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 Individual Determinants of Price
Book IV, Chapter VI
In the chapter before last we saw that price is determined at a level fixed by the valuations of the marginal pairs. We have still to ask, What are the circumstances which determine whether this level itself is high or low?
The first few steps in the answer are very easy. It is clear at a glance that the two things which must have the decisive influence on the position of the marginal pairs are the
number and the
intensity of the desires or valuations on both sides. In this way. The level of the valuation of the marginal pairs will tend to be high when, on the side of the buyers, there are very high valuations, and, relatively, a great many of them, and when, on the side of the sellers, the low valuations are relatively few. For, in this case, the few low valuations of the sellers will be cancelled by a portion of the more numerous high valuations of the buyers, and since, after this is done, there are still buyers with a high valuation, while at the same time the only remaining sellers also have a high valuation, the marginal pairs on both sides are composed of persons with high valuations. On quite analogous grounds the level of the valuation of the marginal pairs will tend to be low when, on the side of the buyers, there are (relatively) few high valuations, and on the side of the sellers there are (relatively) many low valuations.
If we single out the individual factors from the combined action of which, as we have shown, the valuation level of the marginal pairs results, we get the following individual determinants of price:
1. The number of desires directed towards the commodity (Extent of Demand).
2. The figures which the buyers put upon their valuations (Intensity of Demand).
The latter, however, is not a simple matter. The figures in which valuations are expressed are in no wise simple expressions of the absolute amount of subjective value which the commodity has for the valuer. They only express a relation obtained by comparing two different valuations—that of the commodity and that of the equivalent price. When we said in our scheme that A values a horse at £30, that is not to say or prove anything of the absolute importance of a horse to A’s wellbeing; all that it expresses is the relation in which the value of the horse to A stands to the value of the money to A. It simply says that A values the horse thirty times more highly than he values one pound sterling. If, therefore, we wish—and this is the task in which we are at present engaged—to lay down the
elementary factors in the formation of price, we must put down, instead of the combined amounts which make up the figures of our valuation, the elements out of which they are combined. These elements are two—first, the absolute amount of subjective value which the commodity has for the valuer; and second, the absolute amount of the subjective value which the unit of the equivalent price has for the valuer. And, indeed, they obviously work towards combination in this sense, that the figures are high in direct ratio to the absolute value of the commodity, and in inverse ratio to that of the equivalent, and
Thus, in our scheme of the determinants of price, instead of the valuation figures, we have to lay down as the determinants of these figures—
(a) The subjective valuation of the
commodity by the buyers (which itself, again, according to the law of marginal utility already laid down, depends on the relation of wants and provision for want); and
(b) The subjective valuation of the
equivalent price by the buyers. Since, under present conditions, it is money that mostly serves as equivalent, and since, as we saw in a former chapter, the unit of money has a smaller subjective value for the rich than for the poor, it is, in the last instance, the standard of comfort of the buyers which has the preponderating influence on the formation of this determinant.
Continuing our enumeration we have—
3. The number in which goods are offered for sale (Extent of Supply).
4. The figures which the sellers put upon their valuations (Intensity of Supply).
As in the former case, this latter determinant may be split up into two simpler factors—
(a) The subjective valuations of the commodity by the sellers.
(b) The subjective valuations of the equivalent price by the sellers.
These two find their own further determination according to the law of marginal utility. But frequently this leads to a very noteworthy peculiarity. In the present condition of industry most sales are made by men who are producers and merchants by profession, and who hold an amount of their commodities entirely beyond any needs of their own. Consequently, for them the subjective use-value
*25 of their own wares is, for the most part, very nearly nil; and the figure which they put on their valuation (in which the subjective use-value is the standard element) also sinks almost to zero. Finally comes the result that, in such sales, the limiting effect which, according to our theoretical formula, would be exerted by the valuation of the last seller, practically does not come into play, and price is actually limited and determined by the valuations of the buyers alone. In other words: when goods are once produced, and the owner can do nothing with them for his own personal wants, they must, all the same, seek a market. To find this market the seller must, in the usual way, put his goods at a price low enough to find buyers for the whole stock he offers for sale. In the case of a stock of 1000 pieces, for instance, he will find his market at a price which is somewhat less than the valuation of the thousandth buyer, and somewhat higher than the valuation of the thousand and first. If, now, the relations of production and sale are normal, the whole stock offered will, almost invariably, be taken off by the demand at a price which is far above the minimum use-value of the commodity to the sellers, and which, beyond the full amount of costs, brings them a business profit. If the circumstances, however, are unfavourable, it may well happen that the seller must seek for his market at considerably lower levels of demand, and be content to take prices which show a loss when compared with costs of production. But, as a rule, even those forced prices are still above the subjective use-value of the commodity to the seller, and the function of this subjective use-value, as lower limit of price, does not come into operation. It is only if the price should sink almost to zero that it would be checked in its descent by this latter limit, the valuation of the seller, finally coming into play. But it can scarcely ever come to this: in almost all cases the competition of buyers is sufficient of itself to stop the downward movement at a higher point on the scale. Thus, in regard to the prices actually established within a large and organised market, the law of price undergoes a great simplification. Of the four valuations which, as “valuations of the two marginal pairs,” limit the zone within which price is determined, the valuations of the seller, for the reasons mentioned above, fall out altogether. But, if the buyers are very numerous, the interval between the figures which two successive buyers put on their valuation is so small, that the zone limited by the figure of the last buyer and that of the first unsuccessful competitor, is narrowed almost to a point. And so far as this is the case it may be asserted, with sufficient exactness, of the economic exchange which goes on in large markets, that the market price is determined by the Valuation of the Last Buyer.
