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
Interest From Durable Goods—
Book VI, Chapter VIII
To proceed. The phenomenon of interest just explained is characteristic of all durable goods, consumption and production goods alike. But, in the case of production goods, there comes in one circumstance the influence of which has to be investigated. In goods which are to serve as instruments of production, not only are the future services remote from the present, but both the present and the future services are remote from that economical goal which is first to be reached through production. The final destination from which, according to principles with which we are now familiar, they derive their value, is the product obtainable from them
*53 in the future. But from the attainment of this goal the current service—even that service in the very act of realisation—is distant by the whole production period which must intervene between its incorporation in the process and the turning out of the finished product. If this period, for instance, amounts to two years, the current service is two years away from attaining its goal, and at the same time from attaining its full present value: the next year’s service is three years away, the next again four years, and so on; while, in the case of durable consumption goods, every service attains its full present value in the year, or in the moment it is rendered. Now this has a twofold result: first, the services of productive goods undergo a greater reduction as compared with their full final value, and, second, the growth of their value lasts longer on that account. After they are produced and set to work, they bear interest during the whole period of the production process on which they enter; only, in practice, this interest is ascribed, not to the durable good that forms an integral part of the “outlay “—from which, indeed, it is now separated—but to the “business” or “circulating” capital into which it is transferred at the moment of its separation.
To illustrate this. A durable consumption good which lasts six years, and yields at the end of each year a use
*54 of 100, is worth, as we have seen, 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55.
*55 A durable productive good, on the other band,
which lasts six years, and whose year’s use affords a final utility of 100
after a further production period of two years, has the following value. Its “current” year’s use, which is first obtained by the end of the year, and then brings in the amount of 100 after two years more (that is, after three years in all), is only worth in present valuation 86.38. Its next year’s use, which will bring 100 in four years, is to-day worth 82.27. Similarly the third year’s use has a present value of 78.35, the fourth year’s, a value of 74.62, the fifth, a value of 71.06, and, finally, the sixth has a value of 67.68. The whole productive good, accordingly, has a value of 460.36.
At the end of the first year’s use the first service is detached; this, meanwhile, has come nearer to its final goal by a year, and accordingly advances in value from 86.38 to 90.70; the other services follow suit in the usual way. Thus the good, as still bearer of five prospective services of the individual values of 86.38 + 82.27 + 78.35 + 74.62 + 71.06, is now worth in all 392.68. It has therefore lost 67.68 in the course of the year’s use, and, as against the return of 90.70 represented by the service detached, has borne 23.02 of interest—exactly 5% on the initial value of 460.36. So far everything runs as before. But the service which was separated off, with the value of 90.70, neither remains in its former shape nor retains its former value. It is detached from the fixed capital, and has passed over into the circulating capital, where it remains incorporated in some or other of the intermediate products, say, in the yarn spun by the machines. In this new shape it is the object of the further production process, and is by it brought step by step nearer to full maturity, and so to its future value of 100. This it attains in the following—the second—year of use.
At the end of the second year’s use again, the service, which is now the current one, is detached from the parent good with a value of 90.70: the parent good, now valued at 321.62, has lost 71.06, and, as against the return of 90.70, has borne 19.64 as interest. But during this same year, the service detached in the previous year and incorporated in the circulating capital, has risen from 90.70 to 95.23 in value, and bears another 4.53 of interest. And, again, in the same way at the end of the third year of use, a service of the then value of 90.70 is detached, by which the parent good loses 74.62 in value, and interest gains 16.08. But since simultaneously the service detached two years before, and incorporated in the circulating capital, increases from 95.23 to its full value of 100, and that detached one year before, from 90.70 to 95.23, there is a further gain in interest of 4.77 + 4.53; that is, of 9.30.
In this way the peculiar combination of circumstances in durable productive goods gives occasion to a twofold interest relation. The services already detached bear interest after the manner, and as integral part, of the circulating capital; that is, their claim or title to interest is based on their transformation into finished and final product. The services still contained in the good bear interest after the manner of durable consumption goods; that is, their claim is based simply on their approximation to the present. But, of these two elements of the interest return, only the second is formally ascribed to the parent good from which it springs: for it the calculation is concluded at the moment in which the individual service is detached, and with the value which it then has. What further happens with it is ascribed to the circulating capital into which it passes at the moment of its separation.
*56 And thus we come to the final result: All interest borne by durable productive goods is borne by them simply in their character of
durable goods, while their second property, that of being productive, only comes into play in the interest borne by the services already detached and transferred to circulating capital. In this lies the complete explanation of a developed interest phenomenon, which I before suggested but had to delay going fully into until now.
There is still, however, another highly important explanation we may gather in passing.
