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.
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London: Macmillan and Co.
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Book V, Chapter I

Present and Future in Economic Life


Present goods are, as a rule, worth more than future goods of like kind and number. This proposition is the kernel and centre of the interest theory which I have to present. All the lines of explanation, by which I hope to elucidate the phenomena of interest, run through this fact; and round it, both essentially and superficially, is grouped the whole of the theoretical work we have to do. The first part of our explanation will try to prove the truth of the proposition; the second will then show that, out of the fact, spring, naturally and necessarily, all the manifold forms which the phenomena of interest take. In the present book we have to take up the first part, and I shall try to go into it with that minuteness which is due to the cardinal importance of such a proposition. To this end we shall, first of all, make a general survey of the relations between present and future in human economy—a subject, obviously, of the highest importance, but one which, strangely enough, has up till now attracted but scanty scientific attention.*1


In the present we live and move, but our future is not a matter of indifference to us, and our desires are, with reason, directed towards a wellbeing not limited by the present. It is only as the logical carrying out of this general principle that we set before us, in our economical arrangements, the larger object of providing for our future as well as for our present wellbeing. As a fact, the future has a great place in our economical provision; a greater, indeed, than people usually think. It is, of course, a commonplace, but, all the same, it is a truth seldom seen in all its bearings, that our economical conduct has exceedingly little reference to the present, but is, almost entirely, taken up with the future.


Let us clearly understand what this latter statement means. It means that our anxiety in the present is to have at our disposal, in the future, means for the satisfaction of wants that will not emerge till the future. In other words, it means that pleasures or pains, which we will only experience in the future, determine as now to provide goods or services, which, again, will only assert their use in the future. But how is it possible that feelings which are not yet felt, and therefore feelings which, essentially, do not exist, can be motives to will and deed?


Now, as a suggestive writer has said, we do not indeed possess the gift of feeling future sensations, but we possess the other gift of anticipating them in imagination,*2 Either it is that we have already in the past, once or many times, experienced the same want as we expect in the future, and retain a picture of it in our memory; or, at least, we have already experienced wants or feelings that bear a certain resemblance to the feelings we are expecting, and can, from such analogous reminiscences, construct for ourselves an imaginative picture which is more or less true. On such pictures of memory and imagination we base our economical calculations and our economical decisions. Certainly, as many a one will be apt to object, it is an unsafe and deceptive foundation, but, all the same, it is almost the only one that we have. It is the rarest possible thing for us to base a valuation of goods, or an economical decision, on a pain that we are feeling at the very moment. It is, indeed, one of the characteristics of a civilised community that it anticipates want by providing for it, and does not allow the pain of emptiness, which the unsatisfied want would involve, to get to its full height. We do not begin to prepare our meals when hunger has reached its highest point of torment: we do not wait till the flood has overwhelmed house and home before we think of putting up the dam: we do not delay building the fire-engine till the flames have broken over us. At the moment when we decide on an economical action, the wants which cause us to make the decision are, almost always, in the future, and so, however near that future may be, they are acting on us, not as actual feelings, but as simple anticipations. How many a man has never, even in the past, fully felt the want which makes him value the goods he daily uses! How many rich people know only from hearsay what real hunger is!


Hence it is obvious that, however deceitful and unsafe this gift of anticipation may be, and however far astray it may lead us in individual cases, we still have every cause to be heartily thankful that we have it. Otherwise, neither actually feeling the future wants, nor yet forewarned of them by anticipation, we could not, of course, provide for them in advance; once want had made itself felt, any measures we could take would be miserably inadequate to provide for it; and, poorer than the poorest savages, we should drag out a hazardous hand-to-mouth existence.


But economical action means something more than thinking generally about the wants which are to be provided for. As, indeed, all economising arises from the quantitative insufficiency of the means of satisfaction as compared with the wants requiring satisfaction, so it demands a constant selection, a constant choosing between those wants which can and should be provided for, and those others which cannot be provided for. The selection naturally proceeds on a comparison of the importance and urgency—or, as we may say, the intensity—of the feelings of pleasure and pain which are associated with individual wants and their satisfaction. Now, if it is seldom that, in the moment of an economical decision, we actually feel that one want to which it refers, it is much more seldom that, on the moment of our choice, we experience, as actual feelings, all those sensations of pleasure and pain between which we have to choose. Our comparisons must, almost invariably, be, partially and very often completely, made on imaginative anticipations which we make of future feelings. And this leads us to a fact which I should like to emphasise: The future feelings we imagine are commensurable. They are commensurable with present actually-felt sensations, and they are commensurable with one another, and that too without reference to whether they belong to the same or to different levels of time. It is as easy for me to choose between a pleasure which seems desirable at the moment and another pleasure which I can obtain in eight days, as between two different pleasures which are both obtainable in eight days, or, again, as between two pleasures of which the one is obtainable in eight days, the other in eight months, or eight years.


