Capital and Interest: A Critical History of Economical Theory

When we turn from Germany to England our attention is first claimed by Ricardo.

In the case of this distinguished thinker we find the same phenomenon we have already noticed in the case of Adam Smith, that, without putting forward any theory of his own, he has had a deep influence on the development of the interest theory. I must classify him among the Colourless writers, for although he takes up the subject of interest at some length, he treats it only as a self-explanatory, or almost self-explanatory phenomenon, and passes over its origin in a few cursory remarks, to take up at greater length a number of concrete questions of detail. And although he treats these questions most thoroughly and intelligently, it is in such a way that their investigation throws no light on the primary theoretical question. But, exactly as in the case of Adam Smith, his doctrine contains propositions on which distinct theories could have been built, if only they had been worked out to all their conclusions. In fact, later on, distinct theories were built on them, and not the least part of their support consists in the authority of Ricardo, to whom the advocates of these theories were fond of appealing as their spiritual father.

The passages in which Ricardo makes reference to interest are very numerous. Apart from scattered observations, they are to be found principally in chapters i, vi, vii, and xxi of his
Principles of Political Economy and Taxation.*31 The contents of these passages, so far as they refer to our subject, may best be ascertained if we divide them into three groups. In the first group I shall place Ricardo’s direct observations on the origin of interest; in the second, his views on the causes that determine its amount; in the third, his views on the connection of interest with the value of goods. It should be premised, however, that Ricardo, like the majority of English writers, makes no distinction between interest on capital and undertaker’s profit, but groups both under the word Profit.

(1) The first group is very thinly represented. It contains a few passing remarks to the effect that there must be interest, because otherwise capitalists would have no inducement to accumulate capital.
*32 These remarks have an evident connection with the analogous expressions of Adam Smith, with which we are familiar, and come under the same criticism. There is some warrant for seeing in them the primary germs from which the Abstinence theory has since been developed, but in themselves they do not represent a theory.

The same remark is true of another observation. In chap. i. § 5, p. 25, he says that, where production demands an employment of capital for a longer period, the value of the goods produced must be greater than the value of goods which have required exactly the same amount of labour, but where the employment of capital has extended over a shorter period; and concludes: “The difference in value is only a just compensation for the time that the profits were withheld.” One might possibly find in these words a still more direct agreement with the Abstinence theory, but in themselves they do not contain any finished theory.

(2) On the amount or rate of profit Ricardo’s views (principally contained in chapters vi. and xxi.) are very interesting both as regards originality and self-consistency. As they arise out of his theory of land-rent, it will be necessary to give some account of that theory.

According to Ricardo, on the first settling of a country the most fruitful lands are taken into cultivation. So long as there is a superfluity of land of the “first quality” no rent is paid to the owner of the ground, and the whole revenue falls to the cultivators as wages of labour and profit of capital.

Later on, as population increases, the increasing demand for land products demands extended cultivation. This extended cultivation is of two kinds: sometimes the lands of inferior quality, despised up till now, are cultivated; sometimes the lands of first quality already in cultivation are cultivated with more intensiveness—farmed at a greater expenditure of capital and labour. In both cases—assuming that the state of agricultural
technique remains unchanged—the increase in land products is only obtained at increased cost; and the last employed capital and labour are consequently less productiveless productive, that is to say, over the whole field, as the more favourable opportunities of cultivation are successively exhausted, and the less favourable must be resorted to.

The capitals thus employed in circumstances unequally favourable obtain at first unequal results. But these unequal results cannot permanently remain attached to particular capitals. The competition of capitalists will soon bring the rate of profit on all capitals engaged in agriculture to the same level. The standard, indeed, is given by the profit obtainable in the least remunerative employment of capital. All surplus return which the more favourably situated capitals yield in virtue of the better quality of the co-operating powers of the soil, falls into the lap of the landowners as rent.

The extent of profit and wage taken together is thus always determined by the return to the least productive employment of capital; for this return pays no rent, and is divided entirely as profit on capital and wage of labour.

