Capital and Interest: A Critical History of Economical Theory

On the same lines as Rossi, and contributing nothing new, we meet among French writers Molinari
*70 and Leroy-Beaulieu,
*71 and among Germans Roscher, with his followers Schüz and Max Wirth.
*72

Among Italian economists who follow the same eclectic lines may be mentioned Cossa. Unfortunately this admirable writer, in his monograph on the conception of capital,
*73 has not extended his researches to the question of interest, and we have to go by the very scanty hints that occur in his well-known
Elementi di Economia Politica.*74 From it one would judge Cossa to be an eclectic; yet his way of speaking, as if interpreting the ordinary doctrines, appears to me evidently to betray that he has some critical scruples about them. Thus while looking on interest as compensation for the “productive service” of capital (p. 119), he refuses to recognise this service as a primary factor in production, and only allows it the place of a secondary or derivative instrument.
*75 Again, like the Abstinence theorists, he puts “privations” among the costs of production (p. 65), but in the theory of interest he adopts a tone which seems to imply that this did not express his own conviction, but only that of other people.
*76

The most interesting of those eclectic systems that combine the Abstinence and the Productivity conceptions I consider to be that of Jevons, with which I shall finish consideration of this group.
*77

Jevons begins by giving a very clear statement of the economic function of capital, in which he steers clear of the mysticism of any particular “productive power.” The function of capital he finds simply in this, that it enables us to expend labour in advance. It assists men to surmount the difficulty caused by the time that elapses between the beginning and the end of a work. It makes possible an infinite number of improvements in the production of those goods the manufacture of which necessarily depends upon the lengthening of the interval between the moment when labour is exerted and the moment when the work is finished. All such improvements are limited by the use of capital, and in making these improvements possible lies the great and almost the only use of capital.
*78

This being the foundation, Jevons explains interest as follows. He assumes that every extension of time between employment of labour and enjoyment of result makes it possible to obtain a greater product with the same amount of labour. The difference between the product that would have been obtained in the shorter period, and the greater product that may be obtained when the time is extended, forms the profit of that capital by the investing of which the lengthening of the interval has been made possible. If we call the shorter interval
t, and the longer interval made possible by an additional investment of capital
t +
Dt, and further, the product obtainable by a definite quantity of labour in the shorter interval F
t, then by hypothesis the product obtainable in the longer interval will be correspondingly greater; that is F(
t +
Dt). The difference of these two quantities F(
t +
Dt) – F
t is profit.

To ascertain the rate of interest represented by this amount of profit we must calculate the profit on that amount of capital by which the extension of the time was made possible. If F
t is the invested capital, then this is the amount of produce that could have been obtained on the expiry of
t, without any additional investment. The duration of the additional investment is
Dt. The whole amount of the additional investment is therefore represented in the product = (F
t ·
Dt). Dividing the above increment of produce by the latter amount, the rate of interest appears thus—

  
*79

The more abundantly a country is supplied with capital, the greater is the product F
t obtainable without any new investment of capital; the greater also is the capital on which the profit made by additional extension of time is calculated, and the less is the rate of interest corresponding to that profit. Hence the tendency of interest to fall with advancing prosperity. Since, further, all capitals tend to receive a similar rate of interest, they must all be content to take that lowest rate obtained by the additional capital last invested. Thus the advantage conferred on production by the last addition of capital determines the height of the usual rate of interest in the country.