The fact that we borrow from future sensations the motive for our present actions, is one side of our connection with the future. Another side is that, by our present actions, we prepare goods or material services*3 for the benefit of the future. If we analyse the totality of goods which constitutes our wealth we shall find that by far the greater part has the character of what, for want of a better name, we may call "future goods" (Zukunftsgüter). All productive goods, without exception, are destined altogether to the service of the future. Durable consumption goods give off only a fraction of their material services in the present, and all the remainder in the future. If a dwelling-house, for instance, remains occupied for a hundred years, and affords shelter and comfort all that time, only an infinitesimal fraction of these services is rendered today; a still very small fraction is rendered in the present year; the great bulk of the service is spread over remote future periods. Even in the case of those perishable goods, such as meat and drink, wood and candles, which we keep ready for immediate consumption in our domestic economy, only one portion of their use is, strictly speaking, devoted to the service of the moment; the greater part is carried over into the future, although it may be the immediate future. As, among our motives, future feelings are the dominant ones, so, among the goods we possess and use, "future goods" occupy the larger place.


And there is yet another important analogy. As future feelings, whether they belong to the near or to the far future, are commensurable, alike with one another and with present feelings, so are future goods commensurable, alike with one another and with present goods. We can compare the value of a camellia which fades in an hour, with that of a ticket for a next week's concert, or with that of a bunch of next year's roses; or we can give one of these goods for the other. It makes no difference to the matter whether the "future good," which we compare or barter, is at hand and ready for delivery now, or whether it is represented in bodily shape by nothing more than the means of production out of which it will come, or whether, at the moment, it is neither itself ready nor is capable of being palpably represented—is, that is to say, a "future good," in the narrowest and strictest sense of that word. Thus we give present money in exchange, not only for the present consumption good Bread, but also for the present productive good Meal, in which the future good, bread, lies concealed. But just as easily can we buy from a farmer, for money down, his next year's harvest. In "reserved seats" we buy the future services of actors and singers. In buying Consols we give our present money for a series of future payments. Future goods and services are to us—I have cause to emphasise this—entirely familiar objects of economic dealing, just as future feelings are entirely familiar economic motives. Both have their ultimate ground in the continuity of our personal life. What we shall experience in a week or a year hence affects us not less than what we experience to-day, and has, therefore, equal claims to be considered in our economic arrangements. Both arrangements have for their end our wellbeing.


Whether this theoretically similar claim of future and present is always fully recognised in practical life, is another question which will require much consideration.


Provision for the future makes no inconsiderable demands on our intellectual strength; makes some demands, even, on our moral strength; and these demands are not equally met by men at all stages of civilisation. The present always gets its rights. It forces itself upon us through our senses. To cry for food when hungry occurs even to a baby. But the future we must anticipate and picture. Indeed, to have any effect in the future, we must form a double series of anticipations. We must be able to form a mental picture of what will be the state of our wants, needs, feelings, at any particular point of time. And we must be able to form another set of anticipations as to the fate of those measures which we take at the moment with a view to the future. Our knowledge of causal processes must enable us beforehand to form an adequate picture of the forms which goods will take, of the quantity of them, and of the time when they will come to maturity as result of those productive or commercial activities which we are now commencing. To make this double work of anticipating a comparatively remote future clear and true to fact, is not possible to the infant, and not much more than possible to the child and the savage. Civilisation of course teaches us this difficult art gradually. But, even among the most advanced peoples, the art is still very far from being perfect, and the practical economic provision for the future is correspondingly inadequate. But, be the degree of anticipation and provision for the future what it may, wherever it exists in the most general way—and that is even among the most barbarous tribes—future goods and future services are as much actual objects of economical dealing as present goods. We strive to get them; we produce them; we value them; we buy and sell them.