Jahrbücher, pp. 520, 527.
Grundzüge, p. 516.
Jahrbücher, vol. xvi. p. 542) that in all essential respects he can agree with my theory of price; only, he says, it does not go far enough. My “determinants,” and even the determinants of these determinants, do not go to the very root of the explanation; there is still something wanting; and this something, this
Schlussstein or “element which, in the last resort, determines the conditions for an exchange,” Scharling thinks that he has found in the “exertion
(Anstrengung) which is spared the man who wishes… to obtain possession of a good by the fact that the good is transferred to him, in the case in question, by the other party in the exchange” (p. 551). If Scharling here were to mean by
Anstrengung the toil of production which must otherwise be expended, directly or indirectly, for the acquisition of the good, his proposition would be positively false (see above, p. 160 in note), and this, indeed, Scharling himself seems to see and, indirectly at least, to admit (pp. 531, 554). But he goes on to give this expression a wider meaning. Under it he now embraces, among other things, the exertion which it costs to induce an owner to part with his commodity (p. 554), or “to meet competitors” (p. 558), or “to meet other suitors by overbidding” (p. 558), or “to overcome the indisposition of the owner to part with the good” (p. 558), and so on. “The right of the owner to possess the good,” explains Scharling in the most significant passage of this kind, “is the last hindrance which stands in the way of the buyer’s acquisition of the same, and this is now the thing to remove. The exertion which is required for this determines the value, the conditions for the exchange” (p. 558). Now, what kind of “exertion” is this? Scharling himself speaks of it more than once with all desirable plainness
(e.g. p. 555, line 15; p. 558, lines 5, 16, etc.) It consists simply in the offering of a sufficiently high or higher price, in a bidding up or bidding higher. And now I ask: First, is there any justification, material or linguistic, for calling the offering of a price an “exertion,” and, specially, for calling the offering of a price of £20 twice as great an exertion as offering a price of £10? Second, is the “exertion” which consists in offering the purchase price,
e.g. at an auction,
spared the purchaser, or must he not rather take the exertion on himself if he is to obtain the good? And, third and principally, is it explaining the formation of price, or going round about the explanation in a manifest circle, to account for the height of price by the amount of the exertion which the meeting of competition and the inducing of the owner cost, and then explain this exertion again as the offering of a sufficiently high or higher price? Is this not rather to say directly;—the price is high when and because much must be paid to get the good, and it is low in another case when and because but little need be paid? Who will be inclined to accept this as
“der Weisheit letzen Schluss,” as the long-sought-for coping-stone of the theory of price?—And now one more remark in case of misunderstanding. I am very far from denying that “difficulty of attainment” or “amount of toil of production” may, and very often actually does, afford one single important
secondary determinant for the relation of want and provision for want, thereby for the height of marginal utility, and so, finally, for the amount of value. But this determinant only works in the way, and within the limits, which I have indicated in my theory (see in particular the statement of the “exceptional case,” where the amount of a pain or strain averted determines the value of a good,
Grundzüge, p. 42, and especially the statement of the influence of costs of production on value and price, p. 61; then pp. 521, 532, 534). On the other hand, the more extensive claim that Scharling puts forward with so much emphasis (vol. xvi. pp. 551, 552), that difficulty of attainment by itself alone is the last universal determinant and measure of value, I can only most emphatically reject.