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

1. The hesitating way in which many of the Use theorists have expressed themselves is to blame in great part for the fact that, up till now, so little attention has been paid to the independent existence of these theories. Their representatives were usually classed with the adherents of the Productivity theories proper, and it was considered that the former had been confuted when only the latter had been. From what I have said above it will be seen that this is quite erroneous. The two groups of theories rest on essentially distinct principles.

Book III, Chapter II

2. See above, p. 120. [Book II, Chapter II pars. 1-4.—Econlib Ed.]

3. See my Rechte und Verhaltnisse, p. 57. More exactly also below.

4. It will be well to remember that the word Hire (Miethzins in German) is properly used of the lending of a durable article where the sum paid monthly or yearly includes wear and tear. If we pay 20s. a month for the hire of a piano, it is understood that the piano suffers so much by our use, and that the 20s. covers that deterioration. We are not expected to repair the damage done to the piano, nor to pay an extra sum for repairing it. That is to say, the 20s. per month is a gross interest, which includes the replacement of the capital. If in three years the music-seller gets £36 in hires for an ordinary piano, it is evident that this is far more than interest. The true interest (net interest) is found by deducting the capital value of the piano. Say that that value was £30, and that in three years' time the piano is worn out; then £6 is the interest obtained by the music-seller over a period of three years on a capital sum of £30. But this distinction, evident at a first glance in a concrete example, has been overlooked, as we see, by more than one economist.—W. S.

5. Cours d'Economie Politique, vol. i. Paris, 1823.

6. These last words are a quotation from Say.

7. 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.

8. Oeffentliche Credit. I quote from the second edition, 1829.

9. See, e.g. pp. 19, 20.

10. "On the one hand, the necessity and the usefulness of capital for the business of production in its most multifarious forms, and on the other, the hardship of the privations to which we owe its accumulation; these lie at the root of the exchange value of the services rendered by capital. They get their compensation in a share of the value of the products, to the production of which they have cooperated" (p. 19).

"The services of capital and of industry necessarily have an exchange value; the former because capitals are only got through more or less painful privations or exertions, and people can be induced to undergo such only by getting an adequate share..." (p. 22)

11. Kassel, 1850-57.

12. i. sect. ii p. 246, etc., and many other places.

13. ii. p. 214, and other places.

14. ii. p. 255.

15. ii. pp. 633, 660.

16. See first edition, p. 270, in the note.

17. "Ihr Gebrauch während dessen sie fortbestehen, wird ihr Nutzung gennant," etc.

18. P. 111. Hermann of course does not always remain quite faithful to the conception here given. In this passage he calls the goods which form the basis of a durable use capital; but later on he is fond of representing capital as something different from the goods—as it were something hovering over them. Thus, e.g. when he says on p. 605: "Above all we must distinguish the object in which a capital exhibits itself from the capital itself. Capital is the basis of a durable use which has definite exchange value; it continues to exist undiminished so long as the use retains this value, and here it is all the same whether the goods which form the capital are useful simply as capital or in other ways—that is, generally speaking, it is all the same in what form the capital exhibits itself." If the question be put, What then is capital, if it is not the substance of the goods in which it "exhibits" itself? it might be difficult enough to give a straightforward answer, and one that would not be simply playing with words.

19. Hermann evidently considers the exchange value of uses too self-evident to need any formal explanation from him. Even the extremely scanty explanation mentioned above is usually given only indirectly, although at the same time quite plainly; thus when on p. 507 he says: "For the use of land the corn producer can obtain no compensation in price, so long as it is offered to any one in any quantity as a free gift."

20. Pp. 312, etc., 412, etc.

21. P. 286, etc.

22. See below, p. 204. [Book III, Chapter II, pars. III.II.50-51.—Econlib Ed.]

23. See above, p. 125. [Book II, Chapter II, pars. II.II.20-22.—Econlib Ed.]

24. See also p. 560: "The uses of capital are therefore a ground of the determination of prices."

25. Under capital Hermann includes land.

26. E.g. Roscher, § 183. Roesler, who accepts Hermann's results, although he ascribes them to somewhat different causes, is the only exception.

27. A note which occurs here in the German edition is omitted by the author's instructions.—W. S.

28. P. 541; p. 212 of first edition.

29. Versuch einer Kritik der Gründe die für grosses und kleines Grundeigenthum angeführt werden, St. Petersburg, 1849.

30. E.g. p. 236, etc.

31. P. 306, etc.

32. Volkswirtschaftslehre, Stuttgart, 1868; particularly pp. 121, 137, 333. 445, etc.

33. Pp. 122, 432.

34. Schönberg's Handbuch, i. pp. 437, 484, etc.

35. Third edition, Tübingen, 1873.

36. Ges. System, third edition, i. p. 266; ii. p. 458, etc.

37. Second edition, Tübingen, 1881.

38. Knies, Geld und Kredit, ii. part ii. p. 35. See also Nasse's Rezension in vol. xxxv of the Jahrbücher für National-Oekonomie und Statistik, 1880, p. 94.

39. Zeitschrift für die gesammte Staatswissenschaft, vol. xv. p. 559.

40. See above, p. 49.

41. Der Kredit, part i. p. 11.

42. Ibid. ii. p. 38. I may perhaps express the conjecture that the respected author was led to the above polemic by the contents of a work which I had written in his economical Seminar a few years before, and in which I had laid down the views contested.