I say, we value them; and this is a point that must be looked more closely into. On what principles do we estimate the value of future goods? The answer is: On the same principles as we estimate the value of goods in general: that is, according to the marginal utility which they will bring us in the circumstances, of Want and Provision for want. But here, naturally, we have not to deal with the relations of want and provision that obtain at the moment, but with the want and provision of that future period when the goods in question will be at our disposal. To the inhabitants of a besieged town, threatened with starvation, grain that was promised for delivery a year after the raising of the siege would certainly not be valued and paid according to the standard of the moment's need; while, on the contrary, a brewer who, in January, concludes a purchase for a hundred cubic feet of ice to be delivered in July of the coming summer, will, just as certainly, not measure the value of the ice according to the over-supply that obtains at the moment when the bargain is concluded, but according to the scarcity which is likely to come with the summer.*4


Very frequently, however, there enters into the valuation of future goods an element which causes us to value them a little—or even a great deal—under their future marginal utility, but which—as I shall show presently—has no connection with the phenomenon of interest. This is the element of Uncertainty. To us nothing future is absolutely certain. However closely we may have bound present and future together in economical connection, and however much reason we may have to expect the future to bring certain goods into existence, or put them at our disposal, still the actual fulfilment of our expectations is never, in the strict sense of the word, certain: it is always more or less probable. Of course, the probability is often so great that, practically, it amounts to certainty: as, for instance, the expectation that payment will follow an acceptance by the Rothschilds. In such cases we do neglect the infinitely small amount that is wanting of full certainty, and deduct nothing from the valuation we put upon the acceptance on the ground of uncertainty. But, frequently, the probability falls considerably short of full certainty. The farmer, for instance, may have done everything in his power to obtain a harvest by ploughing, manuring, sowing, and so on: but the harvest may be destroyed, wholly or in part, by hail, frost, flooding, or insect ravages. Sometimes, indeed, the probability sinks to the level of a very faint possibility, as, for example, when a man holds one of a hundred tickets in a lottery where there is only a single prize.


Cases like these cause a certain amount of hesitation to economic men. Are they to value uncertain future sums of goods exactly as if they were certain? Impossible! For then every lottery ticket that carried the chance of winning £100 would be valued at £100, and every claim, even the most doubtful, at its full nominal amount;—a course which, obviously, would land the men who tried to do business on these lines in the bankruptcy court in the shortest possible time. Or are the uncertain future sums of goods not to have any value put upon them? is no importance whatever to be attached to them with respect to our wellbeing? As impossible, and as ruinous! For then no man would give the smallest price for a chance in a lottery, or even for nine hundred and ninety-nine chances out of a thousand; no one would dare to make the slightest sacrifice to sow when harvest was uncertain. From this dilemma there is only one escape: we must ascribe to uncertain future sums of goods an importance as regards our wellbeing, but, at the same time, we must take account of the uncertainty of their acquisition according to the degree of that uncertainty. But, practically, this cannot be done otherwise than by transferring the gradation from where the gradation exists, but cannot be expressed—that is, from the degree of probability,—to where the gradation is not, but where alone it can be expressed—that is, the degree of the expected utility: thus equalising a greater, but less probable utility, to a less, but more probable utility, and this again to a still less but absolutely certain utility. In a word, we reduce all possibilities of utility to certainty, and restore the balance by deducting from this utility or value the amount we must add to the probability of the expected utility to raise it to certainty. Thus we reckon a claim on the Rothschilds at its full nominal value (disregarding for the moment the discount, as belonging to an entirely different sphere of phenomena), while one lottery ticket of a thousand, where the chance is a prize of £100, we value perhaps at 2s., one of a hundred at 20s., and one of ten, perhaps, at £10.


Strictly looked at, this kind of valuation—except where the certainty of the anticipated future utility is practically assured—is always incorrect.*5 For, to recur to our illustration, the ticket will either draw the prize or it will draw a blank. In the former case it will have been, as the events show, worth a hundred pounds; in the latter, worth nothing at all. In no case will it have been worth 2s., or 20s., or £10. But, however false this method of valuation is in the individual case, it comes at least approximately right, according to the law of averages, over a great many cases; and, in the absence of any better method of valuation—which is denied us by the dulness of our imaginative forethought—it is well justified as a practical make-shift.*6


I repeat that the element of uncertainty, which is the cause of a lesser value being put upon particular classes of future goods, has no causal connection with the phenomenon of interest. The lesser valuation which is its effect is a special one, and extends to one class of future goods only,*7 and there it bears the character of a deduction as premium for risk.


With the exception of this peculiarity, the valuation of present and future goods is made on identical principles. But, to conclude from this that the amount of value of present and future goods must be identical, would be too hasty. On the contrary, since present goods are available at a different time from future ones, and therefore come under different actual circumstances, and are intended for the service of a different set of wants, it is to be argued, from all we know about value, that the value of such goods must, as a rule, be different. And so it is in fact. We arrive thus at a proposition which is a fundamental one in our inquiry: As a rule present goods have a higher subjective value than future goods of like kind and number. And since the resultant of subjective valuations determines objective exchange value, present goods, as a rule, have a higher exchange value and price than future goods of like kind and number.