Now of these two factors one, the wage of labour, follows a hard and fast law. Wages are necessarily at all times equal to the amount of the necessary cost of subsistence of the worker. They are high if the value of the means of subsistence be high; low if the value of the means of subsistence be low. As then the capitalist receives what remains over, profit finds the line that determines its height in the height of wages at the time. In this connection between interest and wage Ricardo finds the true law of interest. He brings it forward with emphasis in a great many passages, and opposes it to the older view, particularly to that represented by Adam Smith, that the extent of profit is determined by the amount and competition of capitals.

In virtue of this law, Ricardo now goes on to argue, profit must tend to sink steadily with increasing economic cultivation. For in order to obtain means of subsistence for the increasing population, man must resort to conditions of cultivation that are always more and more unfavourable, and the decreasing product, after deduction of the wages of labour, leaves always less and less for profit. True, although the amount of the product diminishes, its value does not fall. For, according to Ricardo’s well-known law, the value of products is at all times related by the quantity of labour employed in their production. Therefore if, at a later point of time, the labour of ten men brings forward only 150 quarters of corn, while at an earlier period it had brought forward 180, the 150 quarters will now have exactly the same value as the 180 before had, because in both is embodied the same quantity of labour—that is, the labour of ten men over a year. But now of course the value of the single quarter of wheat will rise. With it necessarily rises the amount of value which the worker requires for his subsistence, and, as a further result, his wages must also rise. But if, for the same amount of value which the lessened quantity of product represents, a higher wage must be paid to labour, there naturally remains over a less amount for profit.

Were man finally to extend cultivation to lands so unfruitful that the product obtainable was entirely required for the labourers’ subsistence, profit would fall to zero. That is, however, impossible, because the expectation of profit is the one motive to the accumulation of capital, and this motive becomes weakened with the gradual lowering of profit; so that, before zero is reached, the further accumulation of capital, and with it the advance of wealth and of population, would come to a standstill.

The competition of capitalists, on which Adam Smith lays so much weight, can, according to Ricardo, only temporarily lower the profit of capital, when (in accordance with the well-known wage fund theory) the increased quantity of capital at first raises wages. But very soon the labouring population increases in proportion to the increased demand for labour, and wages tend to sink to the former level while profit tends to rise. The only thing that will finally reduce profit is when the means of support necessary for the increased population can be obtained only by the cultivation of less productive lands and at increased cost; and when, in consequence, the finished product leaves a smaller surplus after paying the necessary wages of labour. This will not be in consequence of competition, but in consequence of the necessity of having recourse to less fruitful production. Only from time to time does the tendency of profit to sink with progressive economical development experience a check through improvements in agricultural
technique, which allow of equal quantities of product being obtained with less labour than before.

If we take the substance of this theory we find that Ricardo explains the rate of profit from the rate of wages; the rate of wages is the cause, the rate of profit the effect.
*33

Criticism may approach this theory from different sides. It has, it need scarcely be said, no validity whatever for those who, like Pierstorff, hold Ricardo’s rent theory to be fundamentally untrue. Further, that portion of the argument which rests on the wage fund theory will be exposed to all the objections raised to that theory. I shall put on one side, however, all those objections which relate to assumptions outside the interest theory, and direct my criticism simply to the theory itself.

I ask, therefore, Assuming the correctness of the rent theory and of the wage fund theory, is the rate of profit, or, for that matter, the existence of profit, explained by Ricardo’s theory?

The answer will be in the negative, and that because Ricardo has mistaken what are simply
accompanying circumstances of the phenomenon for its
cause. The matter stands thus.

It is quite right to say that wage, profit, and return of production do, after deduction of possible land-rent, stand in an iron connection. It is quite right to say that the profit of capital can never amount to more, and never to less, than the difference between return and wage. But it is false to interpret this connection as implying that the amount of the return and the amount of the wage are the determining, and the amount of profit simply the determined. Just as plausibly as Ricardo has explained the rate of profit as a result of the rate of wages might he have explained the rate of wages as a result of the rate of profit. He has not done so because he rightly recognised that the rate of wages rests on independent grounds, and grounds peculiar to the factor, labour. But what Ricardo recognised in the case of wages he has overlooked in the case of profit. Profit, too, has grounds that determine its amount arising out of circumstances peculiar to itself. Capital does not simply take what remains over; it knows how to exact its own proper share. Now an efficient explanation of profit would have to bring into prominence just those considerations that appear on the side of the factor “capital,” and prevent the absorption of profit by wages just as effectually as,
e.g. the labourer’s necessity subsistence prevents the absorption of wages by interest. But Ricardo entirely fails to give this prominence to the specific grounds that determine the rate of interest.