43. Das Geld, Berlin, 1873. Der Kredit, part i. 1876; part ii. 1879.

44. Das Geld, pp. 61, 71, etc. I shall return to the details of this inquiry later on, when criticising the Use theory as a whole.

45. See above, p. 196.

46. Kredit, part ii. p. 33, and other places.

47. Vienna, 1871.

48. See above, pp. 139, 199.

49. I regret that I must deny myself the pleasure of introducing in this place more than the barest outlines of Menger's value theory. Holding as I do that his theory is among the most valuable and most certain acquisitions of modern economics, I feel that it cannot be at all adequately appreciated from any such sketch. In my next volume I shall have the opportunity of going more thoroughly into the subject. Meanwhile, for more exact information on the propositions which I have given in very condensed form in the text, I must refer to Menger's own unusually luminous and convincing statement in the Grundsätze, particularly p. 77 onward.

50. Pp. 133-138.

51. Mataja in his Unternehmergewinn (Vienna, 1884) is in substantial agreement with Menger. This valuable work, unfortunately, reached me too late to allow me to make any thorough use of it.

Book III, Chapter III

52. To guard against a misunderstanding which I should very much deprecate, let me say in so many words that I have no intention of denying the existence of "uses of capital" in general. What I must deny is the existence of that special something which our theorists point to as the "use" of capital, and which they endow with a variety of attributes that, in my opinion, go against the nature of things. But this is anticipating.

Book III, Chapter IV

53. Geld, p. 61: "Nutzung = the Gebrauch of a good lasting over a period of time, and limitable by moments of time."

54. See my Rechte und Verhältnisse vom Standpunkte der volkwirthschaftlichen Güterlehre, Innsbruck, 1881, p. 51.

55. I take the liberty in the next chapter of repeating, partly in the same words, the argument of my Rechte und Verhältnisse, which was written some time ago with a view to the present work.

Book III, Chapter V

56. I may remind the reader that, according to the scientific conception of energy—energy being that quality the possession of which confers upon a body the power of doing work—it may exist either as available or unavailable energy; that is, the body may possess energy of which a use can be made, or it may possess energy of which no use can be made. Thus the storage of energy in certain material bodies in an unavailable form, and the change of this unavailable into available energy, by means of which work is done that has a direct influence on the satisfaction of human wants, is just the physical conception applied to economics.—W. S.

57. Schäffle, in particular, in the third volume of his Bau und Leben, very beautifully puts the same point of view. Schäffle, I may say, forms an honourable exception among economists as regards this objectionable habit of not taking any trouble with the principles that regulate the working of goods.

58. I have already introduced this term Nutzleistung in my Rechte und Verhältnisse; before that I used it in a work written in 1876 but not printed. It is employed by Knies several times in the second portion of his Kredit, but unfortunately in the same ambiguous sense in which on other occasions he uses the word Nutzung.

After much deliberation Material Service is the nearest rendering I can give to the word Nutzleistung, introduced by Professor Böhm-Bawerk. Every translator finds the difficulty of rendering scientific terms from one language into another, but this difficulty is greater in political economy, where we are bound to use words "understanded of the people." The word Nutzleistung is one of these happy combinations which, as compounded of two familiar words, do not strike a German as peculiar or clumsy, and are yet strict enough to satisfy scientific requirements. But our language does not admit of many such combinations—the literal translation "use rendering" at once shows the impossibility in the present case—and in a translation one does not feel justified in coining a new word. In rendering the word thus it becomes necessary to eliminate a note that follows in the German edition, where Professor Böhm-Bawerk congratulates himself on having escaped Say's services productifs, which might be objected to on the ground that "only a person, not a thing, can render services." The prefix "material" seems to me fairly to meet this objection, as the total expression now implies a service—a forthputting of natural power in the service of man—rendered by a material object.—W. S.

59. After this clause, in the German edition, come the words: "Und andererseits scheint mir der Name Nutzleistung in der That ausserordentlich prägnant zu sein: es sind im eigenstlichen Wortsinn nützliche Kräfteleistungen, die von den Sachgütern ausgehen."—W. S.

60. It is unfortunate that in English economics we have devoted so little attention to this most elementary conception, on which Menger, in particular, has bestowed so much pains. The poverty of our scientific nomenclature shows this defect very markedly: the word "commodity" is really the only singular equivalent we have for the familiar and suggestive word "goods," although I personally have not scrupled to translate the German Gut by the English "good." There is, indeed, reason for Mr. Ruskin's sarcasm that our most famous treatise on Wealth does not even define the meaning of the word "wealth."—W. S.

61. Even the so-called non-perishable goods are perishable, however gradually they perish.

62. Not of the loan; see below.

63. See also my Rechte und Verhältnisse, p. 70, etc.

64. In my Rechte und Verhältnisse, p. 60, where, in particular, I have stated the character of the material services as primary elements of our economic transactions, and have deduced the value of goods from the value of the material services.

65. This idea, though put somewhat differently, is explicitly recognised by Knies, Der Kredit, part ii. pp. 34, 77, 78. He expressly calls the selling price of a house the price of the permanent use of a house in opposition to the hire price, which is the price of the temporary uses of the same good. See also his Geld, p. 86. Schäffle too (Bau und Leben, second edition, iii.) describes goods as "stores of useful energies" (p. 258).

