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 Profit of Capitalist Undertaking. The General Subsistence Market—
Book VI, Chapter VI
It may be thought that in the disquisition of last chapter we have wandered entirely from our subject, the subsistence market. This, however, is not the case. We are here, indeed, at the very centre of the question, for we are speaking directly of those things which form and regulate the supply and demand on the subsistence market. Who are the people that require to get subsistence advanced them? The answer is: Every one who wishes to produce in capitalist methods.
*34 How much is required?—An amount proportioned to the length of the production process. And in what form is it required?—By instalments. Again, who are the people that have subsistence to give?—All owners of wealth who do not consume but “save” it. How much can they give?—As much as their stock of wealth contains. And in what form can they give it?—Similarly, in instalments—in the proportion that the unfinished goods contained in their inventory successively mature. This is the true nature of what occurs in our market for means of production and in our market for credit—over which, I admit, the division of labour and the use of money throw a veil very difficult to penetrate.
Now at what price will finished present goods be exchanged for future goods on the subsistence market? This is the question in which our whole interest peculiarly centres. To answer it we must describe, with more care than hitherto, both the extent and, in particular, the intensity of supply and demand. To begin with Supply.
The extent of the supply of subsistence we have already gone into with sufficient exactness. It is represented by the total stock of wealth accumulated in a community, exclusive of land, and after deduction of those amounts which are consumed partly by owners who are getting poorer, partly by owners producing independently and spending either on themselves or by way of advances.
As to the intensity of supply, it may be assumed from what was said on
p. 315 as regards modern economic circumstances, that, to the capitalists, the subjective use value of present goods is not greater than that of future goods. In the most unfavourable case, then, they would be willing to give almost 20s. present money for 20s. obtainable in two years, or, what is the same thing, for one week of labour which would bring them in 20s. in two years.
Over and against this supply of present goods stands, as Demand:—
1. An enormous number of wage-earners who cannot employ their labour remuneratively by working on their own account, and are accordingly, as a body, inclined and ready to sell the future product of their labour for a considerably less amount of present goods. Recurring to the figures of our illustration on
p. 313 we may assume that, for the future product of 20s. value—the product turned out complete as the result of a week’s work, and valued after two years at 20s.—one class of the labourers will, in the most unfavourable circumstances, accept a price or wage of 10s., while another class will accept as low a sum as 5s. in present money.
2. A number of independent producers, themselves working, who by an advance of present goods are put in a position to prolong their process, and thus increase the productiveness of their personal labour, say, from 20s. to 24s. per week. Since these persons, obviously, get an advantage from this advance so long as it enables them to obtain
anything over 20s. a week, they will be prepared, where necessary, to give up a portion of the surplus product of 4s. a week, as agio on the present goods to which they owe this surplus product. I purposely here mention only those undertakers who demand productive credit for the assistance of their own labour, and not those who demand it for the employment of workers auxiliary to themselves. The demand of these latter forms only a passing stage: they take some part of the supply, provided by the owners of wealth, out of the market, but only to offer it again, on a different part-market, to the auxiliary workers.
3. A small number of persons who, on account of urgent personal wants, seek credit for purposes of consumption, and are also ready to pay an agio for present goods.
Here then we see that, in these groups constituting the demand, the circumstances are such that those who demand are willing and are able to pay for the present goods they require, where necessary, by a larger sum of future goods; that is to say, by an agio. This being the state of the case, then, that all who own the supply value present and future goods
alike, and all who form the demand value present goods
higher than future, the determination of the price simply depends on which side has the numerical preponderance. If more present goods are offered than are desired by the united demand there can be no interest. The resultant market price, as we know, must always be lower than the subjective valuation of those would-be sellers who do not effect a sale. Now if the demand is, numerically, too weak, and if, in consequence, all the present goods offered cannot find a sale, and if all capitalists—even those who cannot find a sale for their present goods—value 20s. present money at something like 20s. future money, the market price of twenty present shillings cannot be higher than twenty future shillings, and there is no agio on present goods. If, on the contrary, more present goods are wanted than are offered, all the suitors cannot be supplied. In methods with which we are familiar the weeding-out process of competition now ensues; those who are able to offer the highest agio for present goods succeed in effecting an exchange; while the others, be they few or many, are shut out, even although they may have been ready to offer some (smaller) agio. But since the market price must always be higher than that bid by the excluded buyers, and since this latter contains an agio, it is clear that; in the circumstances, the market price also must contain an agio—great or small—for present goods.
Now it can be shown—and with this we come to the goal of our long inquiry—that the supply of present goods
must be numerically less than the demand. The supply, even in the richest nation, is limited by the amount of the people’s wealth at the moment. The demand, on the other hand, is practically infinite: it continues at least so long as the return to production goes on increasing with the extension of the production process, and that is a limit which, even in the richest nation, lies far beyond the amount of wealth possessed at the moment.