Only once does he notice the existence of any such grounds, when he remarks that profit can never sink to zero, because, if it did so, the motive for the accumulation of capital, and with it the accumulation of capital itself, would come to an end.
*34 But this thought, which, logically expanded, might have afforded material for a really original theory of interest, he does not follow up. He continues to look for the circumstances that determine the rate of profit exclusively in the field of the competing factors; and he assiduously points out, as its decisive causes, sometimes the rate of wages, sometimes the degree of productivity of the most unproductive labour, sometimes even—in a way that breathes of the physiocrat, but still is in harmony with the whole doctrine just expounded—the natural fruitfulness of the soil.
*35

This criticism of Ricardo appears of course to be itself exposed to a very obvious objection. If, as we have assumed with Ricardo in the whole course of our argument, wage claims for itself an absolutely determined quantity,—the amount of the costs of subsistence, it appears as if, at the same time, the amount which remains over for profit is so strictly determined that there is no room for the working of any independent motives on the side of profit. Say,
e.g. that the return to production ready for division is 100 quarters. If the workers occupied in producing these 100 quarters require 80 quarters, the share of capital is certainly fixed at 20 quarters, and could not be altered by any motive acting from the side of capital.

This objection, which is conceivable, will not, however, stand examination. For, to keep entirely to Ricardo’s line of thought, the return which the least productive labour yields is not fixed but elastic, and is capable of being affected by any peremptory claims of capital and of labour. Just as effectually as the claims of the worker may and do prevent cultivation being extended to a point at which labour does not obtain even its own costs of subsistence, may the claims of capital prevent an excessive extension of the limits of cultivation, and actually do prevent it. For instance, suppose that these motives to which interest, generally speaking, owes its origin, and which Ricardo unfortunately does so little to explain, demand for a capital of definite amount a profit of 30 quarters, and that the workers employed by this capital need for their subsistence in all 80 quarters; then cultivation will require to call a halt at that point where the labour of so many men as can live on 80 quarters produces 110 quarters. Were the “motives of accumulation” to demand only a profit of 10 quarters, then cultivation could be extended till such time as the least productive labour would produce 90 quarters. But the cultivation of land less productive than this will always be economically impossible, and at the same time the limit to the further increase of population will be for the moment reached.
*36

That the claims of capital may exert this limiting influence Ricardo himself allows, as we have seen, in the very extreme case where profit threatens to disappear altogether. But naturally those circumstances to which capital owes its existence in general put forth their energies not only in the very extreme cases, but permanently. They do not simply prevent the entire disappearance of profit; they keep it constantly in competition with the other factors, and help to determine its amount. So that profit no less than wages may be said to rest on independent determining grounds. To have entirely ignored these grounds is the decisive blunder of Ricardo.

The peculiar nature of this blunder explains also quite naturally the phenomenon that otherwise would be very striking; that the comprehensive investigations, which so distinguished a thinker as Ricardo devoted to the question of the rate of profit, remain so entirely unfruitful as regards the principal question, the causes of profit.

(3) Finally, a third group of observations relating to profit is interwoven with Ricardo’s views on the value of goods. This is a subject which generally gives its writers opportunity to express themselves directly or indirectly as to the source whence profit comes. Does the capitalist’s claim of profit make the exchange value of goods higher than it would otherwise have been, or not? If it does, profit is paid out of a special “surplus value,” without taking anything from those who own the co-operating productive powers; in particular, without taking anything from the wage-worker. If not, it is got at the expense of the other participants. On this Ricardo also has expressed himself, and his opinion is that an addition is made to the value of goods by the employment of capital; still he expresses himself in a somewhat cautious way.