66. For more exact statement, see my Rechte und Verhältnisse, p. 64.

Book III, Chapter VI

67. A hair-splitting critic might perhaps point out that the possession of good machines assists the maker to secure, say, a good credit, a good name, good custom, etc. The careful reader will have no difficulty in answering such objections. To the same category belongs the "use through exchange".

Book III, Chapter VII

68. Staatswirthschaftliche Untersuchungen, second edition, p. 109.

69. P. 110, etc. See the quotation above, p. 194. [Book III, Chapter II, par. III.II.23.—Econlib Ed.]

70. To prove the appropriateness of this analogy we need only picture to ourselves the graduation of transition from the durable goods,—such as land, precious stones,—down through always less durable goods,—as tools, furniture, clothes, linen, tapers, paper collars and so on,—till we come to the entirely perishable goods—matches, food, drink, etc.

71. Geld, p. 59, etc.

Book III, Chapter VIII

72. It is as well to put it in so many words that, in this polemic on the conception of Use, I am in opposition, not only to the Use theorists properly so called, but to almost the entire literature of political economy. The conception of the Use of capital which I dispute is that commonly accepted since the day of Salmasius. Even writers who explain the origin of interest by quite different theories—e.g. Roscher, by the Productivity theory; or Senior, by the Abstinence theory; or Courcelle-Seneuil or Wagner, by the Labour theory—always conceive of loan interest as a remuneration for a transferred Use or Usage of capital, and occasionally they conceive even of natural interest as a result of the same use or usage. The only distinction between them and the Use theorists properly so called is this, that the former employ these expressions naïvely, using terms that have become popular, and do not trouble themselves as to the premises and conclusions of the Use conception,—which sometimes entirely contradict the rest of their interest theory; while the Use theorists build their distinctive theory on the conclusions of that conception. The almost universal acceptance of the error I am opposing may further justify my prolixity.

73. Grundlagen, tenth edition, p. 401, etc.

Book III, Chapter IX

74. The common German word is vertretbar, which might be loosely translated here by "representative" or "replaceable." But the word "fungible" is perhaps worth adopting in English economics.—W. S.

75. See L. 31, Dig. loc. 19, 2, and L. 25, § 1, Dig. dep. 16, 3.

76. Goldschmidt, Handbuch des Handelsrechtes, second edition, Stuttgart, 1883, vol. ii. part. i. p. 26 in the note.

77. Ulpian, it is well known, in Dig. vii. 5, L. 1, De usufructu earum rerum quae usu consumuntur vel minuntur, quotes a decree of the Senate which established the bequeathing of a usufruct in perishable goods. On this Gaius remarks: "Quo senatus consulto non id effectum est, ut pecuniae usufructus proprie esset; nec enim naturalis ratio auctoritate senatus commutari potuit; sed, remedio introducto, caepit quasi usufructus haberi." I do not agree with Knies (Geld, p. 75) that Gaius took exception simply to the formal flaw that there could only be a regular usufruct in goods belonging to another person, while the legatee holds the perishable goods left him as his own property, res suae. The appeal to the naturalis ratio could hardly have been made in order to rehabilitate a defective formal definition of usufruct; it is infinitely more probable that it was made on behalf of a truth of nature that was seriously violated by the decree.

78. The germs of this view, which I consider the only correct one, are to be found in Galiani (see above, p. 49 [Book I, Chapter II, par. I.II.70-72.—Econlib Ed.]), in Turgot (see above, p. 56 [Book I, Chapter II, par. I.II.92-94.—Econlib Ed.]), and latterly in Knies, who, however, has since expressly withdrawn it as erroneous.

Book III, Chapter X

79. Grundsätze, p. 132, etc.

80. Ibid. p. 132, etc.

81. 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.

82. If we put the illustration a little differently it may show more forcibly that the value of the disposal is contained in the value of the good. Suppose that A first lends B a thing for twenty years without interest—presents him therefore with the good called "disposal for twenty years," and then, a couple of days after the loan contract is concluded, presents him with the thing itself. Here he has in two actions given away the twenty years' disposal and the thing itself. If the "disposal" were a thing of independent value in addition to the thing itself, the total value of the gift would obviously be greater than the value of the thing itself, which just as obviously is not the case.

Book IV, Chapter I

1. Extracted from the Encyclopaedia Metropolitana, London, 1836. I quote from the fifth edition, London, 1863.

2. See above, p. 97 [Book I, Chapter V, par. I.V.52.—Econlib Ed.], and below, book vii.

3. Ever since Hodgskin's writings (1825). See below, book vi.

4. See above, p. 71. [Book I, Chapter IV, par. I.IV.4-6.—Econlib Ed.]

5. See above, p. 192. [Book III, Chapter II, par. III.II.13-16—Econlib Ed.]

6. Principles of Political Economy, London, 1833.

Book IV, Chapter II

7. Kapital und Arbeit, Berlin, 1864, p. 110.

8. 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.

9. Some Leading Principles of Political Economy, 1874, chap. iii.

10. Précis de la Science Economique, Paris, 1862; particularly vol. i. pp. 161, 402, etc.

11. Intorno al costo Relativo di Produzione, etc., Bologna, 1882.

12. 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."

Book IV, Chapter III

13. Harmonies Economiques (vol. vi of complete works), third edition, Paris, 1855, p. 210. See also the pages immediately preceding, 207-209, and generally the whole of Chapter VII. [In English translation: Economic Harmonies, .—Econlib Ed.]