Where a people, as in the case of Roscher’s poor fisher-folk, live from hand to mouth, it goes without saying that they will be eager to acquire the first hardly saved stocks which allow them to make boats and nets, and their exchanges will be made with an agio against future goods. But among comfortably-off and wealthy people the position is different, not in kind, but in degree. If the stock of wealth be sufficient to maintain the population during an average one year’s production period, every one will wish to engage in a two years’ process with its greater productiveness, and, the stock of wealth not being sufficient to advance subsistence to everybody for two years, there will be, as before, bidding against each other; the circle of suitors will be weeded out; and the agio on present goods will appear. Nor does it make any difference if the community’s wealth is sufficient for an average of five or ten years’ production period. Since the provision for human wants would be still more abundant if, instead of five or ten years, six or eleven years were the average periods, men will always wish to embark on these more fruitful methods, will compete to obtain the subsistence that is not sufficient for all, and will thereby inevitably call forth an agio for present goods.
Interest and Agio
must appear. Assume for a moment that they do not. Present goods and future goods are exchanged on the great subsistence market at par, and the labourers, for the week’s work, get the whole value of their future product paid down to them in present goods. Say that the average production period, assuming the nation to be enormously wealthy, is ten years: that the week’s work consequently yields 40s. and that the labourer receives the whole of this as wage. What will happen? The undertaker who employs people to work with him in a ten years’ process makes no profit outside of his own personal labour. For the 40s., which the labour of his people yields him at the end of the production period, has already been wholly expended as wage. But how if he extends the production period still further? If the week’s labour has returned 40s. in the ten years’ process, experience tells us it will return more in a twelve years’ process, say 44s. In still longer processes, say, fifteen years, it may return perhaps 48s. Now as the undertaker, by hypothesis, can buy present goods at par on the subsistence market, it would be foolish of him not to extend the production period for himself and his employés to fifteen years. If he does so, he pays his workers out of the borrowed advances 40s., the price on the labour market: in fifteen years he recovers 48s. from the product: from that sum he pays back the advanced 40s. at par, and has remaining the respectable profit of 8s. out of each week of labour. And with this we have the “surplus value,” the profit on capital.
To prevent its appearance the labourer’s wage would have to be raised from 40s. to 48s. But this is not possible. For the well-known levelling tendencies of competition do not allow wages to rise permanently in any isolated branch—so long as it does not presuppose peculiar personal qualities—inasmuch as there will at once be a rush from less paying branches into any particularly paying branch. But neither is a general rise of wages to 48s. possible, because the existent stock of wealth is only sufficient for an average ten years’ period. The extension of the process to fifteen years, consequently, can occur only in isolated cases; the bulk of productive employments must continue the ten years’ process which yields only 40s. per week, and cannot, therefore, permit of any higher wage than 40s.
On the other hand, it is obvious that something else will make its appearance. However sharp undertaker A may be in borrowing money free of interest, and securing a nice surplus value of 8s. per week of labour, undertakers B, C, D and E will not be far behind. The desire to prolong the production period, and, with that, the demand for increased advances of subsistence, will become general: it will not be possible to supply this increased demand from the limited funds of subsistence: and, finally, the weeding out of competition will begin among the classes who constitute the demand. Here, then, we have the agio again appearing in the universal market price of present goods, from which, by hypothesis, we had for the moment banished it.
And this result, as regards the normal and really economic provision of society, is no less healthy than it is necessary. The possibility of obtaining means of subsistence free of agio would be certain to tempt undertakers into immoderate extension of the production period. If this were to occur only partially and in a few branches of production, naturally the limited stocks of subsistence would leave so much less for the other branches of production; these latter would have to curtail their processes unnaturally; and there would ensue a deficiency in the social provision which would outweigh the increased return got from the favoured branches through the immoderate extension of their processes.
*38 But if the excessive extension were to be introduced all over, the community’s stock of subsistence would come to an end sooner than the fruits of processes thus unduly extended could mature; there would be deficiency in provision, want, and distress; famine prices would recall the misdirected natural powers, and put them, with difficulty, to supply provision for the moment. All this could not happen without serious disturbance, expense, and loss.
Now the constant presence of the agio on present goods is like a self-acting drag on the tendency to extend the production period; without checking it all at once it makes it more difficult, and more difficult in proportion to the projected length of the process. Extensions which would be harmful as regards social provision are thus made economically impossible. Moderate extensions over the average process, however, are not absolutely prevented, but are limited to those branches where, from peculiar economic or technical circumstances, the productiveness that goes with the extension of the period is so great that they can bear the progressive burden of the agio. Branches, again, where longer processes are somewhat, but only a little, more productive, are tempted to escape the burden of agio by recurring to periods under the average. Thus, finally, under the influence of the agio, the total fund of subsistence is divided out automatically among the individual branches of production, in such amounts that each branch adopts that length of process which—in the given condition of the fund—is most favourable to the total provision.