He distinguishes between two different epochs of history. In the first, the primitive epoch—when there is very little capital and no private property in land—the exchange value of goods is exclusively determined by the quantity of labour expended on them.
*37 In the second epoch, to which modern economy belongs, there emerges a modification through the employment of capital. The undertaker-capitalists ask, for the capital employed by them in production, the usual rate of profit, calculated according to the amount of the capital and the length of time during which it is employed. But the amount of capital and the duration of its employment are different in the different branches of production, and the claims of profit differ with them. One branch requires more circulating capital, which quickly reproduces itself in the value of the product; another requires more fixed capital, and this again of greater or less durability,—the rapidity of the reproduction in the value of the products being in inverse ratio to the durability. Now the various claims of profit are equalised by the fact that those goods the production of which has required a comparatively greater share in capital, obtain a relatively higher exchange value.
*38

In this passage one can see that Ricardo decidedly inclines to the view that interest arises out of a special surplus value. But the impression we get that Ricardo held this decided opinion is not a little weakened by certain other passages; partly by the numerous passages where Ricardo brings profit and wages into connection, and makes the increase of one factor come out of the loss or curtailment of the other; partly by the previous pure “labour principle” of the primitive epoch of industry, which is inconsistent with that view. It must be said too that he is much more interested and cordial in his exposition of this latter principle than in that of its capitalist modification; a circumstance which cannot but arouse the suspicion that he considered the original state of things the natural one. In fact, the later socialist writers have represented the “labour principle” as Ricardo’s real opinion, and the capitalist modification which he conceded as simply an illogical conclusion.
*39

Thus also on the question whence profit comes we see Ricardo take an undecided position; not hesitating so markedly as his master, Adam Smith, but undecided enough to warrant his retention in the ranks of the Colourless theorists.

Ricardo’s great contemporary, Malthus, has not expressed himself much more distinctly than Ricardo on the subject of interest. Yet there are certain expressions in his writings which allow us to separate him from the entirely Colourless writers, and class him among the Productivity theorists.

The epithet colourless applies, however, with peculiar appropriateness to Torrens.
*40 This diffuse and short-sighted writer brings forward his views on the subject of interest for the most part in the course of an argument against the theory which Malthus had promulgated shortly before, that profit forms a constituent portion of the costs of production, and therefore of the natural price of goods. In opposition to this Torrens, with perfect correctness, but at intolerable length, points out that profit represents a surplus over costs, not a part of costs. He himself, however, has nothing better to put in place of Malthus’s theory.

He makes a distinction between Market price and Natural price. Natural price is “that which we must give in order to obtain the article we want from the great warehouse of nature, and is the same thing as the cost of production” (p. 50); by which expression Torrens means “the amount of capital, or the quantity of accumulated labour expended in production” (p. 34). Market price and natural price in no way tend, as is usually affirmed, to a common level. For profit never makes any part of the expense of production, and is not therefore an element of natural price. But “market price must always include the customary rate of profit for the time being, otherwise industry would be suspended. Hence market price, instead of equalising itself with natural price, will exceed it by the customary rate of profit.”

Torrens has thus eliminated profit from the determinants of natural price, and put it instead among the determinants of market price. This change, it is easy to see, is purely formal. It rests simply on the use of a different terminology. The economists whom he attacked had meant that profit is a determinant of the height of the average price of goods, and had called this average or permanent price “natural price.” Torrens means exactly the same thing; only he calls the permanent price the “market price,” and reserves the name of natural price for what is not a price at all, namely, the capital expended in production.

As to what really is the chief question—Why the actual prices of goods, whether they are called natural or market prices, leave over a profit to capital?—Torrens has almost nothing to say. He evidently considers profit to be a thing so self-explanatory that any detailed explanation of it is quite unnecessary. He contents himself with a few unsatisfactory formulas,—formulas, moreover, which contradict each other, as they point to lines of thought that are entirely distinct. One of these formulas is the often recurring observation that the capitalist must make a profit, otherwise he would have no inducement to accumulate capital, or lay it out in any productive undertaking (pp. 53, 392). Another, pointing in quite a different direction, is that profit is a “new creation” produced by the employment of capital (pp. 51, 54). But
how it is created we are not told; he gives us a formula, not a theory.