The resemblance of this line of thought to that of the German Thünen is obvious. It presents the same weak points to criticism. Like Thünen, Jevons too lightly identifies the “surplus in products” with the “surplus in value.” What his statement seems actually to point to is an “increment of produce” due to the assistance of the last increment of capital. But that this surplus in produce indicates at the same time a surplus in value over the capital consumed in the investment, Jevons has nowhere proved. To illustrate by a concrete case. It is easy to understand that a man employing imperfect, but quickly made machinery, may produce in a year’s time 1000 pieces of a particular class of goods, and by employing machinery which is more perfect, but takes longer to make, may produce in the same time 1200 pieces of the goods. But there is nothing here to show that the difference of 200 pieces must be a net surplus in value. Two things might prevent its being so. (1) It might be that the more perfect machinery to which the increment of 200 pieces is due should obtain so high a value on account of this capability that the increment of 200 pieces is absorbed by the amount set aside for depreciation. (2) It is conceivable that the new method of production, which gives these good results, might be employed so extensively that the increased supply of products would press down the value of the present 1200 pieces to the same level as the former 1000 pieces. In neither case would there be any surplus value. Jevons, therefore, has here fallen into the old error of the Productivity theorists, and mechanically translated the surplus in products, which everybody would grant, into a surplus in value.

Of course in his system there are attempts at explanation of this difference of value. But he has not brought these attempts into connection with his Productivity theory; they do not complete that theory, but traverse it.

One of these attempts is where he accepts parts of the Abstinence theory. Jevons quotes Senior with approval; he explains what Senior called “abstinence” as that “temporary sacrifice of enjoyment that is essential to the existence of capital,” or as the capitalist’s “endurance of want”; and he gives formulæ for calculating the amount of the sacrifice of abstinence (p. 253, etc.) He reckons this abstinence—sometimes indeed, writing loosely, he reckons even interest—among the costs of production; and in one place he expressly speaks of the capitalist’s income as “compensation for abstinence and risk” (p. 295).

Jevons has some very interesting remarks on the effect of time on the valuation of needs and satisfactions. He points out that we anticipate future pleasures and pains, the prospect of future pleasure being already felt as anticipated pleasure. But the intensity of the anticipated pleasure is always less than that of the future pleasure itself, and depends on two factors— the intensity of the pleasure anticipated, and the time that intervenes before the emergence of the pleasure (p. 36, etc.) Somewhat strangely Jevons holds that the distinction we thus make in immediate valuation between a present and a future enjoyment is, rightly considered, unjustifiable. It rests only, he says, on an intellectual error, or an error of natural disposition; and, properly speaking, time should have no such influence. All the same, on account of the imperfection of human nature, it is a fact that “a future feeling is always less influential than a present one ” (p. 78).

Now Jevons is quite correct in saying that this power of anticipation must exert a far-reaching influence in economics, for, among other things, all accumulation of capital depends upon it (p. 37). But, unfortunately, he is satisfied with throwing out suggestions of the most general description, and applying them quite fragmentarily.
*80 He fails to develop the idea, or to give it any fruitful application to the theory of income and value. This omission is the more surprising that there are some features in his interest theory which strongly suggested the possibility of making a very good use of the element of time in the explanation of interest. With more emphasis than any one before him, he had asserted the rôle played by time in the function of capital. The next step evidently would have been to inquire whether the difference of time might not also exert an immediate influence on the valuation of the product of capital, of such a kind that the difference of value, on which interest is founded, might be explained by it. Instead of this Jevons, as we have seen, persists in the old method of explaining interest simply by the difference in the quantity of the product.

Still more obvious, probably, would it have been to connect his other conception of “abstinence” with the difference that we make in the estimation of present and future enjoyments, and to account for the sacrifice that lies in the postponement of enjoyment by that lesser valuation of the future utility. But Jevons gives no positive expression to this. Indeed, indirectly, he even excludes it; for, as we have seen, on the one hand he pronounces the lesser valuation to be a simple error caused by the imperfection of our nature, and, on the other hand, he pronounces the abstinence to be a real and true sacrifice, viz. the continuance in the (painful) state of need.

Thus there is no reciprocal fructification between the many interesting and acute ideas that Jevons throws out regarding our subject; and Jevons himself remains an eclectic of genius perhaps, but still an eclectic.

