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
43 of 55

Book VI, Chapter IV

The Profit of Capitalist Undertaking. The Labour Market.


The exchange of Means of Production against final and finished present goods—practically against Money—is made in three kinds of market: the Labour market, the market for Uses of Land, and the market for Intermediate Products, such as raw materials, tools, machines, factories, etc. Inasmuch as labour and uses of land are the original means of production from the co-operation of which all finished products come into existence, the formation of their price is peculiarly the one which decides the existence of profit on capital. In the markets for intermediate products we have only the continuance of a process which has received its own peculiar impulse in the other two markets. And, of these two markets, again, the labour market is by far the more important. I shall, then, first take up the circumstances of this market, and shall endeavour to show and explain how the market price of the productive good "Labour" must always be less than the value and price of the finished product of labour.


Let us assume that, in the methods of production current in economical society at the moment, the making of a product ready for consumption requires a period of time extending in all over two years. The technical productiveness of this method, we shall assume, is such that it takes a week's labour to turn out a product which will have the value of 20s. The same product may be turned out by shorter methods, but the result will be disproportionately unfavourable. If a three months' process is adopted, the technical result falls to one-half; if the worker has no capital, and his process is, accordingly, one that yields its return immediately, the productiveness falls to one-quarter; that is, respectively, to 10s, and 5s. The price which can be paid for the commodity "labour" in these circumstances is the question now under discussion on the labour market between the labourer and the employers of labour. The price is fixed, in methods with which we are familiar, as resultant of the subjective valuations of both parties. How is it now with these valuations?


In the circumstances of modern industry, the wage workers scarcely ever possess sufficient means to utilise their own labour in methods of production extending over years.*21 They have, therefore, to face the alternative of selling their labour, or of employing it on their own account in such short and unproductive processes as the scanty means at their disposal permit. Naturally they will make that choice which is most advantageous to them. Those workers who are well enough off to embark, on their own account, on a production process lasting at least three months, and yielding a return of 10s. per week, will be willing to sell their labour at any price over 10s.;*22 at any price under 10s. they will rather work on their own account. On the other hand, those workers who are entirely without means, and who, working on their own account in a hand-to-mouth process, could only have a return of 5s., will be willing to sell their labour at any price above 5s. As, unfortunately, the labourers who are entirely without capital, form to-day the great majority, we may assume for our illustration that the "Supply" of labour will be represented by a long row of workers who are ready, in the worst case, to sell the week's labour for 5s., and a shorter row who will do the same for 10s. present money.*23


How is it now with the Demand for labour that confronts this supply?


The demand comes from the Capitalist-Undertakers. The valuation they put upon the labour they wish to buy is so far more definite, inasmuch as the commodity labour, capable of so many employments, is looked at by them in connection with one definite employment; namely, the one carried on by themselves. To them, accordingly, the week's labour, which they wish to buy for the capitalist process, is worth just so much as the product which it will turn out in this capitalist process. On our assumption, this will be 20s. available in two years. But the question for the undertaker still remains: what are 20s., available in two years, worth in relation to the present shillings in which he must pay the week's labour.


Once for all, let us make this entirely clear. If the capitalists were to realise their entire resources as present goods,—that is, to consume their wealth in present enjoyment,—the want of the present would evidently be provided for in superfluity, while the want of the future would have no provision whatever. They must, therefore, find it positively advantageous to change a part of their resources into future goods of some kind or other. In other words: if we look only at the relations of want and provision for want in present and future, present goods, as such, are worth even less than future to the owner of a stock of wealth which is greater than his present wants. It is true, of course, that there is a very simple way of changing present goods into future: they can be stored away either in natura, or in the neutral form of future money. This possibility naturally saves them from the prejudice to their value, which would, in itself, result from the overabundant provision for the present, but, on the other hand, it does not give them any positive advantage in value, or, at any rate, a very trifling one.*24


Nor can the underestimate of future wants form a reasonable basis for any such advantage. It will seldom be strong enough to outweigh the counteracting consideration of the overabundant provision for the present, and to prevent the capitalists from preferring to employ part of their wealth in the service of the future. Persons, moreover, in whom this want of foresight might, exceptionally, be found, are not, or at least would not long remain, capitalists. An estimate like theirs, dictated by momentary desire and carelessness of the future, would soon bear its consequences, and bring their fortunes into spendthrift consumption.


Of the three considerations, therefore, which, as we have seen, generally serve as foundation for the preference of present over future goods, the first two do not apply as regards the great majority of capitalists. It is our third consideration, the well-known technical superiority of present goods, or, as it is usually called, the "productivity of capital," which is decisive with them. The way in which it takes effect is essentially different in simple circumstances from what it is in the full development of our modern economic life.