But no member of the English school has been so unhappy in his treatment of the subject, and has done such ill service to the theory of interest, as M’Culloch.
*41 He comes near quite a number of diverging opinions, but only gets deep enough in them to fall into flagrant self-contradiction; he does not expand any one of them sufficiently to form a theory that even approaches consistency. We find only one exception to this; but the theory which is there advanced is the most absurd that could possibly occur to any thinker. Even this, however, in later editions of his work he abandons, although not without allowing traces of it to remain and contrast equally with facts and with the context. Thus M’Culloch’s utterances on the subject are one great collection of incompleteness, irrationality, and inconsistency.

Since, however, M’Culloch’s views have obtained extensive circulation, and command a certain respect, I cannot shirk the somewhat thankless task of justifying these strictures.

M’Culloch starts with the proposition that labour is the only source of wealth. The value of goods is determined by the quantity of labour required for their production. This he considers true not only of primitive conditions, but also of modern economic life, where capital, as well as direct labour, is employed in production; for capital itself is nothing else than the product of previous labour. It is only necessity to add to the labour which is embedded in the capital the labour immediately expended, and the sum of these determines the value of all products.
*42 Consequently it is labour alone, even in modern economic life, which constitutes the entire cost of production.
*43

But only a few lines before this definition of costs as “identical with the quantity of labour,” M’Culloch has included profit, as well as labour, among the costs;
*44 and almost immediately after he has said that the quantity of labour alone determines value, he shows how a rise in the wages of labour, associated with a fall in profit, alters the exchange value of goods,—raising the value of those goods in the production of which capital of less than average durability is employed, and reducing the value of those goods in the production of which capital of more than average durability is employed.
*45

And, again, M’Culloch has no scruple in defining profit as an “excess of produce,” as a “surplus,” as “the portion of the produce of industry accruing to the capitalists after all the produce expended by them is fully replaced,”—in short, as a surplus pure and simple, although not long before he had pronounced it a constituent part of the costs. Here are almost as many contradictions as propositions!

Nevertheless M’Culloch is at great pains, at least in the first edition of his
Principles, to appear logical. To this end he avails himself of a theory by which he traces profit to labour. Profits are, as he emphasises with italics on p. 291 of his first edition, “only another name for the wages of accumulated labour.” By this explanation he contrives to bring all those cases where profit exerts an influence on value under the law he has just enunciated, that the value of all goods is determined by labour. We shall see how he carries this out.

“Suppose,” he says, “to illustrate the principle, that a cask of new wine, which cost £50, is put into a cellar, and that at the end of twelve month it is worth £55, the question is, Whether ought the £5 of additional value, given to the wine, to be considered as a compensation for the
time the £50 worth of capital has been locked up, or ought it to be considered as the value of additional labour actually laid out on the wine?” M’Culloch concludes for the latter view, “for this most satisfactory and conclusive reason,” that the additional value only takes place in the case of an immature wine, “on which, therefore,
a change or effect is to be produced,” and not in the case of a wine which has already arrived at maturity. This seems to him “to prove incontrovertibly that the additional value acquired by the wine during the period it has been kept in the cellars is not a compensation or return for time, but for the effect or change that has been produced on it. Time cannot of itself produce any effect; it merely affords space for really efficient causes to operate, and it is therefore clear it can have nothing to do with value.”
*46

In these words M’Culloch, with almost startling naïvety, concludes his demonstration. He seems to have no suspicion that, between what he wished to show and what he has shown, there is a very great difference. What he had to show was that the additional value was caused by an addition of labour, of human activity; what he has shown at most is, that the additional value was not given by time, but by some kind of “change” in the wine. But that this change itself was effected by an addition of labour is not only not shown, but by hypothesis could not be shown; for during the whole intervening time the wine lay untouched in the cellar.