A second group of eclectics add on ideas taken from the Labour theory in one or other of its varieties. First may be mentioned Read,
*81 whose work, appearing as it did at the period when English economic literature on the subject of interest was most confused, shows a peculiarly inconsistent heaping together of opinions. He begins by laying the greatest emphasis on the independent productive power of capital, regarding the existence of which power he has no doubt. “How absurd,” he exclaims on one occasion (p. 83), “must it appear to contend that labour produces all, and is the only source of wealth, as if capital produced nothing, and was not a real and distinct source of wealth also!” And a little farther on he finishes an exposition of what capital does in certain branches of production by saying, quite in the spirit of the Productivity theory, that everything remaining over, after payment of the workers who co-operate in the work, “may fairly be claimed as the produce and reward of capital.”

Later still, however, he sees the matter in an essentially different light. He now puts in the foreground the fact that capital itself comes into existence through labour and saving, and builds on that an explanation of interest, half in the spirit of James Mill’s Labour theory, and half in that of Senior’s Abstinence theory. “The person who has laboured before, and not consumed but saved the produce of his labour, and which produce is now applied to assist another labourer in the work of production, is entitled to his profit or interest (which is the reward for labour that is past, and for saving and preserving the fruits of that labour) as much as the present labourer is entitled to his wages, which is the reward for his more recent labour” (p. 310). That eclectic hesitation of this kind must result in all sorts of contradictions goes without saying. Thus in this latter passage Read himself resolves capital into previous labour, although earlier he had protested against this in the most stubborn way.
*82 Thus too he explains profit to be wage for previous labour, while in a previous passage
*83 he had blamed M’Culloch most severely for effacing the distinction between the conception of profit and that of wage.

With Read may be appropriately classed the German economist Gerstner. The “familiar question” whether capital by itself, and independently of the other two sources of goods, is productive, he answers in the affirmative. He believes that the part played in the production of the total product by the instrument of production we call capital, can be determined with mathematical exactitude, and without more ado looks upon this share as the “rent in the total profit that is due to capital.”
*84 With this frank and concise Productivity theory, however, Gerstner combines certain points of agreement with James Mill’s Labour theory; as when (p. 20) he defines the instruments of production as “a kind of anticipation of labour,” and on that basis calls “the rent of capital that falls to the instruments of production the supplementary wage for previously performed labour” (p. 23). But, like Read, he gives no thought to the question that naturally suggests itself, whether in that case the previously performed labour has not previously received its wages from the capital value of the capital, and why, over and above that, it still gets an eternal contribution in the shape of interest.

To the same division of the eclectics belong the French economists Cauwes
*85 and Joseph Garnier.

I have already pointed out
*86 how Cauwes, with some reservation, shows himself an adherent of Courcelle Seneuil’s Labour theory. But at the same time he puts forward a number of views that have their origin in the Productivity theory. Arguing against the socialists he ascribes to capital an independent “active rôle” in production by the side of labour (i. p. 235). In the “productivity of capital” he finds what determines the current rate of loan interest.
*87 Finally, he derives the existence of “surplus value” from the productivity of capital in a passage, where he bases the explanation of interest on the fact that we are indebted to the productive employment of capital for a “certain surplus value.”
*88

In Joseph Garnier
*89 we find the elements of no less than three different theories eclectically combined. The basis of his views is Say’s Productivity theory, from which he even revived and adopted the feature long ago rejected by criticism; that of reckoning interest among the costs of production.
*90 Then, in imitation of Bastiat, he calls the “privation” which the lender of the capital suffers through the alienation of it, the justification of interest. Finally, he declares that interest invites and compensates the “labour of saving.”
*91

All the eclectics hitherto mentioned combine a number of theories which, if they do not agree in the character of their arguments, at least agree in the practical results at which these arguments arrive. That is to say, they combine theories which are favourable to interest. But, strangely enough, there are some writers who, with one or more theories favourable to interest, combine elements of the theory hostile to it, the Exploitation theory.

