The Positive Theory of Capital
By Eugen v. Böhm-Bawerk
Geschichte und Kritik der Kapitalzins-Theorieen (1884), which I translated in 1890 under the title of
Capital and Interest, Professor Bohm-Bawerk, after passing in critical review the various opinions, practical and theoretical, held from the earliest times on the subject of interest, ended with the words: “On the foundation thus laid, I shall try to find for the vexed problem a solution which invents nothing and assumes nothing, but simply and truly attempts to deduce the phenomena of the formation of interest from the simplest natural and psychological principles of our science.”
The Positive Theory of Capital, published in Innsbruck in 1888, and here rendered into English, is the fulfilment of that promise…. [From the Translator’s Preface, by William A. Smart.]
William A. Smart, trans.
First Pub. Date
London: Macmillan and Co.
The text of this edition is in the public domain. Picture of Eugen v. Böhm-Bawerk courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- Translators Preface
- Authors Preface
- Book I,Ch.I
- Book I,Ch.II
- Book I,Ch.III
- Book I,Ch.IV
- Book I,Ch.V
- Book I,Ch.VI
- Book II,Ch.I
- Book II,Ch.II
- Book II,Ch.III
- Book II,Ch.IV
- Book II,Ch.V
- Book II,Ch.VI
- Book III,Ch.I
- Book III,Ch.II
- Book III,Ch.III
- Book III,Ch.IV
- Book III,Ch.V
- Book III,Ch.VI
- Book III,Ch.VII
- Book III,Ch.VIII
- Book III,Ch.IX
- Book III,Ch.X
- Book IV,Ch.I
- Book IV,Ch.II
- Book IV,Ch.III
- Book IV,Ch.IV
- Book IV,Ch.V
- Book IV,Ch.VI
- Book IV,Ch.VII
- Book V,Ch.I
- Book V,Ch.II
- Book V,Ch.III
- Book V,Ch.IV
- Book V,Ch.V
- Book VI,Ch.I
- Book VI,Ch.II
- Book VI,Ch.III
- Book VI,Ch.IV
- Book VI,Ch.V
- Book VI,Ch.VI
- Book VI,Ch.VII
- Book VI,Ch.VIII
- Book VI,Ch.IX
- Book VI,Ch.X
- Book VII,Ch.I
- Book VII,Ch.II
- Book VII,Ch.III
- Book VII,Ch.IV
- Book VII,Ch.V
The Amount of Value
Book III, Chapter III
In asking what is the principle that regulates the amount of value, we pass to a sphere where lies the chief task of a theory of value, and where at the same time lie its greatest difficulties. These difficulties are the result of a peculiar coincidence of circumstances. From one point of view the true principle almost suggests itself. If the value of a good is its importance to human wellbeing, and if this “importance” means that some portion of our wellbeing is dependent on our having the good, it is clear that the amount of the good’s value must be determined by the amount of wellbeing which depends on it. Goods will have high value if our wellbeing depends on them to any important extent, low value if it does not.
But from another point of view, there are certain facts in the economical world which seem to give the lie to this very simple and natural explanation. Everybody knows that, in practical economic life, precious stones possess a high value, while bread and iron have a moderate value, and air and water usually no value at all. Now everybody knows that without air and water we simply could not exist, and that the uses of bread and iron are extremely important, while precious stones, for the most part, only satisfy the love of ornament, and have, accordingly, a very inferior importance for human wellbeing. It would appear, then, that one who holds fast by the principle that the amount of a good’s value is determined by the importance of the services which it may render to human wellbeing, must expect to find in precious stones a low value, in bread and iron a high value, and in water and light the very highest value. But facts show that exactly the opposite of this is the case.
This startling phenomenon has been a veritable rock of offence in the theory of value. The highest utility accompanied by the smallest value is a strange paradox. It is true that, in confusing Usefulness and Use Value, economists did not apprehend and describe the state of the case quite exactly. When they falsely ascribed to the iron a high “use value” and to the diamond a low “use value;” the only reason for surprise was that the “exchange value” of these goods went so entirely in the opposite direction. But this was only to change the name of the opposition, not to take away any of its sharpness. There were plenty of attempts to bridge the fatal contradiction by involved explanations, but these were unsuccessful; and so it happens that, from Adam Smith’s time to our own, innumerable theorists have despaired of finding the nature and measure of value in any relation to human wellbeing, and have fallen back upon quite foreign and often wonderful lines of explanation, such as labour or labour time, costs of production, resistance of nature to man, and the like. But, unable to get rid of the feeling that the value of goods must have something to do with utility and human wellbeing, they put down the want of harmony between the utility and the value of goods as a rare and perplexing contradiction, a
In what follows I mean to prove that the older theory had no need to abandon the most natural explanation. The measure of the utility which depends on a good is, actually and everywhere, the measure of value for that good. To prove this nothing more is necessary than a dispassionate but keen casuistical investigation into the question, What is the gain to our wellbeing that, in any given circumstances, depends on a good? I say deliberately “casuistical” investigation; for the entire theory of subjective value is, properly, nothing else than a system of casuistry, determining when, under what circumstances, and how far our wellbeing
is dependent upon any particular good. It is very remarkable that the ordinary man in everyday life is constantly making casuistic distinctions of this kind, and making them with great certainty. He seldom makes a mistake, and he never makes a mistake in the principle. He may, of course, ascribe a trifling value to a diamond if he mistakes it for a glass bead. But the theoretical consideration—which is quite irrelevant here—that without water the human race could not continue in life, would never lead him to the casuistical conclusion that every gallon of water which flows from the village spring is a good of priceless value, or worth thousands of pounds. Our task, then, is to hold the mirror up to those casuistical distinctions which men make in the ordinary affairs of life, and to bring those laws, which the ordinary man instinctively handles with certainty, to clear and conscious presentation.