At this point I think we may congratulate ourselves on having finished one of the most important demonstrations in the scope of our present task. It fully confirms those inferences which we had drawn from the nature of the productive instrument Labour as a future commodity, and it gives us the key to the explanation of the much-disputed “Surplus Value” of the undertakers. It shows that, in the great combined subsistence market of society, present goods must have an agio, as legitimate consequence of the constant fact that present goods are more useful, and are more desired, than future goods, and that they are never present and offered in unlimited abundance. This agio, thus organically necessary, is given directly on the loan market in the shape of interest, while, on the labour market, it is given in the form of a price for labour which remains under the amount of the future product of labour, and which, on that account, leaves room for the accretion of a surplus value.
The same principles as regulate the price of the productive instrument, Labour, regulate the price of the original productive instrument “Nature,” or those services rendered by the earth which possess an economical character—generally called, from their chief representative, Uses of Land
(Bodennutzungen). If a piece of land—after deducting the share of the complementary productive goods which co-operate—will produce in one year 100 bushels of corn, or will rear in five years 100 cwts. of beef, no one would be willing to pay the par value of 100 present bushels of corn or 100 present cwts. of beef for the use of the land, when these last-named amounts, employed in lengthening the production process, or directly exchanged against future goods on the loan market, or spent in buying labour, could obtain
more than the 100 future bushels or ctws. Thus Uses of Land, when exchanged against present goods, cannot escape a deduction in price any more than can the productive good Labour.
And, finally, on exactly similar grounds the very same is true of the price of Intermediate Products. Concrete capital generally—raw materials, tools, and so on—is bought and sold at a price which remains under the amount of the future product resulting from it. It would be a very easy matter to prove this point by point, as we did with the price of labour, but the case of intermediate products is so closely allied that it seems to me quite unnecessary.
Speaking generally, the importance of the demonstration we have just completed does not consist in its proving that productive instruments are bought at a price which remains under the price of their future product, for this is an old and familiar fact taught not only by daily experience but by the theory of the most diverging schools. The really important result of our investigations is, that this well-known fact has been shown to be the necessary outcome of the same causes as give present goods the superiority in value over future goods.
A few chapters back I assented to one feature of the Socialist interest theory—that which explains surplus value from the low price at which productive powers are purchased. I may now add wherein the theory is wrong. It is wrong, first, in explaining interest by the cheap purchase of
labour only. Interest is got as much by the cheap purchase of uses of land. Quantitatively, of course, the profit from buying labour bulks much more largely in importance. The profit from the “cheap” purchase of intermediate products need not be mentioned here; it is explained on the same principles as the profit from the purchase of the original productive powers.
Second, as I have already said on
p. 301, the purchase is not so cheap as it seems to be, because the object of purchase is measured in (undervalued) future goods, while the price is measured in (full-valued) present goods.
And, finally, the fact that the price of labour is relatively low, is not the naked result of an exploitation in which want forces the labourers to acquiesce. To some extent, although, probably, to a less extent, the same would be the case without any compulsion, if wealth were divided almost equally among all. To prove this let us recur for a moment to the consideration of those primitive circumstances which I hurried over as not immediately appropriate to modern economy.
*40 Suppose a society where all are owners of wealth, and all independent producers. Their labour, embodied in, say, a two years’ process, is moderatively productive. Suppose that, in this society—which is not a poor one—a certain producer possesses means enough to make it possible for him, either to maintain himself for six years, or to maintain himself and one worker for three years. The product of a year’s labour, we shall suppose, is as follows:—in a two years’ production period £52 (at 20s. per week), in a three years’ process £60, in a six years’, £65.
*41 If this man employs his wealth in lengthening the period of his production without employing an assistant, he obtains by his six years’ labour 6 × 65 = £390. If he employs an assistant, and works along with him in a three years’ process, he reaps from his own labour in six years 6 × 60 = £360, while the same amount is produced by the labor of his employé. How much can he pay this employé in wages?
Obviously it is quite impossible to give him the full £360 (that is £60 per year) in wage, for this would be to inflict positive injury on himself. Working by himself he would have obtained in six years £390; by employing another he gets only £360. To avoid loss he must, therefore, keep back of the product of the employé at least £30, and thus he will be able to pay him at most £330, or £55 per year. If he does so, the whole advantage of the business is, obviously, still on the side of the labourer. The undertaker gains nothing, but the labourer gains, inasmuch as he now earns £55 instead of the £52, which is all he could have earned as an independent undertaker with a two years’ process. In these circumstances the idea of exploitation is out of the question: so is the idea of a forced agreement: and still the wage, although stretched in favour of the labourer to the extremest limit of the economically possible, remains under the full amount of his future product. Surely this is a clear enough proof that there is some other reason for the “cheap” buying of labour than compulsion and exploitation!
enough economically. It is exactly the same as when, in a year of bad crops, sufficient buyers cannot at the moment be found in some one market for the strongly appreciated grain, on account of the price being so high. It cannot be truly said that there is a surplus of grain and a deficiency of demand; on the contrary, there is so great a deficiency of grain that, after the weeding out which has resulted from the war of competition, only a very small part of the demand finds, economically, admittance to the scanty stocks.