Thus J. G. Hoffmann lays down a peculiar theory that, on one side, is favourable to interest, and explains it as the remuneration of certain labours in the public service performed by the capitalists.
*92 But, on the other side, he distinctly rejects the Productivity theory, which was then fashionable, speaking of it as a delusion to think “that in the dead mass of capital or land there dwell forces of acquisition” (p. 588); and in blunt terms declares that in taking interest the capitalist takes to himself the fruit of other people’s labour. “Capital,” he says, “can be employed for the promotion of one’s own labour, or for the promotion of other people’s. In the latter case a hire is due the owner for it, and this hire can only be paid from the fruit of labour. This hire, this interest, has so far the nature of land-rent that, like it, it comes to the receiver from the fruit of other people’s labour” (p. 576).

Still more striking is the combination of opposed opinions in J. S. Mill. It has often been remarked that Mill takes a middle position between two very strongly diverging tendencies of political economy—the so-called Manchester school on the one side, and Socialism on the other. It is easy to understand that such a compromise cannot, as a rule, be favourable to the construction of a complete and organic system—least of all in that sphere where the chief struggle of socialism and capitalism is being fought out, the theory of interest. The fact is that Mill’s theory of interest has got into such a tangle that it would be a serious wrong to this distinguished thinker were we to determine his scientific position in political economy by this very unsuccessful part of his work.

As Mill constructed his system in the main on the economical views of Ricardo, he adopted, among others, the principle that labour is the chief source of all value. But this principle is traversed by the actual existence of interest. Mill consequently modified it in the way of making the value of goods determined by their costs of production, instead of by labour in general. Among these costs of production, besides labour which constitutes “so much the principal element as to be very nearly the whole,” he finds room for profit, and gives it an independent position. Profit with him is the second constant element in costs.
*93

That Mill should have fallen into the old mistake of Malthus, and described a surplus as a sacrifice, is all the more wonderful that in English political economy it had already been criticised, severely and forcibly, both by Torrens and Senior.

But whence comes profit? Instead of one, Mill gives three inconsistent answers to this question.

In these the Productivity theory has the smallest share, and it is only in isolated passages, and with all manner of reservations, that Mill tends in this direction. First, he explains with a certain hesitation that capital is the third independent factor in production. Of course capital itself is the product of labour; its efficiency in production is therefore that of labour in an indirect shape. Nevertheless he finds that it “requires to be specified separately.”
*94 In no less involved terms does he express himself on the kindred question whether capital possesses independent productivity. “We often speak of the ‘productive powers of capital.’ This expression is not literally correct. The only productive powers are those of labour and natural agents; or if any portion of capital can by a stretch of language be said to have a productive power of its own, it is only tools and machinery which, like wind and water, may be said to co-operate with labour. The food of labourers and the materials of production have no productive power.”
*95 Thus tools are really productive, while raw materials are not—a distinction as startling as it is untenable.

Much more decisive is his profession of Senior’s Abstinence theory. It forms, as it were, Mill’s official theory on interest. It appears explicitly and completely in the chapter devoted to profit, and is often appealed to afterwards in the course of the work. “As the wages of the labourer are the remuneration of labour,” says Mill in the fifteenth chapter of the second book of his
Principles, “so the profits of the capitalist are properly, according to Mr. Senior’s well-chosen expression, the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses, and allowing it to be consumed by productive labourers for their uses. For this forbearance he requires a recompense.” And as distinctly in another place: “In our analysis of the requisites of production we found that there is another necessary element in it besides labour. There is also capital; and this being the result of abstinence, the produce or its value must be sufficient to remunerate not only all the labour required, but the abstinence of all the persons by whom the remuneration of the different classes of labourers was advanced. The return for abstinence is profit.”
*96

