The Positive Theory of Capital

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
15 of 55

Book II, Chapter IV

The Theory of The Formation of Capital


In our science there are three views in circulation as to the formation of capital. One finds its origin in Saving, a second in Production, and a third in both together. Of these the third enjoys the widest acceptance, and it is also the correct one. But the formula will have to be amplified to some extent, and presented in a way that is, at once, clearer and more true to life than has usually been the case.*28


To put the matter, first of all, in its simplest conceivable terms. Suppose a recluse working absolutely without capital—say some Robinson Crusoe thrown on a lonely shore without either tools or weapons. Being without capital he must at first support life in the most primitive fashion, as, for instance, by gathering berries which grow wild. Now what must happen before he can get possession of his first capital, say a bow and arrow?


Let us put the first theory to the test. Is saving by itself sufficient to call capital into existence? Certainly not. With the one possession that he has—his wild fruits—our Crusoe may save and stint as much as he please; he will accumulate a store of berries—goods for consumption—but that will never give him a single bow or arrow. As we can easily see, these must be positively produced.


Is it sufficient, then, for the origination of capital that it be produced? Again, certainly not. Of course, once Crusoe has got the length of commencing to produce capital, the formation of capital is as good as accomplished. But before he gets that length, there is something else to be done, and that something is by no means self-evident. Productive powers are to be set free for the proposed formation of capital, and this can only be done, as we shall see, through saving.


The amount of original productive powers which our Crusoe has daily at his command is equivalent—leaving natural gifts out of account—to one day's labour, which we shall assume to be ten hours of labour. Suppose, now, that the berries within reach of his hut are so scarce that a full day's labour of ten hours is necessary to provide as much food as will just support him in bare life, obviously no formation of capital is possible. There is no use advising him to produce a bow and arrows. Producing requires time and strength, and all the time and strength our Crusoe has is fully claimed already to keep him in life. To produce capital, then, may be difficult enough without something else; and what that is will appear immediately on our varying a little the assumed facts of the illustration.


Suppose there is such wealth of berries that the result of nine hours' gathering is sufficient to support bare life, while ten hours' gathering gives a return such as to guarantee a subsistence amply sufficient to maintain Crusoe in health and strength. Obviously he has now a choice between two lines of conduct. Either he may take advantage of the opportunity thus offered to complete his provision, and consume each day the fruits of an entire ten hours' day of labour—in which case it is perfectly clear that he has now no time and strength left to make a bow and arrows; or, although the productive power at his disposal would enable him to live better, he may content himself with the barest living, which, as we said, can be provided by the nine hours' labour of gathering; then, and then only, has he a tenth hour free in which to make weapons for future use. This amounts to saying, in other words, that, before capital can actually be formed, the productive powers necessary to its making must be saved by encroaching on the moment's enjoyment.


To anticipate and avoid a mistake very apt to be made, it must be said distinctly that this encroaching on the moment's enjoyment need by no means involve downright privation. With more productive labour, Crusoe's choice would not lie, as in the above illustration, between bare living and comfortable living; but, perhaps, between comfortable and ample living. It is not a question of the absolute insignificance of these claims on the moment's enjoyment, but on their relation to that amount which I may indicate in the shortest and most generally intelligible way by the word "Income"—an expression, unfortunately, not yet strictly enough defined in scientific usage.*29 The essential thing is that the current endowment of productive powers should not be entirely claimed for the immediate consumption of the current period, but that a portion of this endowment should be retained for the service of a future period. But such a retention will undoubtedly be called a real saving of productive powers.


A saving of productive powers, be it noted; for productive powers, and not the goods which constitute capital, are the immediate object of saving. This is an important point, which must be strongly emphasised because, in the current view, too little consideration is given to it. Man saves consumption goods, his means of enjoyment; he thus saves productive powers, and with these finally he can produce capital.*30 It is only exceptionally that capital itself is the immediate object of saving; it may happen in the case of those goods which, by nature, admit of being used either for consumption or for production, such as grain. To the extent that a man withdraws such goods from immediate use in consumption, his saving directly lays the foundation of capital. To build on that foundation, of course, the negative element of saving must have added to it the positive element of devoting the saved goods to production, as intermediate products.


It is easy to show that every further increase of the existing stock of capital is limited by the same conditions as the first formation. Assume that for a month our Crusoe consumes daily only so much fruit as he can gather in nine hours' labour, and devotes the tenth hour to making weapons. As result of this thirty hours' work he now owns a bow and arrows, and in them he has the possibility of making his living much more easily and amply than before. Naturally his desires widen. He wishes decent clothes, a house, all sorts of things that minister to comfort. But for these he requires the suitable intermediate products—axes, nails, braces, etc. Now we ask further what kind of conditions must be fulfilled that Crusoe may obtain this new capital?


This is very easily answered. If he makes use of the improved circumstances, which he owes to the possession of the bow and arrows, simply to increase his immediate consumption—that is, if he spends the whole labour time at his disposal in the service of the moment, hunting, gathering fruits, and sleeping,—not only is it impossible for him to acquire new capital, but he will lose the old. Bows and arrows do not last for ever. In a month's time, we shall say, his arrows will be spent, and his bow worn out. If, therefore, his capital is to remain in existence, he must, obviously, employ at least one of the ten hours in renewing his weapons, and, at the most, he can employ nine only in gathering and hunting.


