explaining those peculiar waves which are thrown up by the value of goods, and out of which surplus value comes. The Productivity theory contents itself with saying, in regard to these waves of value, that they have been produced. The Exploitation theory, almost more culpably, does not even notice them; for it they do not exist; for it, however the facts of the economical world may run contrary, the level of the value of goods agrees simply with the level of the labour expended on them.


But not only negations, but positive ideas bind these two theories more closely together than could well be believed. They are in truth fruit of one and the same bough; children of one and the same naïve assumption that value grows out of production like the blade out of the field.


This assumption has an important history of its own in economic literature. In constantly changing shapes it has, for a hundred and thirty years, ruled our science, and by forcing the explanation of the fundamental phenomenon in a wrong direction has hindered its progress. First it appears in the physiocrat doctrine that land creates all surplus of value by its own fruitfulness. Adam Smith took the strength away from the assumption. Ricardo entirely uprooted it. But, before the first phenomenal form of it had quite disappeared, Say introduced it for a second time into the science in a new and extended form. Instead of the one productive power of the physiocrats appear three productive powers, which produce values and surplus values exactly in the same way as formerly the physiocrats had produced the produit net. Under this form the assumption held the science under its ban for ten long decades. At length the spell was broken, for the most part through the passionate but praiseworthy criticism of the socialist theorists. But still its tough vitality asserted itself. Giving up the form, not the substance, it managed to save itself under a new disguise, and by a strange freak of fortune found its new home in the writings of those who had most bitterly opposed it, the Socialists. The value-creating powers were gone; the value-creating power of labour remained, and with it the old fatal weakness that, instead of the subtle syntheses of the formation of value which should be the work and the pride of our science to unravel, there was nothing left but a stout assumption, or, so far as an assumption would not pass, a still more stout denial.


Thus the naïve theory of the Productivity of capital and the emancipated theory of the socialists are twin systems. So far as the latter aspires to be a critical theory, well and good; it is really so; but it is also obviously a naïve doctrine. It criticises one naïve extreme only to fall into an opposite extreme that is no less naïve. It is nothing else than the long-delayed counterpart of the Naïve Productivity theory.


In comparison with it the remaining theories of interest may take credit to themselves for standing a step higher. They seek for the solution of the interest problem on the ground where the solution is really to be found, the ground of value. The respective merits of these theories, however, are different.


Those which seek to explain interest by the external machinery of the theory of costs have to carry a heavy handicap in the assumption that value grows out of production. Their explanation always leaves something over to explain. Just as certain as is the fact that the fundamental forces which set in motion all economical efforts of men are their interests, egoistic or altruistic, so certain is it that no explanation of the economical phenomena can be satisfactory where the threads of explanation do not reach back unbroken to these fundamental and undoubted forces. This is why the cost theories fail. In thinking that they find the principle of value,—of that guide and universal intermediate motive of human economical affairs,—not in a relation to human welfare, but in a dry fact of the external history of the manufacture of goods, in the technical conditions of their production, they follow the thread of explanation into a cul-de-sac, from which it is impossible to find a way to the psychological interest-motive to which every satisfactory explanation must go back. This condemnation applies to the majority of the interest theories we have been considering, however different the individual theories may have been.


Lastly, one step higher in rank stand those theories which have quite cut themselves adrift from the old superstition that the value of goods comes from their past instead of from their future. These theories know what they wish to explain, and in what direction the explanation is to be sought. If they have, notwithstanding, not discovered the entire truth, it is rather the result of accident; while their predecessors, cut off from the right way of its seeking by a wall of assumption, sought it in a wrong direction, and so sought it in vain. The higher step of the development is indicated in certain individual formulations of the Abstinence theory, but principally in the later Use theories; and here it is the theory of Menger which, to my mind, appears the highest point of the development up till now. And that not because his positive solution is the most complete, but because his statement of the problem is the most complete—two things, of which, as is often the case, the second may perhaps be more important and more difficult than the first.


On the foundation thus laid I shall try to find for the vexed problem a solution which invents nothing and assumes nothing, but simply and truly attempts to deduce the phenomena of the formation of interest from the simplest natural and psychological principles of our science.


I may just mention the element which seems to me to involve the whole truth. It is the influence of Time on human valuation of goods. To expand this proposition must be the task of the second and positive part of my work.


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