But besides this, in the same chapter, under the heading of profit, Mill brings forward yet a third theory: “The cause of profit,” he says in the fifth paragraph, “is that labour produces more than is required for its support. The reason why agricultural capital yields a profit is because human beings can grow more food than is necessary to feed them while it is being grown, including the time occupied in constructing the tools, and making all other needful preparations; from which it is a consequence that if a capitalist undertakes to feed the labourers on condition of receiving the produce, he has some of it remaining for himself after replacing his advances. To vary the form of the theorem: the reason why capital yields a profit is because food, clothing, materials, and tools last longer than the time which was required to produce them; so that if a capitalist supplies a party of labourers with these things, on condition of receiving all they produce, they will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining to work for the capitalist.” Here the cause of profit is found, not in a productive power of capital, nor in the necessity of compensating the capitalist’s abstinence as a special sacrifice, but simply in this, that “labour produces more than is required for its support”; that “the workers have a portion of their time remaining to work for the capitalist”: in a word, profit is explained according to the Exploitation theory, as an appropriation by the capitalist of the surplus value created by labour.

A similar middle course, on the boundary line between Capitalism and Socialism, is taken by the German Katheder Socialists. The result in this case also is not seldom an eclecticism, but it is an eclecticism which ends more in agreement with the Exploitation theory than was the case with Mill. I shall only mention here the Katheder Socialist whom we have already met repeatedly in the course of this work, Schäffle.

In those writings of Schäffle where he treats of our subject three clear and distinct currents of thought may be traced. In the first Schäffle follows Hermann’s Use theory, which he weakens as a theory by the subjective colouring he gives to the conception of Use—so bringing it nearer to the second of his theories. The first current predominates in the
Gesellschaftliche System der menschlichen Wirthschaft, and has left evident traces even in the
Bau und Leben.*97 The second current takes the direction of making interest a kind of professional income, an income which is drawn by the capitalist for certain services he renders. This conception, which had already appeared in the
Gesellschaftliche System, is explicitly confirmed in the
Bau und Leben.*98 But, finally, by the side of this in the
Bau und Leben there appear numerous approximations to the socialist Exploitation theory. The chief of these is the resolution of all the costs of production into labour. While in the
Gesellschaftliche System*99 Schäffle had still recognised the uses of wealth as an independent and elementary factor in cost besides labour, he now says: “Costs have two constituents: expenditure of personal goods through the putting forth of labour, and expenditure of capital. But the latter costs also can be traced back to labour costs, for the productive expenditure of real goods may be reduced to a sum of labours expended at earlier periods; all costs, therefore, may be considered as costs of labour.”
*100

If thus the labour which the production of goods costs is the only economic sacrifice that requires to be considered, it is but a step farther to claim the whole result of production for those who have made this sacrifice. Thus Schäffle repeatedly gives us to understand (
e.g. iii. p. 313, etc.) that he considers the ideal economic distribution of goods to be the division to the members of the community according to work done. In the present day of course the realisation of this ideal is still prevented by all kinds of hindrances; among others, by the fact that wealth as capital serves as an instrument of appropriation—partly an illegal and immoral appropriation, partly a legal and moral appropriation of the product of labour.
*101 This appropriation of surplus value by the capitalists Schäffle does not condemn unconditionally; he would let it continue as a temporary and artificial arrangement so long as we are not able to replace the “economic service of private capital by a more perfect public organisation, established by law, and less ‘greedy of surplus value.’ ”
*102

But notwithstanding this opportunist toleration, Schäffle often brings forward in blunt terms the dogma of the Exploitation theory, that interest is a robbery of the product of other people’s labour. Thus, in immediate continuation of these words, he says: “All the same the speculative, individualistic organisation of business is not the
non plus ultra of the history of economics. It serves a social purpose only indirectly. It is immediately directed, not to the highest net utility of the whole, but to the greatest acquisition of the means of production by private owners, and towards procuring for the families of the capitalists the highest life of enjoyment. The possession of the means of production, movable and immovable, is made use of to appropriate from the produce of the national labour as much as possible. Proudhon has already put it in full critical evidence that capital forestalls labour in a hundred different forms. The only share of which the wage labourer is assured is the share that an upright beast of burden, endowed with reason, and therefore incapable of being reduced to simple animal wants, finds necessary to sustain him in the condition of life in which he has been placed by circumstances that are historical—this condition itself being necessary to allow of the capitalist’s competition.”