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
48 of 55

Book VI, Chapter IX



We have traced all kinds and methods of acquiring interest to one identical source—the increasing value of future goods as they ripen into present goods. Thus it is with the profit of the undertakers, who transform labour—the future good which they purchase—into products for consumption. Thus it is with landlords, property-owners, and owners of durable goods generally, who allow the later services of the goods they possess to gradually mature, and pluck them when they have ripened into full value. Thus, finally, it is with the loan. Even here it is not the case, as one might easily think at first sight, that the enrichment of the capitalist comes from the creditor receiving more articles than he gives—for at first, indeed, the articles concerned are less in value—but from the fact that the loaned objects, at first lower in value, gradually increase in value, and on the moment of fruition enter into their complete higher present value.


What, then, are the capitalists as regards the community?—In a word, they are merchants who have present goods to sell. They are the fortunate possessors of a stock of goods which they do not require for the personal needs of the moment. They exchange this stock, therefore, into future goods of some form or another, and allow these to ripen in their hands again into present goods possessing full value. Many capitalists make this exchange once for all. One who builds a house with his capital, or buys a piece of land, or acquires a bond, or gives a loan at interest for fifty years, exchanges his present goods, wholly or in part, for goods or services which belong to a remote period of time, and consequently creates, as it were at a blow, the opportunity or condition of a permanent increment of value, and an income called interest which will last over this long period. One, again, who discounts a three months' bill, or enters on a one year's production, must frequently repeat the exchange. In three months or in one year the future goods thus acquired become full-valued present goods. With these present goods the business begins over again; new bills are bought, new raw material, new labour; these in their turn ripen into present goods, and so on again and again.


In the circumstances, then, it is very easily explained why capital bears an "everlasting" interest. We may dismiss any idea of an inexhaustible "productive power" in capital, assuring it eternal fruitfulness,—any idea of an eternal "Use" given off; year out year in, to the end of time by a good perhaps long perished.*62 It is because the stock of present goods is always too low that the conjuncture for their exchange against future goods is always favourable. And it is because time always stretches forward that the prudently purchased future commodity steadily becomes a present commodity, grows accordingly into the full value of the present, and permits its owner again and again to utilise the always favourable conjuncture.


I do not see that there is anything objectionable in this. For natural reasons, present goods are certainly more valuable commodities than future goods. If the owner of the more valuable commodity exchange it for a greater quantity of the less valuable, there is nothing more objectionable in this than that the owner of wheat should exchange a peck of wheat for more than a peck of oats or barley, or that a holder of gold should exchange a pound of gold for more than a pound of iron or copper. For the owner not to realise the higher value of his commodity would be an act of unselfishness and charity which could not possibly be translated into a general duty, and as a fact would not be so translated in regard to any other commodity.


In the essence of interest, then, there is nothing which should make it appear in itself unreasonable or unjust. But the essence of an institution is one thing, and the circumstances which may accidentally accompany it in its practical working out are another. That the community has a power of choosing representatives is good; but if at every election there are broken heads, and pot-house agitation and brute force instead of patriotic deliberation decide the majority, it is not good. And, like every other human institution, interest is exposed to the danger of exaggeration, degeneration, abuse; and, perhaps, to a greater extent than most institutions.


It is undeniable that, in this exchange of present commodities against future, the circumstances are of such a nature as to threaten the poor with exploitation of monopolists. Present goods are absolutely needed by everybody if people are to live. He who has not got them must try to obtain them at any price. To produce them on his own account is proscribed the poor man by circumstances; the only kind of production he could take up would be one yielding an immediate return, and this is not only unremunerative but almost impracticable under modern economic conditions. He must, then, buy his present goods from those who have them, either in the form of a loan, or, more usually, by selling his labour. But in this bargain he is doubly handicapped; first, by the position of compulsion under which he finds himself, and, second, by the numerical relation existing between buyers and sellers of present goods. The capitalists who have present goods for sale are relatively few; the proletarians who must buy them are innumerable. In the market for present goods, then, a majority of buyers, who find themselves compelled to bay, stands opposite a minority of sellers, and this is a relation which obviously is profoundly favourable to the sellers and unfavourable to the buyers.


Now, of course, the circumstances unfavourable to buyers may be corrected by active competition among sellers. The fewer the sellers, the greater are the amounts of present goods they have to dispose of. To find purchasers for them all, competition must bring down the price from extreme heights to a moderate level that leaves no room for exploitation of poor men.*63 Fortunately, in actual life this is the rule, not the exception. But, every now and then, something will suspend the capitalists' competition, and then those unfortunates, whom fate has thrown on a local market ruled by monopoly, are delivered over to the discretion of the adversary. Hence direct usury, of which the poor borrower is only too often the victim; and hence the low wages forcibly exploited from the workers—sometimes the workers of individual factories, sometimes of individual branches of production, sometimes—though happily not often, and only under peculiarly unfavourable circumstances—of whole nations.


It is not my business to put excesses like these, where there actually is exploitation, under the ægis of that favourable opinion I pronounced above as to the essence of interest. But, on the other hand, I must say with all emphasis, that what we might stigmatise as "usury" does not consist in the obtaining of a gain out of the loan, or out of the buying of labour, but in the immoderate extent of that gain. If exchanges are to take place between present and future commodities, the existence of some gain is an entirely normal phenomenon; is, indeed, an economic necessity. Some gain or profit on capital there would be if there were no compulsion on the poor, and no monopolising of property; and some gain there must be. It is only the height of this gain where, in particular cases, it reaches an excess, that is open to criticism, and, of course, the very unequal conditions of wealth in our modern communities bring us unpleasantly near the danger of exploitation and of usurious rates of interest.