What human wellbeing may gain from a good, and thus the advantage which is dependent on a good, is, in most cases,
*7 the satisfaction of a want. The casuistical consideration that really determines how far a person’s wellbeing depends upon a particular good is found in the answer to two questions: first,
which, among two or more wants, depends on it? and, second, what is the
urgency of the dependent want or of its satisfaction?
For convenience we shall take the second question first, and answer it in the present chapter. It is a familiar fact that our wants vary very greatly in importance. We are accustomed to rank them according to the seriousness of the consequences which their non-satisfaction has on our wellbeing. Thus we attach the greatest weight to those wants the nonsatisfaction of which would be followed by death. Next to these we place wants the non-satisfaction of which would result in some serious permanent injury to our health, honour, or happiness. Below these again come such wants as expose us to more temporary injuries, pain, or deprivations. Finally, we put in the very lowest class those wants the non-satisfaction of which costs us nothing more than a very slight unpleasantness, or the deprivation of some quite insignificant pleasure. Arranging our wants according to these characteristics we obtain a regularly graduated scale of wants. Of course as differences of bodily and mental disposition, culture, and so on, result in very marked differences of wants, this scale will come out very different for different individuals, and even for the same individual at different times. All the same, every practical man whose means are limited must have a scale more or less clearly before his mind if he would make a choice among these wants, and even theorists have often had occasion to sketch such a scale from the “objective” standpoint of impartial scientific consideration.
So far everything would be simple and certain were it not that there is an ambiguity when we speak of graduation or ranking of wants. We may mean by these terms either the graduation of wants as
kinds of wants, or the graduation of
degrees of wants, the concrete individual feelings of want; and these two are essentially different, even divergent. If we compare kinds of wants, looked at as a whole, according to their importance for human wellbeing, there is no doubt whatever that to the needs of subsistence would be allotted the first rank, to the needs of housing and clothing a rank not much inferior, to the wants satisfied by tobacco, spirituous liquors, music, etc., a very much less important place, while the wants of ornament and the like would have a very insignificant rank indeed.
Now the graduation of
concrete feelings of want is essentially different from this. Within one and the same kind of want the feeling of want is not always uniform, not always equally strong. Every feeling of hunger is not equally intense, and every satisfaction of hunger is not equally perfect. In the class of “needs of subsistence;” for instance, the concrete want of a man who has not eaten a morsel for eight days is infinitely more urgent than that of another man who has already got through two courses of his ordinary dinner, and is meditating whether he should have a third. In the graduation of concrete wants we have to deal with an entirely different state of affairs, and with a much greater variation. In the scale of
kinds of wants the “needs of subsistence” came far and away before the desire for tobacco, for liquor, for ornament, etc. In the scale of concrete wants, wants belonging to the most various kinds cross and intersect each other. It is true that, even here, the most important concrete wants in the most important classes of wants stand at the top of the scale; but the less important concrete wants of these classes are frequently overpassed by concrete wants of much inferior classes—the bottom members of the highest class, perhaps, overpassed by the top member of the lowest class. It is very much the same as if a geographer were one time to arrange the Alps, Pyrenees, and Harz by their height as mountain ranges, and another time were to arrange their single summits. As ranges the Alps would, of course, come before the Pyrenees, and the Pyrenees before the Harz. But, in comparing individual heights, a great many of the Alpine summits would take rank below individual peaks of the Pyrenees, some even below hills in the insignificant Harz.
And now the question is, When goods have to be valued, by which scale shall we measure the importance of the wants they subserve—the scale of kinds or the scale of concrete wants? When the older theory came to this dividing of the ways—the very first opportunity offered it of making a mistake—it chose the wrong way. It adopted the scale of kinds. On this scale the class “Needs of Subsistence” occupies one of the most conspicuous places, while the class “Desire of Ornament” has a subordinate place. Thus the older theory decided that bread, universally, has a high “use value,” and diamonds a low “use value,” and, naturally, was very much astonished that the value practically put upon those two kinds of goods was exactly the reverse of this.