14. "Si l'on penètre le fond des choses, on trouve qu'en ce cas le cédant se prive en faveur du cessionaire ou d'une satisfaction immédiate qu'il récule de plusieurs années, ou d'un instrument de travail qui aurait augmenté ses forces, fait concourir les agents naturels, et augmenté, a son profit, le rapport des satisfactions aux efforts" (vii. p. 209). "Il ajourne la possibilité d'une production.... Je l'emploierai pendant dix ans sous une forme productive" (xv. p. 445). So often in the tract Capital et Rente, e.g. p. 44. James, who has made a plane, and has now lent it to William for a year, makes this the ground for his claim of interest: "I expected some advantage from it, more work done and better paid, an improvement in my lot. I cannot lend you all that for nothing."

15. 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.

16. See, e.g. Rodbertus, Zur Beleuchtung, i. p. 116, etc.; Pierstorff, p. 202.

17. P. 214.

18. P. 216.

19. "... et je défie qu'on puisse imaginer une telle répartition en dehors du mécanisme de l'intérêt" (p. 217).

20. "Réconnaissons donc que le mécanisme social naturel est assez ingénieuz pour que nous puissions nous dispenser de lui substituer un mécanisme artificiel" (p. 216, at end).

21. P. 223.

Book V, Chapter I

22. Elements of Political Economy, third edition, London, 1826. I was not able, unfortunately, to get sight of the first edition of 1821.

23. The author (as is evident from a parallel passage on p. 100) means annuities which replace the original value of the machine in ten years, and at the same time pay interest at the rate fixed by the condition of the market.

24. See above, p. 97. The doubtful honour of priority in this theory belongs to James Mill.

25. Traité théorique et pratique d'Economie Politique, i. Paris, 1858.

26. Précis du Cours d'Economie Politique, second edition, Paris, 1881, 1882.

27. ii. p. 189; also i. p. 236.

28. See above, p. 286. [Book IV, Chapter II, par. IV.II.38.—Econlib Ed.]

29. Traité d'Economie Politique, eighth edition, Paris, 1880. P. 522: "Le loyer rémunère et provoque les efforts ou le travail d'épargne et de conservation."

30. The name they themselves use is the "Social Political-School of National Economy."

31. Zur Erklärung und Abhülfe der heutigen Kreditnoth des Grundbesitzes, second edition, 1876, ii. p. 273, etc.

32. This follows from the tone of the passage, which suggests a simile and a comparison rather than a strict explanation; from its position in a note; from the fact of Rodbertus having another and a different theory; finally, from an explicit explanation which he makes in stating this other theory, that interest in the present day has not the character of (indirect) salary, but that of an immediate share in the national product (Zur Beleuchtung, p. 75).

33. ii. p. 458.

34. ii. p. 459, etc.

35. See above, p. 206. [Book III, Chapter II, par. III.II.57.—Econlib Ed.]

36. "Thus I cannot, in any case, agree with the absolute condemnation of capital and of profit as 'pure appropriation of surplus value'; it is a function of cardinal importance which private capital, whatever be its motives, now performs when it assists what Rodbertus called 'business left to itself,' " (second edition, iii. p. 386). "Historically then even capitalism may be fully warranted and profit justified. To remove the latter without having found a better organisation of production would be senseless." "We may therefore practically condemn profit as appropriation of 'surplus value' only if we are able to replace the economic service of private capital by a public organisation positively established, more complete, and less greedy of surplus value" (Mehrwerth schluckende), iii p. 422.

37. See above, p. 207. [Book III, Chapter II, par. III.II.57-59.—Econlib Ed.]

38. Allgemeine oder theoretische Volkwirthschaftslehre, part i. Grundlegung, second edition. Leipzig and Heidelberg, 1879, pp. 40, 594.

39. Bau und Leben, iii. p. 451.

40. It is much to be regretted that of Wagner's theoretical political economy the part which specially deals with the theory of interest has not yet appeared. It may be that this distinguished thinker would have given such explanations as make my present polemic,—which I have been careful to make hypothetical,—superfluous.

41. As appendix to this chapter I should like, shortly, to refer to J.G. Hoffmann. He also interprets interest as wage for certain labours. "Even those rents," he says, meaning rents from capital, "are only a wage for labour, and indeed for labour of great public benefit; for with the obtaining of this wage is bound up, essentially and peculiarly, the duty of free activity in the public welfare, in science and skill, in everything that lightens, ennobles, and adorns human life" (Ueber die wahre Natur und Bestimmung der Renten aus Boden—und Kapitaleigenthum, Sammlung der kleiner Schriften staatswirthschaftlichen Inhalts, Berlin, 1843, p. 566). As regards Hoffmann, even more than as regards the Katheder Socialists, we are justified in doubting whether the words quoted were meant as a theoretic explanation of interest. If they were so, his theory is unquestionably more inadequate than all the other Labour theories; if they were not, it lies outside my task to question their justification.

Book VI, Chapter I

1. Civil Government, book ii. chap. v. § 40: "Nor is it so strange, as perhaps before consideration it may appear, that the property of labour should be able to overbalance the community of land; for it is labour indeed that put the difference of value on everything; and let any one consider what the difference is between an acre of land planted with tobacco or sugar, sown with wheat or barley, and an acre of the same land lying in common without any husbandry upon it, and he will find that the improvement of labour makes the far greater part of the value. I think it will be but a very modest computation to say that of the products of the earth useful to the life of man nine-tenths are the effect of labour, nay, if we will rightly estimate things as they come to our use, and cast up the several expenses about them, what in them is purely owing to nature, and what to labour, we shall find that in most of them ninety-nine hundredths are wholly to be put on the account of labour."