This phenomenon is the result of the co-operation of a number of causes; causes which, individually, are of very different natures, but which, as it happens, work in the same direction. These causes we shall consider in order.

Notes for this chapter

A history of the theory of this subject—which I have no intention of writing here—would probably start with Adam Smith's emphatic opposition of "present enjoyment" to "future profit" (ii. 1). In more recent times there are some good observations on the subject in Senior (Political Economy, third edition, p. 58) under the headings of "Abstinence" and "Capital"; in Rae (New Principles of Political Economy, quoted in Mill's Principles, book i. chap. xi.); and in Menger (Grundsätze der Volkswirthschaftslehre, p. 127). The first, so far as I know, to treat it as a subject by itself, was Jevons (Theory of Political Economy, 1871, second edition, 1879). Jevons's work is exceedingly interesting and suggestive, but, on the whole, it is rather imperfect—as could scarcely be otherwise in a first attempt, and on a field of speculation hitherto all but untouched. It shows a good deal of incorrectness, a good many contradictions, and, in particular, many obvious gaps. Jevous may be said rather to have shown, by a bold stroke of genius, that here was a new circle of ideas waiting to be taken up, than shown what was to be done with them. Closely following Jevons, without going beyond their master, are, quite recently, Launhardt Mathematische Begründung der Volkswirthschaftslehre, 1885) and Emil has (Grundlegung der theoretischen Staatswirthschaft, 1887, pp. 178, 313). A little before these G. Gross (Die Zeit in der Volkswirthschaft, in the Zeitschrift für die ges. Staatswissenschaft, 1883, p. 126) had made a well-meant suggestion,—which, however, was by that time carried out by Jevons and then by myself,—that the element of time in economical theory was worthy of a fuller consideration. Finally, as concerns my own work, I owe it to myself to say that I arrived at my views on this subject in complete independence, and altogether uninfluenced by Jevons—and, naturally, still less by later writers. I first became acquainted with Jevons's writings in 1883,—shortly before the printing of my Capital and Interest,—when completing the historical material already collected in that work by a review of the latest English literature on the subject. The principles of my own theory of capital, on the other hand, were laid down by me as early as 1876. In that year I first suggested them in a youthful work never published. In later writings I gave many plain, if still cautious, hints of my leading ideas (e.g. in Rechte und Verhältnisse, p. 68 in note on the phenomenon of Abnützung, pp. 76 and particularly 109, 115 in note, on the computation of the future rise, and p. 152; in Capital and Interest, pp. 257, 276, 343, 424, and particularly on p. 428 where I formulated the programme of my positive theory in saying that the explanation of interest was to be deduced from the influence of Time on human valuations of goods). The cautious tone which I still deliberately adopted in giving these hints was due to my desire not to compromise my new ideas by any premature or incomplete formulation of them. I meant that they should not go before the public till I was in a position to produce them as a finished whole, all harmoniously fitted in to a system of carefully planned economic doctrine. That is why I preferred to work for ten years at laying the foundation of the present theory by completing the theory of goods (1881), the criticism of the theories of capital (1884), and the theory of value (1886), rather than snatch, as I might easily have done, at the glory of priority by publishing original but still immature ideas a decade earlier. Moreover my theory, if it touches that of Jevons at several points, by no means agrees with it in essence; and in the most important points, such as the explanation of interest, it is in distinct opposition to his.
When Jevons calls that intellectual phenomenon which impels us to provide for future wants and to value future goods, a "present anticipated feeling" (Political Economy, second edition, p. 37), the expression is very apt to be misleading. We must distinguish between two fundamentally distinct things, which Jevons seems to me not to have sufficiently kept apart. It is one thing to represent to ourselves, or imagine, a future pleasure or future pain, and to estimate its presumable intensity on the ground of this imagination. It is quite another thing to experience, in this imagination itself, a pleasure, an actual present pleasure of anticipation. To give an example. I think of taking a pleasure trip to Italy. From personal experiences, or from travellers' tales heard or read, I represent to myself the pleasures of the journey, and I put the intensity of these pleasures so high, that it seems to me worth the sacrifice of £50 to realise them. But, beyond this, in picturing to myself the future pleasure of the journey, a real present pleasure of anticipation is kindled. Thinking on the journey affords me an actual pleasure, but, in any case, it is an entirely different pleasure and, in all probability, its intensity is ever so much less than the pleasure of the journey itself. If I value the latter at £50, the pleasure of anticipation is, perhaps, not worth more than 10s.—of which it may be sufficient proof that I am willing to lay out so much money, and no more, in buying a book of travels that lifts me into the pleasant world of thought. The concrete figures here are of no moment. No constant or normal quantitative relation can be established between an anticipated pleasure and a pleasure of anticipation: the relation will vary in the wildest way according to persons, motives, and circumstances. With dreamy imaginative men, for instance, who are apt to be strongly excited by their own imaginings, the pleasures of anticipation may be relatively strong; with hard-headed unimpassioned men, on the other hand, they will be disproportionately weak. For our purpose it is sufficient to establish two things: first, that the intensity of the represented future pleasure and that of the actually felt pleasure of anticipation, are two different quantities; and second, in the vast majority of cases, the intensity of the pleasure of anticipation is less than the anticipated pleasure, not by a few per cent, but infinitely.