He himself appears, however, to be sensible, to some small extent, of the weakness of this first demonstration; for, “still better to illustrate this proposition,” he adds example to example, although it must be said that, the more clear and exact these are meant to be as demonstrations of his thesis, the more obscure and impossible they actually are.

In the next illustration he supposes the case of an individual who has two capitals, “one consisting of £1000 worth of new wine, and the other consisting of £900 worth of leather, and £100 worth of money. Suppose now that the wine is put into a cellar, and that the £100 is paid to a shoemaker, who is employed to convert the leather into shoes. At the end of a year this capitalist will have two equivalent values—perhaps £1100 worth of wine and £1100 worth of shoes.” Therefore, concludes M’Culloch, the two cases are parallel, and “both shoes and wine are the result of equal quantities of labour.”
*47

Without doubt! But does this show what M’Culloch meant to show—that the additional value of the wine was the result of human labour expended on it? Not in the least. The two cases are parallel; but they are parallel also in this, that each of them includes an increment in value of £100, which is not explained by M’Culloch. The leather was worth £900. The £100 of money were exchanged for labour of equal value; and this labour, one would think, added £100 in value to the raw material. Therefore the total product, the shoes, should be worth £1000. But they are worth £1100. Whence comes the surplus value? Surely not from the labour of the shoemaker! For in that case the shoemaker, who was paid £100 in wages, would have added to the leather a surplus value of £200, and the capitalist, in this branch of his business, would have obtained a profit of fully 100 per cent, which is contrary to hypothesis. Whence then comes the surplus value? M’Culloch gives no explanation in the case of the leather, and still less, therefore, in the case of the wine, which was to have been explained by analogy with the leather.

But M’Culloch is indefatigable. “The case of timber,” he says, “affords a still better example. Let us suppose that a tree which is now worth £25 or £30 was planted a hundred years ago at an expense of one shilling; it may be easily shown that the present value of the tree is owing entirely to the quantity of labour laid out on it. A tree is at once a piece of timber and a machine for manufacturing timber; and though the original cost of this machine be but small, yet, as it is not liable to waste or decay, the capital vested in it will, at the end of a distant period, have operated a considerable effect, or, in other words, will have produced a considerable value. If we suppose that a machine, which cost only one shilling, had been invented a hundred years since; that this machine was indestructible, and consequently required no repairs; and that it had all the while been employed in the weaving of a quantity of yarn, gratuitously produced by nature, which was only now finished, this cloth might now be worth £25 or £30. But, whatever value it may be possessed of, it is evident (!) it must have derived it entirely from the continued agency of the machine, or, in other words, from the quantity of labour expended on its production” (p. 317).

That is to say, a tree has cost a couple of hours’ labour, worth a single shilling. At the present moment the same tree, without other human labour being expended on it in the interval, is worth not one shilling, but £25 or £30. And M’Culloch does not bring this forward as disproving, but as proving the proposition that the value of goods invariably adapts itself to the quantity of labour which their production has cost! Any further commentary is superfluous.
*48

In later editions of his
Principles M’Culloch has dropped all these impossible illustrations of the proposition that profit is wage of labour. In the corresponding passage in the fifth edition (pp. 292-294) he mentions the illustration of the wine, which evidently causes him a certain amount of perplexity; but he contents himself with the negative statement that the surplus value is not produced by the activity of natural powers, as natural powers work gratuitously. The only positive statement he makes is, that the increment of value is a “result of the profit” which accrues to the capital required for carrying on the process; but he does not explain the nature of that profit. On p. 277, however, the proposition that profit is only another name for the “wages of anterior labour,” remains unaltered.

I may conclude this criticism by quoting an expression of M’Culloch, which will illustrate his untrustworthiness in matters of theory.

