The Positive Theory of Capital

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
(1851-1914)
CEE
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Editor/Trans.
William A. Smart, trans.
First Pub. Date
1888
Publisher/Edition
London: Macmillan and Co.
Pub. Date
1891
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Book II, Chapter III

The Function of Capital in Production

II.III.1

After what has been said in the preceding chapter it should not be difficult accurately to indicate the role which capital plays in economic production.

II.III.2

Capital has, first, a symptomatic importance. Its presence is always the symptom of a profitable roundabout production. I say, deliberately, "symptom" and not "cause" or "condition" of profitable methods of production; for, as a fact, its presence is rather the result than the cause. If men to-day are fishing with boats and nets instead of picking the fish out of pools on the shore with their hands, it cannot be said that they have adopted those more fruitful methods because they possess boats and nets. Obviously they possess boats and nets because they have adopted these methods. They must have already chosen the roundabout way of production before these goods, speaking generally, come into existence.*21

II.III.3

This, however, does not exhaust the importance of capital. It is, secondly, and herein lies the chief point of its productive efficiency,—an effective intermediate cause of the consummation of this profitable roundabout process. Every piece of capital is, to a certain extent, a store of useful natural powers, the working of which helps to bring to a successful issue the roundabout process in the course of which the piece of capital has come into existence. I say "intermediate cause;" not "cause." Capital gives no independent impulse; it only transmits an impulse given by the original productive powers, just as one billiard ball transmits motion to another. The function of capital, indeed, has been called the "prisoning of natural powers." The expression is quite appropriate, and very happy. Only it must never be forgotten that this attribute belongs to the entire capitalist process, not only to the "descending branch," generally called the use of the capital, but also to the "ascending branch," in which the capital itself is first made. Man does not first prison natural powers by means of capital; capital itself originates as the result of a previous imprisonment—by the original productive powers that are at man's own bidding—of certain compliant natural powers. Taken all in all, among the many predicates which economists have given to capital, the one that best fits this aspect of the case is that of "Tool of Production."

II.III.4

But, thirdly, capital is also the indirect cause of other profitable roundabout ways of production being entered on other, that is, than those in the course of which it itself has come into existence. When a people possesses much capital not only can it successfully complete those processes in the course of which the capital presently existing has come into being, but it can also adopt other and new methods. For the stock of capital in hand (which, essentially, is nothing else than an aggregate of consumption goods in a transition state*22) throws off every year a certain quantity of its constituents, which have just completed their transition state and become finished goods, and places them at the disposal of the current economic period for purposes of immediate consumption. In this way the greater the stock of capital, the larger is the share taken by the productive powers of the past in providing means of consumption for the present, and the less are the new productive powers of the present drawn on for the present. Thus a larger proportion of these current powers is free for the service of the future, that is, for investment in more or less far-reaching processes of production.

II.III.5

If a community is so poor that the consumption goods maturing out of capitalist intermediate products in any year, say in 1888, scarcely cover 1/20 of that year's wants, then the remaining 19/20 must be provided out of the labour and uses of land of 1888, and only a fractional part of the productive powers of that year remains over to initiate methods of production that will turn out consumption goods in the years following. If, on the other hand, the past has accumulated a treasure of intermediate products—raw materials, tools, machines, factories, workshops, etc.—so great that their successive maturing covers the consumption demand of the year 1888 to the extent of 35/10, that of 1889 to the extent of 4/10, that of 1890 to the extent of 3/10, and so on, then only one half of the productive powers of 1888 will be claimed to make up the current wants, while the entire other half may be spent unhesitatingly in producing intermediate products which will come to maturity, as consumption goods, only in later years—all the later in proportion as the next year's wants are already covered by accumulations of capital in the past.

II.III.6

In this sense, but only in this sense, is it correct to say that man must already have capital before he can enter on roundabout ways of production; that want of capital prevents man taking advantage of far-reaching and profitable methods of production, such as the laying of railways, building of canals, irrigation schemes, altering of river-beds, and so on. It would be quite incorrect to understand this proposition as meaning that a community must have, finished and ready to hand, that kind of concrete capital with which the methods of production in question are carried out, or even the concrete capital (raw materials, tools, etc.) out of which are made the forms of capital first needed. All that is required is, that the community possess so much capital, whatever its shape, as will cover—while it is being gradually changed into consumption goods—the demand of the present and near future for such goods sufficiently to leave the current production powers free for investment in intermediate products of the kind required. It would be essentially more correct to say that we require consumption goods before we can enter upon roundabout ways of production, whether these be in the form of finished stocks of goods ready for consumption, or in the transition form of intermediate products.