2. Considerations of the Consequences of the Lowering of Interest, 1691, p. 24. See above, p. 45. [Book I, Chapter II, par. I.II.57-59.—Econlib Ed.]

3. See above, p. 46. [Book I, Chapter II, par. I.II.60-63.—Econlib Ed.]

4. Handlungswissenschaft, second edition, p. 430.

5. Geldumlauf, book iii. p. 26.

6. I may give a few characteristic passages: "All the benefits attributed to capital arise from coexisting and skilled labour." After stating that, by the help of tools and machines, more products and better products can be created than without them, he adds the following consideration: "But the question then occurs, What produces instruments and machines, and in what degree do they aid production independent of the labourer, so that the owners of them are entitled to by far the greater part of the whole produce of the country? Are they or are they not the product of labour? Do they or do they not constitute an efficient means of production separate from labour? Are they or are they not so much inert, decaying, or dead matter of no utility whatever, possessing no productive power whatever, but as they are guided, directed, and applied by skilful hands?" (p. 14)

The numerous writers with socialistic tendencies mentioned by Held in the second book of his Zur sozialen Geschichte Englands (Leipzig, 1881) have little direct concern with the theory of interest.

7. First edition, 1819. Second edition, Paris, 1827. I quote from the latter.

8. A proposition, however, which Adam Smith himself did not always very consistently adhere to. Besides labour he not seldom mentions land and capital as sources of goods.

9. In these words one may find a very condensed statement of James Mill's labour theory (see above, p. 298). [Book V, Chapter I, par. V.I.5-8.—Econlib Ed.]

10. See Proudhon's numerous writings passim, particularly Qu'est ce que la propriété? (1840: in the Paris edition of 1849, p. 162), Philosophie de la Misère (pp. 62, 287 of the German translation), Defence before the Assizes at Besançon on 3d February 1842 (collected edition, Paris, 1868, ii.)

11. 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.

12. Die Lehre vom Einkommen in dessen Gesammtzweigen, 1869. I quote from the second edition of 1878.

13. Ibid., pp. 109, etc., 122, etc. See also p. 271. etc.

14. Kursus der National-und Sozialökonomie, Berlin, 1873, p. 183. A little further on (p. 185), evidently borrowing from Proudhon's Droit d'Aubaine, he explains interest as a "toll" imposed in return for the giving over of economic power, the rate of interest representing the rate at which the toll is levied.

15. See below, book vii.

16. Der Kredit, part ii, Berlin, 1879, p. 7.

Book VI, Chapter II

17. A tolerably complete list of the writings of Dr. Karl Rodbertus-Jagetzow is to be found in Kozak's Rodbertus' sozialökonomische Ansichten, Jena, 1882, p. 7, etc. I have made use by preference of the second and third Social Letters to Von Kirchmann in the (somewhat altered) copy published by Rodbertus in 1875, under the name of Zur Beleuchtung der sozialen Frage; also of the tract Zur Erklärung und Abhilfe der heutigen Kreditnoth des Grundbesitzes; and of the fourth Social Letter to Von Kirchmann (Berlin, 1884), published under Rodbertus's bequest by Adolf Wagner and Kozak under the name Das Kapital. A few years ago Rodbertus's interest theory was subjected to an extremely close and conscientious criticism by Knies (Der Kredit, part ii. Berlin, 1879, p. 47, etc.), with which in its most important points I fully agree. I feel myself, however, bound to take up the task of criticism independently, my theoretic point of view being so different from that of Knies that I cannot help looking at many things in an essentially different light.

18. Zur Beleuchtung der sozialen Frage, pp. 68, 69.

19. Soziale Frage, p. 71.

20. Erklärung und Abhilfe, ii. p. 160 note.

21. Soziale Frage, p. 56; Erklärung, p. 112.

22. Soziale Frage, pp. 87 90; Erklärung, p. 111; Kapital, p. 116.

23. Soziale Frage, p. 146; Erklärung, ii. p. 109, etc.

24. Soziale Frage, p. 32.

25. Ibid. p. 74, etc.

26. Soziale Frage, p. 33; similarly and more in detail, pp. 77-94.

27. Ibid. p. 115, and other places.

28. Ibid. p. 150; Kapital, p. 202.

29. Soziale Frage, pp. 115, 148, etc. See also the criticism of Bastiat, pp. 115-119.

30. Ibid. p. 123, etc.

31. Soziale Frage, p. 106.

32. Ibid. p. 107; similarly pp. 113, 147. Erklärung, i. p. 123.

33. Soziale Frage, p. 148.

34. This illustration is not given by Rodbertus; I only add it to put the difficult line of argument more clearly.

35. Soziale Frage, p. 94, etc.; particularly pp. 109-111. Erklärung, i. p. 123.

It may be advisable, in the interest of the English reader, to put this theory of land-rent in a different way.

According to Rodbertus, all rent is a deduction from product, and an exploitation of the labour that produces the product. Both land-rent then and capital-rent (profit) must be accounted for by this deduction, and only by this deduction. Now rent cannot emerge at all unless the necessary resources are provided. The owners give these resources; the labourer works with them; the owner takes his rent from the product, and, naturally enough, calculates it as a percentage on the amount of the resources he provides. In reality, however, rent does not depend on the amount and duration of these resources, but on the amount of labour employed and exploited.