To add to the chaos of his incoherent opinions, in one place he takes Adam Smith’s old self-interest argument,
*49 and as if not content with the confusion prevailing in his theory of interest, and anxious to throw his tolerably clear theory of wages into the same confusion, he pronounces the labourer himself to be a capital, a machine, and calls his wages a profit of capital in addition to a sum for wear and tear of the “machine called man!”
*50

Passing by another set of writers like Whately, Jones, and Chalmers, who contribute nothing of great consequence to our subject, we come to M’Leod.
*51

This eccentric writer is remarkable for the naïvety with which he treats the interest problem, not only in his earlier work of 1858, but in his later work of 1872, although in the fourteen years that intervened the problem had very greatly developed. For M’Leod there is absolutely no problem. Profit is simply a self-explanatory and necessary fact. The price of commodities sold, the hire of concrete capital lent, the interest on sums of money borrowed, “must,” over and above costs, deterioration, and premium on risk, contain the “necessary” profit.
*52 Why they should do so is not once asked, even in the most superficial way.

If on one occasion M’Leod describes the origin of loan interest, the immediate circumstances of the illustration in which he does so are selected in such a way that the obtaining of an “increase” from the capital lent admits of being represented as a natural self-intelligible thing, requiring no explanation. He makes the capitalist lend seed and sheep,
*53 but even where the capital lent is one that does not consist of naturally fruitful objects, he considers the emergence of an increase as equally self-explanatory. That any one should think otherwise—that any one should even doubt the justifiability of profit, he appears, in spite of the wide dissemination of socialistic ideas in his time, to have no suspicion. To him it is perfectly clear that “when a man employs his own capital in trade he is entitled to retain for his own use all the profit resulting from such operations, whether these profits be 20 per cent, 100 per cent, or 1000 per cent; and if any one of superior powers of invention were to employ his capital in producing a machine, he might realise immense profits and accumulate a splendid fortune, and no one in the ordinary possession of their senses would grudge it him.”
*54

At the same time M’Leod plays the severe critic on other interest theories. He rejects the doctrine that profit is a constituent of the costs of production.
*55 He controverts Ricardo’s statement that the height of profit is limited by the height of wages.
*56 He condemns alike M’Culloch’s strange Labour theory and Senior’s acute Abstinence theory.
*57 And yet these critical attacks never seem to have suggested to him one single view which might be put in place of the opinions he rejects.

This appears to me due to two peculiarities of his doctrine. The first of these lies in the extraordinary vagueness of his conception of capital. Capital, in its original and primary sense, he takes to mean “circulating power.” It is only in a “secondary and metaphorical sense” that it is applied to commodities. But when so applied it embraces things so incongruous as tools and commodities, skill, capacities, education, land, and good character,
*58—a collection which, we must admit, makes it difficult to class the incomes that flow from all those different kinds of things under one category, and explain them by one definite theory. The second of these peculiarities is the exaggerated opinion he entertains of the theoretical value of the formula of supply and demand to explain the various phenomena of price. When he has succeeded in tracing back any phenomenon of value whatever to the relation of supply and demand,—or, as he likes to express it in his own terminology, to the relation between “the intensity of the service performed and the power of the buyer over the seller,”—he thinks that he has done enough. And thus, perhaps, he really thought it sufficient to say of interest on capital: “All value arises exclusively from demand, and all profit originates in the value of a commodity exceeding its costs of production.”
*59

While in Germany and England there were a good many prominent writers who, for some considerable time, took an undecided attitude on the interest problem, we have only a few Colourless writers to record in the literature of France. The principal reason of this difference is that in France J. B. Say, who was one of the first to take up Adam Smith’s doctrine, had already propounded a definite theory of interest, and popularised it simultaneously with Adam Smith’s doctrine; while in Germany and England Adam Smith himself, and after him Ricardo, remained for a long time at the head of the general development of economic literature; and both of these, as we know, neglected the interest problem.

From French literature of that period there are, then, only three names which need be mentioned, two of them before the date of J. B. Say—Germain Garnier, Canard, and Droz.

Garnier,
*60 still half entangled in the doctrine of the physiocrats, like them asserts the earth to be the only source of all wealth, and labour the instrument by which men obtain it from this source (p. 9). Capital he identifies with the “advances” that the undertaker must make, and profit he defines as the indemnification which he receives for these advances (p. 35). In one place he designates it with more significance as the “indemnification for a privation and a risk.” He nowhere, however, goes any deeper into the matter.