II.III.7

Lastly, we can now answer, easily and categorically, the much-disputed question, whether any independent productive power is inherent in capital; or, to put the question in its usual form, whether capital is a third and independent "factor in production" alongside of labour and nature?

II.III.8

The answer must be a most distinct negative. This seems to me the only conclusion any one can come to, provided he makes clear to himself the sense in which this question is put, and must be put if it is worth the trouble of putting at all. And this sense is a very emphatic one. The following analogy will make it perfectly clear. A man throws a stone at another man and kills him. Has the stone killed the man? If the question is put without laying any special emphasis it may be answered without hesitation in the affirmative. But how if the murderer, on his trial, were to defend himself by saying that it was not he but the stone that had killed the man? Taking the words in this sense should we still say that the stone had killed the man, and acquit the murderer?

II.III.9

Now it is with an emphasis like this that economists inquire as to the independent productivity of capital. The question comes up in the course of the inquiry concerning the elements which constitute our material goods. A similar interest to that which the chemist has in the analysis of compound bodies leads the economist to analyse the multiform transition stages of material goods, to trace them back to their source, and to resolve the thousandfold instruments and auxiliaries of production, to which, directly or indirectly, they owe their existence, into the simple fundamental powers from the co-operation of which everything proceeds. In this connection the doubt arises whether capital is an independent productive power or not. The whole spirit of the inquiry allows only one meaning to be given to the question, and the emphasis is very marked. We are not asking about dependent intermediate causes, but about ultimate independent elements. The question is not whether capital plays a part in the bringing about of a productive result—such as the stone does in the killing of the man—but whether, granted the productive result, some part of it is due to capital so entirely and peculiarly that it simply cannot be put to the credit of the two other recognised elementary factors, nature and labour. Now can this question be answered in the affirmative?

II.III.10

Emphatically it can not. Capital is an intermediate product of nature and labour, nothing more. Its own origin, its existence, its subsequent action, are nothing but stages in the continuous working of the true elements, nature and labour. They and they alone do everything from beginning to end in bringing consumption goods into existence. The only distinction is that sometimes they do it all at once, sometimes by several stages. In the latter case the completion of each stage is marked outwardly by the appearance of a fore-product or intermediate product, and capital has emerged. But, let me ask, is a thing any the less the work of its author that it is not produced all at once, but in instalments? If to-day, by allying my labour with natural powers, I make bricks out of clay, and to-morrow, by allying my labour with natural gifts, I obtain lime, and the day after that make mortar and so construct a wall, can it be said of any part of the wall that I and the natural powers have not made it? Again, before a lengthy piece of work, such as the building of a house, is quite finished, it naturally must be at one tine; a fourth finished, then a half finished, then three-quarters finished. What now would be said if one were to describe these inevitable stages of the work as independent requisites of house-building, and maintain that, for the building of a house, we require, besides building materials and labour, a quarter-finished house, a half-finished house, a three-quarters-finished house? In form perhaps it is less striking, but in effect it is not a whit more correct, to elevate those intermediate steps in the progress of the work, which outwardly take the shape of capital, into an independent agent of production by the side of nature and labour.

II.III.11

This would never have been called in question had it not been that the introduction of division of vocations and labour had split up the united work of producing consumption goods into a number of apparently independent acts of production. It was this that made economists forget to look at it as a whole, and made them, with singular modesty, bow before the dependent intermediate creations of previous human activity as if they represented an independent power. But even as it was, it was scarcely possible for any acute theorist to make this confusion if another circumstance had not conspired to assist it. That was the accepted parallelism between factors of production and branches of income, and the awkwardness economists feared to encounter in the explanation and justification of interest if they had to refuse recognition to capital as an independent factor of production. All natural income, it was taught, is based on participation in the production of goods. The various branches of income are nothing else than the forms in which the different contributories to production are paid. Rent of land is the payment for the factor of nature, wage the payment for the factor of labour, and interest—well, interest appeared to have no substantial foundation if it also could not be interpreted as a payment for a third independent factor of production. It did not seem to be explained theoretically, nor—what indeed might be more serious to the theorists in question—to be justified practically. Thus it was that many a learned thinker was driven into a corner, and preferred rather to shut an eye to clear facts than to sacrifice the independent productivity of capital, and with it the welcome basis for the current theory of interest.