The question now is: When we value future goods, and when in conformity with that valuation we are making these economical determinations on which we provide for future wants, with which of these two intensities have we to do? On this, at any rate, there call be no doubt: we shall all agree that it is the intensity of the future pleasure (or of the averted future pain) valued on the representation or imagination of it. A good which I have every reason to expect will bring me all intensity of satisfaction indicated by 100, I shall value at 100 and not at 1, even if, in anticipating the same, I experience only all actual pleasure of anticipation of the intensity 1. And, in the same way, in choosing whether I shall provide for any definite future want, in general, or to which of several I should give the preference, I shall try to decide, as impartially as possible, according to my reasonable valuation of the future pleasure, and not according to the degree of my momentary feeling of pleasure. (That we not seldom have our clear judgment clouded by the latter, and that it thus obtains an indirect influence on our determinations, is a phenomenon which belongs to quite another sphere.) If, after what has been said, there should still be any doubt on the subject—which I do not anticipate—it may be removed by pointing to the well-known fact, that enthusiastic dreamers, in whom the anticipation of future events excite very lively present emotions, are not at all the sort of people who are given to provide economically for their future needs in the most efficient way. On the contrary, it is the cold calculating men who do so; men whose sober intellectual judgment of future situations is little or not at all affected by accompanying excitement.

Now Jevons has fundamentally confused these things. He makes out that our economical transactions have for their motive present feelings, which, according to the distance of time, remain a few per cent behind the intensity of future pleasures and pains—standing to the latter, perhaps, in the ratio of 95 to 100. But nothing is more certain than that, while we represent to ourselves feelings of that intensity and anticipate them, we do not experience them as present feelings. Sax, again, who, in this respect, has obviously followed Jevons without proving the facts of the case for himself, has made the same blunder in a ruder way. He speaks of a Vorempfindung of future wants—to be distinguished from a simple prescience (Grundlegung, p. 178), and out of these "previous feelings" he even construes actual "present wants" and "feelings of want," which should be only a little weaker, according to the distance of time, than the corresponding immediate want of the present itself (p. 314). Surely Sax has scarcely considered what tortures aye must constantly endure if all the future pleasures and pains, against which we protect ourselves by forethought, are really to be experienced by us in anticipation, and only a few per cent less vividly than in reality!—Let me add the following remark. I am quite aware that the psychologists attach two distinct conceptions to the words "feeling" and "sensation" (Gefühl and Empfindung). The speech of economics, however, has not yet carried out this distinction and it is usual to speak either of sensations or feelings of want, pain, and so on. I retain these common expressions because, by giving them up, I should probably lose more, among economic readers, in plainness, than I could gain in exactness.

NOTE BY TRANSLATOR.—I may suggest here that, so far as concerns Jevons, the above criticism scarcely applies. It is based on a literal reading of two unfortunate expressions, "present anticipated feeling" and "vague though powerful feeling of the future." The whole passage, however, shows that Jevons did not mean the present feeling, but the represented future feeling—what he himself calls the "actual amount of feeling anticipated." The criticism, however, probably finds its mark in those German writers who have too faithfully followed the letter of Jevons.—W. S.

On the conception of Material Services see Capital and Interest, p. 223.
Menger, Grundsätze, p. 124.
This proposition has lately been disputed by Mataja (Das Recht des Schadenersatzes vom Standpunkte der Nationalökonomie, Leipsic, 1888, p. 149, note 1) on the ground that, in the selling of such goods, one might actually obtain their average return as price, and therefore, quite correctly, value them according to this. But Mataja forgets that the market price is not the cause, but is itself the result of the fact that the individuals, who appear as buyers and sellers of such goods, value them in the first instance—that is, in the individual case, objectively falsely—according to the average return.
See my former tract on Rechte and Verhältnisse, p. 85, where I brought out the same idea in a somewhat different connection: also Mataja, ibid. p. 139.
It embraces also goods which, materially, are present, but are intended for future consumption; for instance, productive goods, the technical transformation of which into consumption goods is accompanied by a danger of not succeeding.

End of Notes

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