Capital and Interest: A Critical History of Economical Theory

Any one who cares to hunt up ancient pedigrees of theories might discover in the writers of past centuries many an expression that fits in with the line of thought taken by the Exploitation theory. Not to speak of the canonists, who arrived at the same results more by accident than anything else, I may mention Locke, who on one occasion points very distinctly to labour as the source of all wealth,
*1 and at another time speaks of interest as the fruit of the labour of others;
*2 James Steuart, who expresses himself less distinctly, but takes the same line.
*3 Sonnenfels, who occasionally describes capitalists as a class who do no labour, and thrive by the sweat of the labouring classes;
*4 or Büsch, who also,—treating indeed only of contract interest,—regards it as “a return to property obtained by the industry of others.”
*5

These are instances which could very likely be multiplied by careful examination of the older literature. The birth of the Exploitation theory, however, as a conscious and coherent doctrine, must be assigned to a later period.

Two developments preceded and prepared the way for it. First, as mentioned above, it was the development and popularising of the Ricardian theory of value which supplied the scientific soil out of which the Exploitation theory could naturally spring and grow. And, secondly, there was the triumphant spread of capitalist production on a large scale; for this large production, while creating and revealing a wide gulf of opposition between capital and labour, placed in the foremost rank of great social questions the problem of interest as an income obtained without personal labour.

Under those influences the time seems to have become ready for the systematic development of the Exploitation theory about the twentieth year of this century. Among the first to give it explicit statement—in a history of theory I leave out of account the “practical” communists, whose efforts, of course, were based on similar ideas—were Hodgskin in England and Sismondi in France.

Hodgskin’s writings—a little known
Popular Political Economy and an anonymous publication under the significant title “Labour defended against the Claims of Capital”
*6—do not seem to have had any extensive influence. Thus Sismondi becomes all the more important in the development of the theory.

In naming Sismondi as representative of the Exploitation theory, I must do so with a certain reservation. It is that, although his theory contains all the other essential features of that system, he expresses no condemnatory opinion on interest. He is the writer of a transition period. Though really acquiescing in the new theory, he has not yet broken with the old so completely as to accept all the very extreme conclusions of the new position.

For our purpose the book which we have chiefly to consider is his great and influential
Nouveaux Principes d’Economie Politique.*7 In it Sismondi connects with Adam Smith. He accepts with warm approval (p. 51) Adam Smith’s proposition that labour is the sole source of all wealth;
*8 complains that the three kinds of income,—rent, profit, and wages,—are frequently ascribed to three different sources, land, capital, and labour, while in reality all income springs from labour alone, these three branches being only so many different ways of sharing in the fruits of human labour (p. 85). The labourer, by whose activity all goods are produced, has not been able “in our stage of civilisation” to obtain possession of the means necessary to production. On the one hand, land is generally in the possession of some other person who requires from the labourer a part of the fruit of his labour as compensation for the co-operation of this “productive power.” This part forms the land-rent. On the other hand, the productive labourer does not as a rule possess a sufficient stock of the means of subsistence upon which to live during the course of his labour. Nor does he possess the raw materials necessary to production or the often expensive tools and machines. The rich man who has all these things thus obtains a certain command over the labour of the poor man, and, without himself taking part in that labour, he takes away, as compensation for the advantages which he places at the disposal of the poor man, the better part of the fruits of his labour (
la part la plus importante des fruits de son travail). This share is the profit on capital (pp. 86, 87). Thus, by the arrangements of society, wealth acquires the capacity of reproducing itself by means of the labour of others (p. 82).

But although the labourer produces by his day’s labour very much more than the day’s needs, yet, after the division with the landowner and the capitalist, there seldom remains to him much more than his absolutely necessary maintenance, and this he receives in the form of wages. The reason for this lies in the dependent position in which the labourer is placed in relation to the undertaker who owns the capital. The labourer’s need for maintenance is much more urgent than the undertaker’s need for labour. The labourer requires his maintenance in order to live, while the undertaker requires his labour only to make a profit. Thus the transaction turns out almost invariably to the disadvantage of the labourer. He is in nearly all cases obliged to be satisfied with the barest maintenance, while the lion’s share in the results of a productivity which is increased by the division of labour falls to the undertaker (p. 91, etc.)