But resources are of two kinds, land and capital. In manufacturing the resources consist of capital alone. The profit exploited from the manufacturing labourers is calculated as a rate on the capital, and comes to be ascribed to the capital. Under the competitive system profits tend to an equality over the whole field, and accordingly we should expect the landowner to get simply the same rent for the resources he lends (land) as the capitalist gets for the resources he lends (capital). But as a fact the landowner gets more; in fact, sufficient to pay another rent, which is properly called land-rent. How is this?

The reason is that in manufacture there are two outlays of capital, one for wages and one for raw materials. But there is only one field of exploitation, wages. There is, then, in manufacturing a portion of capital employed which yields no profit, and the profit that is made in the total manufacture, being calculated on this portion plus the portion employed in paying wages, the rate of profit is lower than it would be otherwise.

Now in agriculture there is indeed only one source of rent or profit, labour, but there is no outlay for raw materials. The profit thus in agriculture is calculated on a smaller capital, and so must leave, over and above the ordinary manufacturing rate of profit, a surplus which is land-rent.—W. S.

36. Erklärung, ii. p. 303.

37. Erklärung, p. 273, etc. In the posthumous tract on "Capital" Rodbertus expresses himself more severely on the subject of private property in capital, and would have it redeemed, if not abolished (p. 116, etc.)

38. Soziale Frage, p. 69.

39. Kredit, part second, p. 60, etc.

40. Erklärung und Abhilfe, ii. p. 160; similarly Soziale Frage, p. 69.

41. Der Kredit, part second, p. 69: "What Rodbertus brings forward as his sole reason, viz. that 'labour is the only original power, and also the only original cost with which human economy is concerned,' is simply, in point of fact, untrue. What surprising blindness it is not to see that in the case of a landlord the effectual power of the soil in our limited fields could not be allowed 'to lie dead' by uneconomic men, could not be wasted in growing weeds, etc. etc. So absurd an opinion would certainly in the long run justify any one in defending the proposition that the loss to a landlord of X acres, and the loss to a people's economy of Y square miles, represents no 'economical loss.' "

42. See Knies, Der Kredit, part second, p. 64, etc.: "A man who wishes to 'produce' coal must not simply dig; he must dig in a particular place; in thousands of places he may perform the same material operation of digging without any result whatever. But if the difficult and necessary work of finding the proper place is undertaken by a separate person, say a geologist; if without some other and "intellectual power" no shaft is sunk, and so on, how can the 'economic' work be digging only? When the choice of materials, the decision on the proportions of the ingredients, and such like, are made by another person than by him who rolls the pills, are we to say that the economical value of this material body, this medicine, is a product of nothing but the hand labour employed in it?"

43. Of course I do not mean to put forward the rate of interest as the cause of the smaller valuation of future goods. I know quite well that interest and rate of interest can only be a result of this primary phenomenon. I am not here explaining but only depicting facts.

44. The appropriateness of these figures, which seem strange at the first glance, will be seen immediately.

45. More exact criticism on this head I postpone till my second volume. To protect myself against misunderstandings, however, and particularly against the imputation of considering undertaking profit to be a "profit of plunder" when it exceeds the usual rate of interest, I may add a short note.

In the total difference, between value of product and wages expended, which falls to the undertaker, there may possibly be four constituents, essentially different from each other.

    1. A premium for risk, to provide against the danger of the production turning out badly. Rightly measured, this will, on an average of years, be spent in covering actual losses, and this of course involves no curtailment of the labourer.
    2. A payment for the undertaker's own labour. This of course is equally unobjectionable, and in certain circumstances, as in the using of a new invention of the undertaker, may be very highly assessed without any injustice being done to the labourer.
    3. The compensation referred to in the text, viz. the compensation for difference of time between the wage payment and the realising of the final product, this being afforded by the customary interest.
    4. The undertaker may possibly get an additional profit by taking advantage of the necessitous condition of the labourers to usuriously force down their wages.

Of these four constituents only the latter involves any violation of the principle that the labourer should receive the whole value of his product.

46. E.g., Soziale Frage, pp. 44, 107.

47. Soziale Frage, pp. 113, 147. Erklärung und Abhilfe, i. p. 123. In the latter Rodbertus says: "If the value of agricultural and manufacturing product is regulated by the labour incorporated in it, as always happens on the whole, even where commerce is free," etc.

48. Ibid. p. iii. n.

49. The above was written before the publication of Rodbertus's posthumous work, Capital, in 1884. In it Rodbertus takes an exceedingly strange position towards our question,—a position which calls rather for a strengthening than a modification of the above criticism. He strongly emphasises the point that the law of labour value is not an exact law, but simply a law that determines the point towards which value will gravitate (p. 6, etc.) He even owns in as many words that, on account of the undertaker's claim on profit, a constant divergence takes place between the actual value of the goods and their value as measured by labour (p. 11, etc.) Only he makes the extent of this concession much too trifling when he assumes that the deviation obtains only in the relations of the different stages of production of one and the same good; and that the deviation does not obtain in the case of all the stages of production as a whole. That is, if the making of a good is divided into several sections of production, of which each section develops into a separate trade, according to Rodbertus the value of the separate product which is made in each individual section cannot remain in exact correspondence with the quantity of labour expended on it; because the undertakers of the later stages of production have to make a greater outlay for material, and therefore a greater expenditure of capital, and on that account have to calculate on a higher profit, which higher profit can only be provided by a relatively higher value of the product in question.

