The Positive Theory of Capital
By Eugen v. Böhm-Bawerk
In his
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.]
Translator/Editor
William A. Smart, trans.
First Pub. Date
1888
Publisher
London: Macmillan and Co.
Pub. Date
1891
Copyright
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
- Introduction
- 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
- Appendix
One-Sided Competition
Book IV, Chapter III
First: of one-sided competition of Buyers. Accommodating the conditions of our illustration to the requirements of the new typical case, let us assume that A
1 finds a competitor, whom we shall call A
2, already in the field, and that he also has the intention of purchasing the horse. The circumstances of this competitor are such that he counts the possession of the horse worth as much as £20. What will happen now? Each of the competitors wishes to buy the horse, but only one, of course, can buy him. Each of them wishes to be that one. Each, therefore, will try to persuade B to sell the horse to him, and the means of persuasion will be to bid a higher price. Thus ensues the familiar phenomenon of mutual overbidding. How long will this last? It will last till the rising bids have reached the valuation of the least capable competitor, who, in this case, is A
2. So long as the bids are under £20, A
2, acting on the motto “rather a small gain than no exchange,” will try to secure the purchase by raising his offer, which attempt, naturally, A
1 acting on the same principle, will counteract by raising his offer. But A
2 cannot go beyond the limit of £20 without losing by the exchange. At this point his advantage dictates “better no exchange than a loss,” and he leaves the field to his competitor.
This is not to say that the price A
1 pays must be just £20. It is possible that B, knowing A
1 to be in urgent want of a horse, will not be content with £20, and will try, by holding back and by skilful bargaining, to extort a price of £25, £28, or even £29:19s. The one thing certain is that the price cannot exceed £30 (the valuation of A
1 who concludes the purchase) and cannot be under £20 (the valuation of A
2, the excluded competitor).
Assume now that, in addition to A
1 and A
2, three other buyers, A
3, A
4, A
5, compete for the horse, and that their circumstances are such that they count the possession of the horse equivalent to £22, £25, and £28 respectively. It is easy to show, in the same way, that, in the ensuing competition, A
3 will bid to the limit of £22, A
4 to £25, and A
5 to £28; that the most capable competitor, A
1, will always be the successful one; and that the price will be fixed between £30 as higher limit, and £28—the valuation of the most capable of the excluded competitors—as lower limit.
The results of this investigation may therefore be expressed in the following general proposition:—
In one-sided competition of buyers—where there is one seller and more than one buyer—the most capable competitor will be the purchaser; that is, the one who puts the highest value on the commodity he wishes to buy in comparison with the good he wishes to sell; and the price will lie somewhere between the valuation of the purchaser as higher limit, and the valuation of the most capable among the unsuccessful competitors as lower limit—always understood that the price can in no case be lower than the subsidiary lower limit of the seller’s own valuation. Comparing this proposition with the result arrived at under the former typical case, we see that competition of buyers has the effect of narrowing the sphere within which price is determined, and narrowing it in the upward direction. Between A and B the limits within which price was determined were £10 and £30; by the added competition the lower limit was moved up to £28.
Second: of one-sided competition of Sellers. This forms the exact converse of the foregoing. Entirely analogous tendencies lead to entirely analogous results—only in an opposite direction. The statement of this need not detain us long.
Suppose that our friend A is the only buyer, and that five dealers, whom we shall call B
1, B
2, B
3, B
4, and B
5, are competing to sell him a horse. We assume that all the horses are equally good, but B
1 values his horse at £10, B
2 values his at £12, B
3 at £15, B
4 at £20, and B
5 at £25. Each of the five rivals tries to utilise the present as the sole opportunity of sale, and endeavours to secure a preference over his competitors by underselling, as in the former case by overbidding. But as no one will care to offer his commodity for less than what it is worth to himself, B
5 will cease offering at £25, B
4 at £20, B
3 at £15; then B
1 and B
2 will compete for a while till, finally, at £12 B
2 finds himself “economically excluded,”
*6 and B
1 alone keeps the field. The price at which he remains a seller must necessarily be higher than £10—otherwise there would be no use in the exchange, and therefore no motive for it—but neither must it be higher than £12, otherwise B
2 will continue his competition.
In general terms, then, we have the following proposition. In one-sided competition of sellers—where there is one buyer and more than one seller—the most capable competitor will be the actual seller; that is, the one who puts the lowest value on the good he wishes to sell in comparison with the commodity he wishes to buy; and the price will lie somewhere between the valuation of the seller as lower limit, and the valuation of the most capable among the unsuccessful competitors as higher limit.
*7 Compared, therefore, with the case of isolated exchange, where, according to the first formula, the price had to lie between £10 and £30, the sphere within which price is determined will be narrowed by the competitions of sellers, and narrowed in the downward direction.