To indicate Canard’s
*61 derivation of interest I must shortly refer to the general principles of his doctrine.

In the labour of man Canard sees the means to his support and development. One portion of human labour must be spent simply in the support of man; that Canard calls “necessary labour.” But happily the whole labour of man is not necessary for this; the remainder, “superfluous labour,” may be employed in the production of goods which go beyond the immediately necessary, and create for their producer a claim to get, by way of exchange, the command of just as much labour as the production of these goods has cost. Labour is thus the source of all exchange value; goods which have value in exchange are nothing else than accumulation of superfluous labour.

It is the possibility of accumulating superfluous labour that humanity has to thank for all economic progress. Through such accumulation lands are made fruitful, machines built, and, generally speaking, all the thousand and one means obtained which serve to increase the product of human labour.

Now the accumulation of superfluous labour is also the source of all rents. It may yield these rents by being employed in any of three ways. First, in manuring and improving the land; the net return arising from this is land-rent (
rente foncière). Second, in the acquisition of personal skill, learning of an art or a handicraft; the skilled labour (
travail appris) which is the result of such an expenditure must, beyond the wage of “natural” labour, yield a rent to that fund which had to be devoted to the acquisition of the knowledge. Finally, all the products of labour that proceed from these first two “sources of rent” must be divided out, so as to be employed by individuals in the satisfaction of their wants. This requires that a third class of owners should invest “superfluous labour” in the institutions of commerce. This accumulated labour also must bear a rent, the
rente mobilière, commonly called money interest.

But as to why labour accumulated in these three forms should bear rent we are told almost nothing by Canard. Land-rent he accepts as a natural fact not requiring explanation.
*62 In the same way he treats the
rente industrièlle, contenting himself with saying that “skilled labour” must produce the rent of the capital that has been devoted to the acquisition of knowledge (p. 10). And for the
rente mobilière, our interest on capital, he lays down a proposition which explains nothing, and embellishes it with details evidently intended to accompany an explanation. “Commerce, accordingly, like the other two sources of rent, presupposes an accumulation of superfluous labour which must,
in consequence, bear a rent” (
qui doit par conséquent produire une rente), p. 12. But there is nothing whatever to justify this
par conséquent, unless Canard, perhaps, considers that the bare fact of labour having been accumulated is sufficient ground for its obtaining a rent; and so far he has not said so. He has certainly said that all rents are traceable to accumulated labour, but he has not said that all accumulated labour must bear a rent—a proposition which, in any case, is quite different from the other, and would have been a matter for proof as well as assertion.

If we take an analysis which follows later (p. 13), to the effect that all three kinds of rent must stand equal in importance, then undoubtedly we can make out a certain foundation for interest, although Canard has not put it into words; a foundation which would agree in essence with Turgot’s Fructification theory. If it is a natural fact that capital invested in land bears rent, then all capitals otherwise invested must bear rent, or else everybody would invest in land. But if this be Canard’s explanation—and it may at least be read between the lines—we have already, when speaking of Turgot, shown its insufficiency as the sole explanation.

Droz, who writes some thirty years later (
Economie Politique, Paris, 1829), has to choose between the English view, according to which labour is the sole productive power, and the theory of Say, in which capital represents an independent productive power. In each of these views, however, he finds something to object to, and accepts neither of them, but puts forward a third view, in which saving (
l’épargne) takes the place of capital as an elementary productive power. He thus recognises three productive powers: the Labour of Nature, the Labour of Man, and the Saving which accumulates capitals (p. 69, etc.)

If Droz had followed this line of thought, belonging primary to the theory of production, into the sphere of distribution, and made use of it to examine accurately the nature of income, he would have arrived at a distinctive theory of interest. But he did not go far enough for that. In his distribution theory he devotes almost all his attention to contract or loan interest, where there is not much to explain, and in a few words disposes of natural interest, where there is everything to explain. In these few words he gives himself no chance of going any deeper into the nature of interest by treating it as interest on loans which the capitalist pays to himself (p. 267). Thus Droz, in introducing the productive power of “saving,” begins well, but all the same he does not escape from the category of the Colourless writers.