In simple circumstances, where the undertaker is himself a worker, and has no capital to speak of, present goods immediately obtain a higher use value. An undertaker, for instance, has just enough wealth to defray the subsistence of one working person for four years,—or to advance that amount. The choice is now open to him, either to work by himself in a four years' process, or to assume a helper and work alongside of him in a two years' process. In a two years' process the week's labour yields, as we have assumed, 20s.: in a four years' process—since longer methods are, technically, more productive—it will yield, say, 24s. The balance now stands as follows. If our capitalist pays his helper, for the week's work, the full 20s. in present money, he has to pay him £104 for the two years' work; from its product he recovers just this sum of £104; and finally, he can pay himself only 20s. a week, that is, in all, £104. His total net income, for the two years, thus amounts to £104. On the other hand, if, instead of spending £104 in paying a labourer, he spends it on his own maintenance during a third and fourth year of production, he may, from the 104 weeks of his own labour time at the higher rate of 24s. per week, recover £124:16s.; so that his two years' net income is increased by £20:16s. In these circumstances it is obviously more advantageous for the capitalist to have no helper. To obtain any advantage from a helper it must be possible to pay him at such a price, that the capitalist gains more by the buying of another person's labour than what he loses in the realisation of his own labour by the shortening of the production period: in other words, that 20s. a week present money paid in wages should bring him more than 24s. a week, future money, in products. This will only be the case if he can pay a weekly wage that is under 16s. 8d.*25


Were the circumstances of capitalist production generally so simple as this, the value to the undertakers of 20s. in future products would, speaking generally, be equal to the value of 16s. 8d. present money,—the actual figures varying a little, but not the tendency. And if the buyers value the commodity labour at not more than 16s. 8d., while the sellers value it at, perhaps, 5s. or 10s., it is clear that the resultant of these valuations, the price of labour, will, in no case, exceed the amount of 16s. 8d., and must a fortiori come under 20s., the full sum of the future product—which was the point to be proved.


But the circumstances of present-day industry are not so simple. The great majority of our undertakers are not themselves workers, and their capitals, moreover, are generally so great as to be far above what any one man could use for his subsistence during the very longest practicable process. The possibility, which capital gives its owner, of employing his own labour in longer production processes does not, therefore, as a rule, under present conditions, give any higher use value to present goods. Our illustration of simple circumstances has very great importance in other lines of proof,—of which later,—but it does not suffice to explain the profit of capital in the circumstances of capitalist industry. These very complicated circumstances, however, develop a phenomenon which works, in another form, to the same end; this phenomenon is Credit. The capitalist cannot use his present goods to make his own labour more fruitful, but others are willing to take them in exchange for future goods to make their labour more profitable, and are very willing to pay an agio in future goods. And, evidently, the capitalist need not barter his present money at par with the workers for their future product, when he can obtain on the loan market, for a certain sum of present goods, a greater sum of future goods.


One is tempted to apply this fact to the explanation of profit, as if it were owing to the chances offered on the market for loans that the capitalist's present goods had, in all cases, a higher subjective exchange value than future goods. But this is not my idea of explanation. We have no right either to represent loan interest as a fait accompli, and explain natural profit on capital from it, or, conversely, to represent the latter as a fait accompli, and explain loan interest thereby. The fact is that the Loan market and the Labour market are two markets on which one and the same commodity is mutually offered and demanded, viz. Present Goods. On both markets the demand is for means of subsistence, with the view of making labour more profitable by longer processes of production; only the circumstances of demand are different. For the present goods which he receives the wage worker gives, wholly and entirely, the indefinite future product which his labour may create: the borrower in productive credit—consumptive credit is much less important, but manifests its effects, in the long-run, in exactly the same direction—gives, in exchange for present goods, a definite quantity of future products, and, if the actual product differs from this quantity, may gain or lose by it. Thus wage workers and borrowers form two branches of the same demand; they mutually support its effect; and jointly help to form the resultant price. Only in outside appearance are they two distinct markets; in reality they overlap each other; and the market price of present goods is their joint result.


To get to the root of the matter therefore, before considering isolated and partial markets, we must take a comprehensive survey of that total market for advances of subsistence which, in every economic community, is built upon numerous communicating partial markets.

Notes for this chapter

Whether it take the form of completing the two years' production process from beginning to end by their own labour, or that of introducing their own labour at a later stage,—e.g. in the fourth half-year of the total production process,—and buying the fruits of the preparatory labour,—raw materials, tools, etc.,—from the others who have performed that previous labour.
The pleasure of an independent position may indeed very often create a preference for labour on one's own account, even although the labourer might obtain a somewhat greater income by taking a wage. Influences of this kind, however, can alter only the figures, not the principle.
Of course the possibility open to the labourer in question of realising his labour in other branches of activity, can do little or nothing to alter the position of circumstances assumed in the text. For if the other branches are such as likewise demand a somewhat long production period the matter stands just the same with the labourer of this branch; and the few branches which a man with no capital, or almost no capital, can take up with any result,—such as in particular the performance of personal services, domestic service, and the like,—can, from their nature, afford a remunerative refuge only to a limited number of workers, while any strong pressure would immediately result in overstocking and a corresponding entailment of the advantage.
See above, p. 250.
16s. 8d. : 20s. = £104 : £124:16s.

End of Notes

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