As little, again, will the unbiassed spectator deny that, in the circumstances accompanying the receipt of interest, it is frequently the case that one's sense of fairness is offended by the contrast between gain and desert. Where capital has once been obtained by personal exertion and ability no one would grudge its owner the further profit he makes, without exertion, by exchanging his hard-won present goods into future goods. But often it is just the greatest fortune that falls into the lap of its owner without any personal desert on his part, simply by the happy chance of a legal enactment giving him the preference, and in this case also the lucrative exchange, of present goods for future goods which steadily ripen into more valuable present goods, is made without exertion and without personal deserving. In all other branches of exchange clever speculation is needed, timely seizing of opportunities, favourable conjunctures, if a gain is to be made by the exchange. But the merchant of present goods finds the conjuncture always favourable. He need only put out his hand to dispose of his goods, with a profit, to any one among the thousands of eager buyers, while, by his side, the poor labourer drags out a painful existence of heavy toil, at a sacrifice of personal strength and personal happiness.


But what is the conclusion from all this? Surely that, owing to accessory circumstances, interest may be associated with a usurious exploitation and with bad social conditions; not that, in its innermost essence, it is rotten. And the logical conclusion is that the axe should be laid to the decayed branches, and not to the sound stem,—just as it would be foolish to take away the right of self-representation instead of simply putting down the riots at election time. But what if these abuses are so inseparably connected with interest that they cannot be eradicated, or cannot be quite eradicated? Even then it is by no means certain that the institution should be abolished. Arrangements absolutely free from drawback are never allotted to us in human affairs. Instead of the absolute good, which is beyond reach, we must choose what, on the whole, is the relative best, where the balance, between attainable advantage and the drawbacks that must be taken into the bargain, is the most favourable possible for us. Living in a great city has certainly many disadvantages; so has living in a small city; and so has living in the country. But we must live somewhere, and so we make our choice of the place where, after wise consideration of all the circumstances, the unavoidable evils seem to be most outweighed by the advantages. And in the same way, before we abolish interest as such, we must first draw out a balance-sheet to show whether human wellbeing is better promoted in a society which permits gain from capital and recognises it, or in one which permits only income from labour.


In making this calculation it will not be overlooked that the institution of interest has its manifold uses; particularly as the prospect of interest induces saving and accumulation of capital, and thus, by making possible the adoption of more fruitful methods of production, becomes the cause of a more abundant provision for the whole people. In this connection the much-used and much-abused expression, "Reward of Abstinence," is in its proper place. The existence of interest cannot be theoretically explained by it: one cannot hope in using it to say anything about the essential nature of interest: every one knows how much interest is simply pocketed without any "abstinence" that deserves reward.*64 But, just as interest sometimes has its injurious accompaniments, so in its train it brings others, fortunately, that are beneficent and useful; and to these it is due that interest, which has its origin in quite different causes, acts, among other things, as a wage and as an inducement to save. I know very well that private saving is not the only possible way to the accumulation of capital, and that, even in the Socialist state, capital may be accumulated and added to.*65 But the fact remains that private accumulation of capital is a proved fact, while socialist accumulation is not;—and there are, besides, some very serious a priori doubts whether it can be.


Still it is neither my purpose nor my duty to inquire what organisation of society on the whole is best,—the present or the Socialist. I have only here to answer what comes up for answer in an inquiry as to the nature and origin of interest. And the answer here runs: There is no inherent blot in the essential nature of interest. Those, then, who demand its abolition may base their demand on certain considerations of expediency, but not, as the Socialists do at present, on the assertion that this kind of income is essentially unjustifiable.


Is the abolition of interest, then, possible? It may, I think, not be unprofitable to many of my readers to follow the fate of interest in the Socialist state.

Notes for this chapter

The incorrectness of a theory is shown in its not being able to give a satisfactory solution for all given cases. I have already had frequent occasion to point to cases which could not be satisfactorily explained by means of the—to my mind—incorrect "Use theory" (see above, pp. 287, 347). Here I have to add another instance;—the buying of a perpetual interest, e.g. Consols, where the original debt can neither be called up nor paid back. In these annual payments the Use theory would see the price for a "use of capital" perpetually transferred. But what has happened with the capital stock? It has of course been transferred. But it is not simply lent, for it will never be paid back. Nor, in the view of the Use theorists, can it be transferred against payment, for the annual interest is the price of the "use," and there is nothing paid beyond that. Nor, finally, is it transferred without payment,—presented as a gift: the rentiers, the representatives of those who made the loan, have no intention of making any such present, and the government which received the loan certainly does not feel that it has received a gift.—Now what the Use theory could not explain, or explained only in a most artificial way, is explained perfectly simply by our theory: it is just an exchange of present goods (the original capital) against a series of future sums of goods (the annual interest payments).
See below on the Rate of Interest.
I gladly embrace this opportunity to repair an omission in my Capital and Interest. At the time when I published that work I unfortunately had not made the acquaintance of Loria's La Rendita Fondiaria (Mailand, 1880). It contains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence theory, of which I can only say that, if the Abstinence theory were tenable—which, of course, I do not believe it to be—Loria's setting of it would be the first to gain recognition.
See above, p. 114.

End of Notes

48 of 55

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