However correct this is, it is clear that it does not go far enough. The divergence of the actual value of goods from the quantity of labour expended does not take place only between the fore-products of one good in relation to each other, in such a way that, in the course of the various stages of production, it cancels itself again through reciprocal compensation, and so the final result of all the stages of production, the goods ready for consumption, obeys the law of labour-value. On the contrary, the amount and the duration of the advance of capital definitively forces the value of all goods away from exact correspondence with their labour costs. To illustrate. Say that the production of a commodity requiring ninety days for its manufacture is divided into three stages of thirty days' labour in each. Rodbertus would say that the product of the first thirty days' labour might only attain the value of twenty-five days' labour, while the second thirty attained the value of thirty days', and the third thirty of thirty-five days' labour. But on the whole the final value of the product would be equal to ninety days' labour. But it is a matter of common experience that, in normal successive production, the value of such a commodity will increase during the three stages by a definite amount, say 30 + 31 + 32, and that the final product will be equal to, say, ninety-three days of labour; i.e. a value greater than the value of the labour incorporated in it by the amount of the customary interest.

Besides this, Rodbertus deserves the severest censure that, in spite of his own admission, he always persists in developing the law of the distribution of all goods in wages and rent under the theoretical hypothesis that all goods possess "normal value"; that is, a value that corresponds to their labour costs. He thinks he is justified in doing this because the "normal value, in regard to the derivation both of rent in general and of land-rent and capital-rent in particular, is the least captious; it alone does not quietly beg the question, and assume what was first to be explained by it, as every value does in which is included beforehand an element for rent."

Here Rodbertus is grievously mistaken. He begs the question quite as improperly as any of his opponents ever did; only in an opposite way. His opponents, by their assumptions, have begged the question of the existence of interest. Rodbertus has begged the question of its non-existence. In taking no notice of the constant divergence from "normal value" (which divergence gives natural interest its source and its nourishment), he himself altogether abstracts the chief feature in the phenomenon of interest.

Book VI, Chapter III

50. Zur Kritik der politischen-Oekonomie, Berlin, 1859. Das Kapital, Kritik der politischen-Oekonomie, vol. i, first edition, Hamburg, 1867; second edition, 1872. English translation by Moore and Aveling, Sonnenschein, 1887. I quote from Das Kapital as the book in which Marx stated his views last and most in detail. On Marx also Knies has made some very valuable criticisms, of which I make frequent use in the sequel. Most of the other attempts to criticise and refute Marx's work are so far below that of Knies in value that I have not found it useful to refer to them.

51. With Marx simply called Value.

52. Das Kapital, second edition, p. 10, etc.

53. Das Kapital, p. 205, etc.

54. E.g. when in the fifth chapter of the second book he says of the farmer: "Not only his labouring servants, but his labouring cattle are productive labourers." and further, "In agriculture too Nature labours along with man, and though her labour costs no expense, its produce has its value as well as that of the most expensive workmen." See also Knies, Der Kredit, part ii p. 62.

55. See above, p. 354 [Book VI, Chapter II, par. VI.II.72.—Econlib Ed.], and Knies as before, p. 60, etc.

56. Wealth of Nations,book i. chap. v. (p. 13 of M'Culloch's edition); Ricardo, Principles, chap. i.

57. Adam Smith gets rid of the difficulty mentioned in the text as follows: "If the one species of labour requires an uncommon degree of dexterity and ingenuity, the esteem which men have for such talents will naturally give a value to their produce superior to what would be due to the time employed about it. Such talents can seldom be acquired, but in consequence of long application and the superior value of their produce may frequently be more than a reasonable compensation for the time and labour which must be spent in acquiring them" (book i. chap. vi.)

The insufficiency of this explanation is obvious. In the first place, it is clear that the higher value of the products of exceptionally skilled men rests on a quite different foundation from the "esteem which men have for such talents." How many poets and scholars does the public leave to starve in spite of the very high esteem which it pays to their talents, and how many unscrupulous speculators has it rewarded for their adroitness by hundreds of thousands, although it has no esteem whatever for their "talents"! But suppose esteem were the foundation of value, in that case the law that value depends on trouble would evidently not be confirmed but violated. If, again, in the second of the above sentences, Adam Smith attempts to trace that higher value to the trouble expended in acquiring the dexterity, by his insertion of the word "frequently" he confesses that it will not hold in all cases. The contradiction therefore remains.

58. For instance, in p. 15 at the end: "Finally, nothing can be valuable without being an object of use. If it is useless the labour contained in it is also useless; it does not count as labour (sic), and therefore confers no value." Knies has already drawn attention to the logical blunder here criticised (Das Geld, Berlin, 1873, p. 123, etc.)

59. Das Kapital, p. 17 etc.

60. See also on the subject Knies, Das Geld, p. 121.

61. See also Knies, Kredit, part ii, p. 61.

62. P. 175.

63. "The rate of surplus value and the value of labour power being given, the amounts of surplus value produced are in direct ratio with the amounts of variable capital advanced.... The value and the degree of exploitation of labour power being equal, the amounts of value and surplus value produced by various capitals stand in direct ratio with the amounts of the variable constituent of these capitals; that is, of those constituents which are converted into living labour power" (p. 311, etc.)

64. "The value of these contributory means of production may rise, fall, remain unchanged, be little or much, it remains without any influence whatever in producing surplus value" (p. 312).