To put it in propositional form. To retain capital in existence, man must make over, and devote to the service of the future, at least so much of the productive powers of the current period as he has consumed, during the current period, of the produce of former productive powers.*31 Or, to put it in other words, the consumption of the current period is limited by the produce of as many productive powers—present and past taken together—as come into existence anew during the current period.


Finally, if an increase of capital is to become possible, obviously a still greater proportion of the current productive powers must be withdrawn from the consumption of the present, and transferred to the service of the future; of his ten hours of labour our Crusoe must devote one to renewing his weapons, and less than nine to gathering berries and killing game, if he is to make the new capital he desires in what remains free of his labour time. To put it generally, he must curtail the immediate consumption of the current period to such a point, that it uses up the produce of fewer (past and present) productive powers than come into existence anew in the same period; he must, in a word, save productive powers.


All this is quite clear and simple; indeed it is even a little too simple for our purpose. Robinsonades and pictures of primitive circumstances are very good when the object is to present clearly the simplest typical principles—to give a kind of skeleton of economical procedure,—and to that extent, I trust, our Robinsonade also has done good service. But, naturally, they cannot give us an adequate picture of those peculiar and developed forms in which this skeleton clothes itself in the living actuality of a modern economic community. And it is just at this point that it becomes important to fill out the abstract formula with explanation and illustration taken from life. We shall, therefore, leave the lonely shore of our Crusoe, and come to the industrial conduct of a great nation with its millions of people.

Notes for this chapter

The dispute as to the share which Saving plays in the formation of capital is almost old as economic science. The theory which ascribed it the prominent place was the first to appear. Already suggested by the Physiocrats, it was formulated by Adam Smith in the often-quoted proposition, "Parsimony and not industry is the immediate cause of the increase of capital" (Wealth of Nations, book ii. chap. iii.) Supported by his authority it was for a long time almost the only one that held the field, and, although in later times it has suffered many reverses, it still finds some notable apostles: thus, among others, Mill—"Capital is the result of saving" (book i. chap. v. § 4); Roscher—"Capital is mainly the result of saving" (Grundlagen, § 45); Francis Walker—"It arises solely out of saving. It stands always for self-denial and abstinence" (Political Economy, p. 67). But from a very early period there was sharp opposition to the theory, first from Lauderdale (Inquiry, 1804, chap. iv.); then, after some time, from the socialist theorists, Rodbertus (Das Kapital, pp. 240, 267—"Just as the capital of the isolated individual originates and increases, so does the national capital,—only through labour and not through saving"); Lassalle (Kapital und Arbeit, p. 64); Marx (Das Kapital, i. second edition, p. 619). To these opinions a great many recent writers of other schools more or less incline; thus, very clearly and decidedly, Gide (Principes, p. 167); less decidedly, Kleinwächter (in Schönberg's Handbuch, second edition, p. 213), and R. Meyer (Das Wesen des Einkommens, 1887, p. 213); more by way of reconciliation, Wagner (Grundlegung, second edition, § 298); and, a little obscurely and confusedly, Cohn (Grundlegung, 1885, § 257). Although, however, this tendency to ascribe capital to labour is unmistakably rapidly gaining ground, that view which ascribes to saving a share in the formation of capital is still the view of the majority. But the later representatives of this view are in the habit of rightly limiting it, and expressly emphasising the fact that saving alone is not sufficient, and that there must also be "labour," or "devotion to productive purposes," or such like—which, indeed, may very well have been the true meaning of many of the older adherents of the Saving theory, and only not expressed by them because of its assumed obviousness. See, e.g., Rau (Volkswirthschaftslehre, eighth edition, i. § 133), Ricca-Salerno (Sulla Teoria del Capitale, chap. iv. p. 118—"Il capitale deve la sua origins all' industria e al risparmio"), Cossa (Elementi, eighth edition, p. 39), and many others.
On the many divergent and contradictory readings of the conception of Income, see R. Meyer's Das Wesen des Einkommens, 1887, particularly pp. 1-27. I purposely avoid going into the controversy as to this conception, which Meyer's work, notwithstanding its many merits, seems to me to have by no means adequately settled. Where I use the word Income in the sequel it is to be understood, not in Meyer's sense, but in a sense very much in agreement with popular usage.
Adam Smith's celebrated proposition therefore—"Parsimony and not industry is the immediate cause of the increase of capital"—is, strictly speaking, to be turned just the other way about. The immediate cause of the origin of capital is production; the mediate cause is a previous saving.
It is only in cases where, in the meanwhile, the technique of the particular production has improved, that the transference of a less amount of productive powers to the service of the future is sufficient. If, for instance Crusoe learns how to make in fifteen days those weapons which formerly had taken thirty days, it is, of course, sufficient for the upkeep of the capital if he works only half an hour daily at the repair of his weapons, and nine and a half hours can now be spent in directly obtaining a more plentiful maintenance without prejudice to his economical position

End of Notes

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