II.III.12

Facts certainly spoke with perfect distinctness. It was impossible to deny that capital is no element in the proper sense of the word, inasmuch as it itself springs from the co-operation of nature and labour. Not only so, but by a singular irony of fate this had to be expressly proved—as it had been by Adam Smith before them—by those very theorists who maintained its independent productivity. In their theory of price, in having to show how all prices resolve themselves finally into rent, wage, and interest, they were forced to demonstrate in the most minute way that concrete capital is not an element; that, for instance, copper and steel, which serve as capital in the manufacture of watches, originate in the co-operation of the natural mineral deposits, of the work of miners, and of older capitals, which themselves have originated in similar ways, and so on.*23 In the face of this, to maintain the independent productivity of what they had just demonstrated to be a dependent and intermediate product, they were driven to adopt very singular expedients. The favourite ones were obscurity and brevity. Instead of making an earnest effort to bridge the yawning contradiction, they either did not suggest the doubt at all, or, if a doubt had already been raised, they dismissed it with some laconic phrase or other. A long series of writers make no scruple about expounding capital on one page as a factor of production "derived" from nature and labour, and on the next as a third independent factor of production along with nature and labour.*24 Mill has so far yielded to the pressure of facts as to admit that capital is itself the product of labour, and that its instrumentality in production is therefore in reality that of labour in an indirect shape. But with a quick turn he saves its independence. "Not the less," he continues, "does it require to be specified separately. A previous application of labour to produce the capital required for consumption during the work is no less essential than the application of labour to the work itself."*25 Therefore, because labour must be applied twice, in two different stages of production, something else besides labour must be recognised as the independent condition of production!

II.III.13

Some writers, of course, treat the matter more seriously. They do not evade the difficulty, but try to get a real solution of it. They cannot overlook the fact that capital first comes into existence through combination of simpler factors. Quite correctly, therefore, they do not attempt to claim for capital itself the character of an element; but they still require an independent support for interest. This they obtain by resolving capital into its elements, and finding that, besides nature and labour, there is still a third independent element: Senior calls it Abstinence, Hermann calls it the Use of Capital. These attempts at solution, which I went into in detail and pronounced upon in my former book, Capital and Interest, were certainly not very happy. Hermann's, in particular, is singularly unfortunate in being obliged to explain the "use" which capital gives as more elementary than capital itself—as if the egg which the hen lays is antecedent to the hen! Nevertheless as regards our present question these theories are very instructive. They show that several of our most clear-sighted thinkers preferred to take refuge in the most hazardous and artificial constructions rather than agree in the current doctrine that capital itself, while originating in the co-operation of nature and labour, is, all the same, an "independent" factor of production along with them!

II.III.14

We may confidently, then, strike capital out of the list of independent productive powers, as a portion of the English school did long ago, and as the Socialists have done more recently. I may say, however, that the manner in which they have done so is not quite appropriate. In the instrumentality of capital they see only the instrumentality of the labour expended in producing it; they explain it as "previous stored-up labour." This is not correct. Capital—to keep the same form of expression—is "stored-up labour," but it is something more; it is also stored-up valuable natural power. It is the medium through which the two original productive powers exert their instrumentality. To the instrumentality of gold, which is employed as capital in gilding the lightning-rod, the labour of the miner, who finds the ore and refines it, is not the only contributory: nature also has contributed her share in depositing the valuable vein or placer.

II.III.15

Although, then, we have traced its instrumentality in production to nature and labour, is capital itself not productive at all? Certainly it is, in more than one sense of that too ambiguous word.*26 It is, first, "productive" because it finds its destination in the production of goods; it is, further, productive because it is an effectual tool in completing the roundabout and profitable methods of production once they are entered on; finally, it is productive indirectly because it makes the adoption of new and profitable methods possible. One thing, however, it is not; it is not independently productive in the sense on which the most important part of the controversy turns. As the old economist Lotz expressed it, briefly and succinctly "Of any independent labour in capital there is simply no question."*27


Notes for this chapter


21.
It would be somewhat different if we were to adopt the other conception of capital, and understand by it, not intermediate products only, but the entire national subsistence fund, which would therefore include the labourers' subsistence. In that case, but only in that case, one might say that capital was the cause of these profitable roundabout ways of production being adopted.
22.
Schäffle very finely speaks of capital as "Consumption wealth as it were in the stalk, when it is still only swelling bud and ripening fruit" (Schönberg's Handbuch, second edition, vol. i. p. 208).
23.
e.g. Say, Traité, seventh edition, p. 344.
24.
Of older writers, e.g. B. Fulda, Grundsätze der Oek. pol. or Kameralwissenschaften, second edition, 1820, p. 135; Schön, Neue Untersuchung der National-Oekonomie, 1835, p. 47. Of later writers Cossa himself, Elementi, eighth edition, p. 34; and Gide, Principes d'Éc. Pol. 1884, pp. 101, 145.
25.
Book i. chap. vii. § i.
26.
See Capital and Interest, p. 114.
27.
Handbuch der Staatswirthschaftstlehre, Erlangen, 1821, i. p. 66, in note.

End of Notes


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