65. Pp. 204, 312.

66. Pp. 312, 542 at end.

Book VII, Chapter I

67. Fourth edition, Paris, 1865.

68. "The costs of production are made up of (1) the recompense to the workers; (2) the profits of the capitalists," etc. (p. 93).s

69. See also the sharp but most pertinent criticism of Pierstorff, Lehre vom Unternehmergewinn, p. 93, etc.

70. Cours d'Economie Politique, second edition, Paris, 1863. His Productivity theory is similar to that of Say (e.g. "interest is a compensation for the productive service of capital," i. p. 302). His Abstinence theory (1, 289, 293, 300) is particularly unsatisfactory on account of the peculiar meaning he gives to the conception of "privation." He means by it what the capitalist may suffer on account of the capital sunk in production not being available for the satisfaction of pressing wants which may possibly arise in the meantime. Surely a very unsuitable foundation for a universal theory of interest!

71. Essai sur la Répartition des Richesses, second edition, Paris, 1885. See particularly pp. 236 (Abstinence theory), 233, 238 (Productivity theory); see also above, p. 131. [Book II, Chapter II, par. II.II.38.—Econlib Ed.]

72. On Roscher, see above, p. 129 [Book II, Chapter II, par. II.II.33.—Econlib Ed.], Schüz, Grundsätze der National-Oekonomie, Tübingen, 1843; particularly pp. 70, 285, 296, etc. Max Wirth, Grundzüge der National-Oekonomie, third edition, i. p. 324; fifth edition, i. 327. See further Huhn, Allgemeine Volkswirthschaftslehre, Leipzig, 1862, p. 204; H. Bischof, Grundzüge eines Systems der National-Oekononik, Graz, 1876, p. 459, and particularly note on p. 465; Schülze-Delitzsch, Kapitel zu einem deutschen Arbeiterkatechismus, pp. 23, 27, 28, etc.

73. La Nozione del Capitale, in the Saggi di Economia Politica, Mailand, 1878, p. 155.

74. Sixth edition, 1883.

75. P. 34, and more at length in the Saggi.

76. "The elements of interest are two: first, compensation for the non-use of capital, or, as some say, for its formation, and for its productive service" (p. 119).

77. Theory of Political Economy, second edition, London, 1879.

78. P. 243.

79. P. 266. Jevons puts the same formula in other ways that need not be specified here.

80. Thus, on one occasion, he says that, under the influence of this element of time, in the case of the distribution of a stock of goods in the present and in the future, "less commodity will be consigned to future days in some proportion to the intervening time" (p. 79).

81. An Inquiry into the Natural Grounds of Right to Vendible Property or Wealth, Edinburgh, 1829.

82. P. 131, and generally all through the argument against Godwin, and the anonymous tract "Labour Defended."

83. Note to p. 247.

84. Beitrag zur Lehre vom Kapital, Erlangen, 1857, pp. 16, 22, etc.

85. Précis d'Economie Politique, second edition, Paris, 1881.

86. See above, p. 304. [Book V, Chapter I, par. IV.I.26-27.—Econlib Ed.]

87. "The principle then is that the rate of interest is a direct consequence of the productivity of capital" (ii. p. 110).

88. "We saw that the real value of interest depended on the productive employment given to capital; since a certain surplus value is due to capital, interest is one part of that surplus value presumably fixée à forfait (without consideration of gain or loss) which the lender receives for the service rendered by him" (ii. p. 189).

89. Traité d'Economie Politique, eighth edition, Paris, 1880.

90. P. 47.

91. P. 522.

92. Kleine Schriften staatswirthschaftlichen Inhalts, Berlin, 1843, p. 566. See above, p. 312. [Book V, Chapter I, note c41.—Econlib Ed.]

93. Principles, book iii, chap. iv. §§ 1, 4, 6; chap. vi. § 1, No. 8, etc.

94. Book i. chap. vii. § 1.

95. Book v. § 1.

96. Book iii. chap. iv. § 4.

97. See above, p. 206. [Book III, Chapter II, par. III.II.57-58.—Econlib Ed.]

98. See above, p. 306. [Book V, Chapter I, par. IV.I.33.—Econlib Ed.]

99. i. pp. 258, 268, 271, etc.

100. Bau und Leben, iii. p. 273, etc.

101. iii. p. 266, etc.

102. iii. p. 423, See also iii. p. 330, 386, 428, etc.

Book VII, Chapter II

103. By desire of the author I here omit, as of little interest to English readers, a statement and criticism of Schellwien's theory (Die Arbeti und ihr Recht, Berlin, 1882, p. 195. etc.) which occupies pp. 477-486 of the German edition.—W. S.

104. Progress and Poverty. Kegan Paul, 1885.

105. Capital et Rente. See above, p. 289. [Book IV, Chapter III.—Econlib Ed.]

106. Parallel with the "vital forces of nature," according to George, works also "the utilisation of the variation in the forces of nature and of man by exchange." This too leads to "an increase which somewhat resembles that produced by the vital forces of nature" (p. 129). But I need not here enter into a more exact exposition of this somewhat obscure element, since George himself ascribes to it only a secondary rôle in the origination of interest.

107. See my remarks on "Competition of Wealth" in Rechte und Verhältnisse, p. 80, etc.

108. See above, p. 178. Book II, Chapter III, par. II.III.147-49.—Econlib Ed.]

End of Notes.
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