Any one who has followed Sismondi thus far, and has noticed among others the proposition that “the rich spend what the labour of others has produced” (p. 81), must expect that Sismondi would end by condemning interest, and declaring it to be an unjust and extortionate profit. This conclusion, however, Sismondi does not draw, but with a sudden swerve wanders into some obscure and vague observations in favour of interest, and finishes by entirely justifying it. First of all he says of the landowner that, by the original labour of cultivating, or even by occupation of an unowned piece of land, he has earned a right to its rent (p. 110). By analogy he ascribes to the owner of capital a right to its interest, as founded on the “original labour” to which the capital owes its existence (p. 111). Both branches of income, which, as income due to ownership, form a contrast to the income due to labour, he finally manages to commend as having precisely the same origin as the income of labour, except that their origin goes back to another point of time. The labourer earns yearly a new right to income by new labour, while the owner has acquired at an earlier period of time a perpetual right in virtue of an original labour which the yearly labour renders more profitable (p. 112).
*9 “Every one,” he concludes, “receives his share in the national income only according to the measure of what he himself or his representative has contributed, or contributes, towards its origin.” How this statement can be said to agree with the former one, where interest appears as something taken from the fruits of the labour of other people, must remain a mystery.

The conclusions that Sismondi did not venture to draw from his own theory were soon very decidedly drawn by others. Sismondi forms the bridge between Adam Smith and Ricardo on the one side, and the Socialism and Communism that succeeded on the other. The two former had, by their theory of value, given occasion for the appearance of the Exploitation theory, but had in no way themselves developed it. Sismondi has, substantially, all but arrived at this theory, but has not given it any social or political application. After him comes the great mass of Socialism and Communism following the old theory of value into all its theoretical and practical consequences, and coming to the conclusion that interest is plunder, and ought therefore to cease.

It would not be interesting from the point of theory were I to excerpt, from the mass of socialist literature produced in this century, all expressions in which the Exploitation theory is suggested or implied. I should only weary the reader with innumerable parallel passages, scarcely varying in words, and exhibiting in substance a dull monotony; passages, moreover, which for the most part only repeat the cardinal propositions of the Exploitation theory, without adding to its proof more than a few commonplaces and appeals to the authority of Ricardo. In fact the majority of socialists have exercised their intellectual powers, not so much in laying the foundations of their own theory, as in bitterly criticising the theories of their opponents.

Out of the mass of writers with socialist tendencies I content myself therefore with naming a few who have become specially important in the development and spread of this theory.

Among those the author of the
Contradictions Economiques, P. J. Proudhon, is pre-eminent for honesty of intention and brilliant dialectic; qualities which rendered him the most efficient apostle of the theory in France. As we are more concerned with substance than with form, I shall not give any detailed example of his style, but content myself with condensing his doctrine into a few sentences. It will be seen at once that, with the exception of a few peculiarities of expression, it differs very little from the general scheme of the theory as given at the beginning of this chapter.

At the outset Proudhon takes it for granted that all value is produced by labour. Thus the labourer has a natural claim to the possession of his whole product. In the wage contract, however, he waives this claim in favour of the owner of capital, and gets in return a wage which is less than the product he gives up. Thereby he is defrauded, for he does not know his natural rights, nor the extent of what he gives up, nor yet the meaning of the contract which the owner concludes with him. And thus the capitalist avails himself of error and surprise, if not cunning and fraud (
erreur et surprise si même on ne doit dire dol et fraud).

So it comes that at the present day the labourer cannot buy his own product. In the market his product costs more than he has received in wage; it costs more by the amount of many profits, which are made possible by the existence of the right of property; and these profits under the most various names, such as profit, interest, rent, hire, tithe, and so on, form just so many tolls (
aubaines) laid upon labour. For example, what twenty million labourers have produced for a year’s wage of twenty milliards of francs is sold for the price (including these profits, and on account of them) of twenty-five milliards. But this is equivalent to saying that the labourers who are compelled to purchase back these same products are forced to pay five for that which they have produced for four; or that in every five days they must go without food for one. Thus interest is an additional tax on labour, a something kept back (
rétenue) from the wages of labour.
*10

Equal to Proudhon in the Purity of his intentions, and far surpassing him in depth of thought and judgment, though certainly behind the impetuous Frenchman in power of statement, is the German Rodbertus.

As regards the history of theory Rodbertus is the weightiest personage we have to mention in this chapter. His scientific importance was long misunderstood, and that, strangely enough, precisely on account of the scientific character of his writings. Not addressing himself, like others, to the people, but restricting himself for the most part to the theoretical investigation of the social problem; moderate and reserved in those practical proposals which, with the great majority, are the chief objects of concern; his reputation for a while lagged behind that of less important writers who accepted his intellectual wares at second hand, and made them acceptable by appealing to popular interests. It is only in recent times that full justIce has been done to this most amiable socialist, and that he has been recognised as what he is—the spiritual father of modern scientific Socialism. Instead of fiery attacks and rhetorical antitheses, by which most socialists are fond of drawing a crowd, Rodbertus has left behind him a profound, honestly thought-out theory of the distribution of goods, which, erroneous as it may be in many points, contains enough that is really valuable to ensure its author an abiding rank among the theorists of political economy.

