Part 2, Essay 3
Review of Gustav Cassel, The Nature and Necessity of Interest, and Eugen von Böhm-Bawerk,Recent Literature on Interest
Reprinted from Political Science Quarterly 20 (March 1905). The reviewed works are: Eugen von Böhm-Bawerk, Recent Literature on Interest: A Supplement to Capital and Interest, trans. William A. Scott and Sigmund Feilbogen (New York: Macmillan Co., 1903); and Gustav Cassel, The Nature and Necessity of Interest (London: Macmillan & Co., 1903).
These two books, published almost simultaneously last year, testify to the attention which the theoretical problem of interest still commands. The first is a well-executed translation of the new material embodied in the second German edition (1900) of Böhm-Bawerk's Geschichte und Kritik der Capitalzinstheorien. The translators well say in their preface:
Whatever may be the final verdict of science regarding the agio theory, no one can doubt that the splendid example of criticism and analysis which is contained in Böhm-Bawerk's work has raised theoretical discussion to a higher level and has been a constant and powerful stimulus to investigation in this field.
The preface is largely taken up with the translators' epitome of the criticism of John Rae, to whose ideas the author's attention had been called after the first edition of his work appeared. The translation is made up mostly of somewhat detailed replies to Marshall (a modified abstinence theorist), Carver (an abstinence theorist), and Wieser (a productivity theorist), and to various advocates of labor-cost and exploitation theories.
The book has, on the whole, a negative rather than a positive character. To borrow a phrase from recent politics, the author "stands pat" on what he had written fifteen years before. More clearly than before he realizes and frankly confesses that he is an eclectic. He admits (p. 137) that something may be said against eclecticism of every kind, but the objection seems to him least when "incoherent elements of different theories are combined into an external unity." He repeats his familiar condemnation of the productivity theory, declaring (p. 121) that "the solution of the problem of interest can never be found in the process of thought peculiar to that theory." But he here means complete solution, and again and again he repeats his belief that two elements coöperate in the explanation (p. xxxii), that psychological and technical points of view must be harmonized (p.8), that interest has several sources, including the roundabout process (pp. 45, 46, 143, 145 et passim). He contrasts (p. 142) his own partial productivity theory with "the genuine, outspoken productivity theories," which leave out "a full half of the actual causes of the phenomenon of interest." So far from seeking to evade the appearance of eclecticism, he takes pride (p. 146) in the two-fold nature of his explanation, and declares it to be "a recognized truth" that a correct solution must be an eclectic one. We must express an emphatic dissent from this lame and impotent conclusion which, however, completely verifies the opinion of the reviewer as expressed in the Quarterly Journal of Economics (vol. xvii, p. 177) that Böhm-Bawerk's theory, "so far as it rests on the productiveness of the roundabout process, is a productivity theory." An eclectic conclusion disappoints the high purposes with which Böhm-Bawerk began his study of the subject, and the high hopes he inspired. His whole discussion goes astray for lack of a consistent conception of capital. He seems at times near to a broader and truer conception of the problem of time-discount, but fails at such points to develop his thought.
The author is entirely untouched by those currents of thought which, beginning with J.B. Clark and Irving Fisher, have developed an entirely new literature of the subject of the capital concept. For lack of such a point of view, most of the subtle controversy of the present volume must appear to many readers to be the echoes of ancient opinions. The argument does not move forward, but merely marks time. The familiar ideas, when reiterated, may still engage the attention of a small group of special students of abstract theory, but they have lost their power to stimulate and inspire.
Dr. Cassel attempts first to develop a new theory of interest and secondly to examine the causes why interest is and always will be necessary. He presents a theory of interest as the pay for "waiting," and differs with Böhm-Bawerk, to whom he refers slightingly (p. 22), whose review of the history of the subject he criticizes as one-sided, and to whose roundabout process he presents essentially the same objections that had been pointed out a year before by the reviewer (in the Quarterly Journal of Economics, vol. xvii, pp. 163-180). But Dr. Cassel meets some of the same difficulties that befell Böhm-Bawerk, for he also fails to get a consistent capital concept. He connects the payment for "waiting" with the definite factor capital (p.67), and then after some delay limits capital to "produced goods except such consumable goods as are already in the hands of the consumer" (p. 88; see also p. 133). He does not see that waiting may be present both in the case of consumable goods in the hands of the consumer and in the case of land (which, in the old-fashioned way, he usually thinks of as not being an object of waiting). He wavers somewhat when (p. 167) he declares that interest is paid not for "the use of a piece of concrete capital...but for 'goods in general,'" for land must here also be included. But it is needless to adduce other examples to show that such a limitation of the capital concept makes impossible a complete theory of time-discount.
In the part dealing with the necessity of interest, the book is more original. It discusses at length and suggestively the changes that would be worked in the motives of men if the rate of interest fell from three per cent to two per cent or lower. The shifting of the margin of application of agents is described, and "the main argument of the book" (p. 157), which is to show "the necessity of interest," is strikingly brought out. The argument is strong as directed against the notions of the over-production of capital and the fallacy of saving. By this, its most interesting and valuable feature, the book should be judged as a contribution to economic theory.