Now their conclusion was quite wrong. What the casuist must say to himself is: If I have a slice of bread I can indeed still this or that concrete feeling of hunger as it arises, but I can never satisfy the totality of such feelings—the actual and possible, present and future, feelings of hunger which, together, make up the kind “needs of subsistence.” Obviously, then, it is quite out of place to attempt to measure the service which the piece of bread can render me by the fact that the totality of such feelings possesses much or little importance. To do so would be like the act of a man who, on being asked as to the height of the Kahlenberg, an insignificant off-shoot of the Alps near Vienna, were to ascribe to it the height of the Alpine chain! As a fact it would never occur to us in practical life to value every bit of bread in our possession as a treasure of infinite importance. We do not rejoice every time we buy a baker’s roll as if we had saved a life, nor do we blame a man as spendthrift when he carelessly gives away a slice of bread or throws it to a dog. Yet this is the judgment we must pass if we would transfer the importance of the kind “needs of subsistence,” on the satisfaction of which our very life depends, to the goods which actually minister to that satisfaction.
This much is clear, then, that the value we ascribe to goods has nothing to do with the graduation of kinds of want, but only with the graduation of concrete wants. In order to bring out all that is involved in this conclusion, it may be desirable to put more clearly certain points relating to the composition of this graduated scale, and to put the whole argument on a surer basis than has been done in the foregoing analysis.
Most of our wants are divisible, in the sense that they are susceptible of piecemeal satisfaction. When hungry I am not compelled to choose between satisfying my hunger completely and going entirely unsatisfied. I may take the edge off my appetite by a moderate meal, intending, perhaps, to dispel the feeling of hunger altogether later on by a full meal, or, perhaps, to make shift with the partial satisfaction I have got. Naturally the partial satisfaction of a concrete want has another and a smaller importance for my wellbeing than a complete satisfaction of the same; and, to a certain extent, this of itself would suffice to call attention to the above-mentioned phenomenon that, within a kind of wants, there are concrete wants (or degrees of want) of varying importance. But with this is connected a further notable fact. It is an experience, as familiar as it is deep-rooted in human nature, that the same enjoyment, when constantly repeated, gives us, beyond a certain point, a constantly decreasing gratification, till, in the end, it changes into its opposite. Any one can prove for himself that at a meal when the fourth or fifth course is reached, the appetite is not nearly so keen as at the first course, and that, if there are too many courses, a point is reached where enjoyment turns into discomfort or disgust. The same occurs in too long a concert, lecture, walk, play, and, generally speaking, in the case of most physical as well as intellectual enjoyments.
If we put the essence of these well-known facts into technical language we get the following proposition: The concrete degrees of want into which our sensations of want may be divided, or the successive degrees of satisfaction obtained from similar amounts of goods, are usually of very dissimilar importance—indeed, of importance which diminishes step by step to zero.
This will explain a whole series of propositions which were simply asserted above. It explains, firstly, how, in one and the same kind of wants, there may be concrete wants, or degrees of want, of varying urgency. Indeed in the case of all divisible satisfactions as the term is defined above—that is, in the great majority of cases—this not only may be but must be so, quite normally and, so to speak, organically. It explains, again, that, even in the most important kinds of wants, there are lower and lowest grades of importance. Properly speaking, the more important kind is marked off from the less important only by the fact that, to some extent, its head rises higher than the others, while its base stands on the same level as all the others. And, finally, it explains that, not only may it occasionally happen, as I have just said, that a concrete want belonging to a kind which, on the whole, is more important, may be outweighed by some individual concrete want of a kind, on the whole, less important, but that this happens as a perfectly normal, ordinary, and organic occurrence. There will always, for instance, be innumerable concrete subsistence wants which are weaker and less urgent than many a concrete want of quite unimportant classes; such things as the desire of ornament, the love of dancing, the craving for tobacco, etc., will often be stronger than the need of good food and warm clothing.
If we try to represent the classification of our wants by a typical scheme we must, on the principles just laid down, give it something like the following shape
In this scheme the Roman figures indicate the various kinds of wants, decreasing in order of importance from I to X. I indicates the most urgent kind, say the needs of subsistence; V indicates a kind of medium importance, say that of spirituous liquors; while X indicates the least important conceivable kind.
The Arabic figures 10 to 1, again, indicate the concrete wants and degrees of want that occur in the different kinds, their rank being shown by assigning the figure 10 to the most important conceivable want, the figure 9 to that next in importance, and so on, till the last figure 1 indicates the most insignificant want likely to occur.
This scheme now puts before us the fact that the more important the kind, the higher stands the most important concrete want contained in the kind; but it shows at the same time that in each kind there are all grades of importance, from greatest to least. The only exceptions in the scheme occur in classes IV and VII, in which some individual members of the descending scale are wanting. These represent the (comparatively rare) kinds where, on technical grounds, a successive satisfaction by means of partial acts is either incomplete or quite impossible, and where, accordingly, the want must either be entirely satisfied or not satisfied at all. The want met by kitchen ranges, for instance, is generally met so completely by one range that we should have absolutely no use for a second. Finally, the scheme shows that in the most important kind (I) there occur concrete wants, which bear the lowest figure of importance, while, in almost all the other kinds which stand under it in importance, there are concrete wants that bear higher figures.
Jahrbücher, vol. xiii. p. 42.
Grudsätze der Volkswirthschaftslehre, p. 93.