Reserving meanwhile his formulation of the Exploitation theory to return to it later on in detail, I turn to two of his successors, who differ from each other as widely as they differ from their predecessor Rodbertus. One of these is Ferdinand Lassalle, the most eloquent, but, as regards substance, the least original among the leaders of Socialism. I only mention him here because his brilliant eloquence exerted a great influence on the spread of the Exploitation theory; to its theoretical development he contributed almost nothing. His doctrine is substantially that of his predecessors, and I may therefore pass on without reproducing it in quotations or extracts, and merely refer to some of the most characteristic passages in a note.
*11

While Lassalle is an agitator and nothing else, Karl Marx is a theorist, and indeed, after Rodbertus, the most important theorist of Socialism. His doctrine is certainly founded in many respects on the pioneering work of Rodbertus, but it is built up with some originality and a considerable degree of acute logical power into an organic whole. This theory also we shall consider in detail later on.

If the perfecting of the Exploitation theory has been,
par excellence, the work of socialist theorists, the ideas peculiar to it have nevertheless found admittance into other circles, though in different ways and in different degrees. Many adopted the Exploitation theory in its entirety, and, at the most, only refused to acknowledge its last practical consequences. Guth, for example, takes this position.
*12 He accepts all the essential propositions of the socialists, and accepts them in their entire extent. Labour is to him the sole source of value. Interest arises from the fact that, in virtue of the unfavourable circumstances of competition, the wages of labour are always less than the product of labour. Indeed Guth does not scruple to introduce the harsh expression
Ausbeutung for this fact as
terminus technicus. Finally, however, he draws back from the practical consequences of the doctrine by introducing some saving clauses. “Far be it from us to declare that the
Ausbeutung of the labourer, which is the source of profit, is unjustifiable from a legal point of view. It rests rather on a free alliance between the employer and the labourer, which takes place under circumstances of the market that are, as a rule, unfavourable to the latter.” The sacrifice which the exploited labourer suffers is rather an “advance against replacement.” For the increase of capital is always increasing the productivity of labour; consequently the products of labour grow cheaper, the labourer is able to buy more of these products with his wages, and thus his real wages rise. At the same time the labourer’s sphere of employment is enlarged “on account of greater demand, and his money wage also rises.” Thus the
Ausbeutung is equivalent to an investment of capital, which, in its indirect consequences, yields the labourer a rising percentage of interest.
*13

Dühring also in his theory of interest takes an entirely socialistic position. “The nature of profit is that of an appropriation of the principal part of the return to labour. The increase of the return and the saving of labour are results of the improved and enlarged means of production. But the circumstance that the hindrances and difficulties of production are lessened, and that bare labour, in furnishing itself with tools, renders itself more productive, does not give the
inanimate tool any claim to absorb a fraction more than what is required to reproduce it. The idea of profit therefore is not one that could be evolved from the productivity of labour, or in any system where the economical subject was looked on as an economically self-contained individual. It is a form of appropriation, and is a creation of the peculiar circumstances of distribution.”
*14

A second group of eclectic writers add the ideas of the Exploitation theory to their other views on the interest problem; as, for example, John Stuart Mill and Schäffle.
*15

Finally, there are others who have allowed themselves to be swayed by the impression made on them by socialist writers, and while not acknowledging the entire system of these writers, have still accepted individual points of importance. The most noteworthy feature in this direction seems to me the acceptance, by a considerable number of the German Katheder Socialists, of the old proposition that labour is the sole source of all value, the sole value-producing power.

This proposition, the acceptance or rejection of which has such an enormous weight in determining our judgment of the most important economic phenomena, has had a peculiar fate. It was originally started by the political economy of England, and in the first twenty years or so after the appearance of the
Wealth of Nations it had gained a wide circulation along with Adam Smith’s system. Later on, under the influence of Say, who developed the theory of the three productive factors, nature, labour, and capital, and then under the influence of Hermann and Senior, it came into disrepute with the majority of political economists, even of the English school. For a time the tradition was maintained only by a few socialist writers. Then the Katheder Socialists accepted it from the writings of such men as Proudhon, Rodbertus, and Marx, and it once more gained a firm position in scientific political economy. At the present time it almost looks as if the authority enjoyed by the distinguished leaders of that school was on the eve of starting it for the second time on a triumphant march round the literature of all nations.

Whether this is to be desired or not will be shown by the critical examination of the Exploitation theory to which I now address myself.