In goods capable of only a moderate number of services the contraction of value, even in the case of the last services, is but small. The result of this is, on the one hand, that the value of the parent good is only a little behind the gradually developing value of its collective services—in our first example the value of the machine lasting six years was not quite 600, but still it was over 500; and, on the other hand, that the amount of wear and tear, even in the first year,
*58 is relatively high, and almost equal to the entire value of the current service—in our illustration the value of the current service was 100, the value of the last service, that which decides the wear and tear, about 78.
In goods, again, capable of a very long series of services, both the value of the parent good and the amount of wear and tear fall proportionately. A good capable of rendering services of the annual value of 100 for 100 years, is very far from being valued at 100 × 100 = 10,000. At most (where the usual under-valuation of future goods is at the rate of 5%) it is worth 2000; and the loss of value in the course of the first year’s use—although a service worth 100 has been consumed and detached from the use-content of the good—is, not 100 but .76, that and no more being the present value (at a discount rate of 5% per annum) of a sum of 100 falling due in 100 years!
Finally, if a good is capable of rendering not only a great many, but, practically, an infinite number of services, the phenomenon just mentioned is seen in full development: the present value of the parent good is infinitely less than the successively increasing value of its services. A piece of land, for instance, which bears £100 each year for an infinite series of years, is worth, not 100 times infinity, not £100,000, not even £10,000, but only some £2000, and its loss of value sinks to zero: the piece of land whose annual current service is worth £100, yields the
whole £100 net. The law remains just as before; but the very remote services of the second, third, tenth century, have so exceedingly small a value in the present that they can add almost nothing to the present value of the land, and the last service, the one which should decide the amount of depreciation, as infinitely far away, has no present value at all.
This is the ultimate reason why rent of land appears as a net income, and here first is the solution of the problem of rent traced to its real issue. The old rent theory gave only a preliminary and partial answer, and, strangely enough, had not the slightest suspicion that its tentative solutions had never come near the heart of the problem. All preceding attempts, from Ricardo downwards, exhausted themselves in more or less successfully pointing out that the annual uses of land have an economic value, or yield an economic return, and why they do so. But the yield of such services is in itself, first of all, a gross return. That the owner gets a net return, a net income, has nothing to do with fruitfulness, situation, kind of ground, or any such thing, but simply with the lower value put upon future goods, and the determination of the present value of the land in conformity with that. Suppose that a quarry, after deduction of all other recognised costs, produced for a hundred years a—what we may call—net annual return of £100; and suppose that future services were
not less valued than present; the value of the quarry would be the full amount, 100 × 100. The quarry-owner would draw an annual income of £100, but not a shilling of that would be “rent” in the present sense of that term, that is to say, a net income. The whole of it would be a protracted consumption of the parent wealth of £10,000. And the case of all other lands is different from that of the quarry, not in kind, but only in degree. If a field is considered capable of producing crop for 1000 years—or 2000 years if one should prefer it, for literal infinity in human affairs is out of court—and if the future crops are to be valued as highly as the present ones, the valuation put upon such a field will reach an exorbitant height, viz. £100,000 or £200,000, and the yearly rent of £100 will present the character of a breaking-off of the parent stem of wealth—a very gradual destruction of the stem, but still a destruction, not a net income. Landowners would be lords of a giant stem or stock of wealth, but they would have no net income.
The theoretical explanation of rent from land, then, coincides ultimately with the explanation of interest obtained from durable concrete capital, and land rent is nothing but a special case of interest obtained from durable goods. That the two explanations do not entirely coincide, and that, on the contrary, the current rent theories are substantially so very different from the interest theories, is only traceable to the fact that, in the course of the explanation of rent, an intercalation had to be made which did not require to be made in the case of interest on durable capital; and that, at the same time, from a faulty conception of the rent problem, economists exhausted the whole content of the rent theories in making this special intercalation. In the case of all products of labour, and, consequently, in all goods that constitute capital, it needs no explanation that they and their material services have economic value: were it not so they would not be produced. In the case of the services of land, on the other hand, this is not self-evident. And, therefore, the economist must first exert himself to show why and under what circumstances the use of land receives a value and a price. With a correct value theory, a few strokes of a pen will supply this proof; by means of the doctrines of marginal utility and of complementary goods. Wanting the guidance of such a theory, and entangled in the fetters of the labour value theory, economists gave it a shape which was unnecessarily circumstantial and clumsy, and was, at the same time, not very satisfactory in principle. Of Ricardo’s rent theory, which in essence has remained the ruling one up till the present day—the theories of his opponents Carey and Rodbertus being quite exploded—it must be said that it contains an abundance of truth put in a formula essentially false. It is a brilliant piece of casuistry, which is out of connection with the central fire of correct principles; it lights up a bit of the road, but leaves the rest in obscurity and error. Hence the peculiar fate of the Ricardian theory. It does not quite satisfy anybody. Even its friends are fain to discover a number of weak points in it, and its most universal propositions are, for the most part, its weakest. But there remains in it an indestructible core of truth, which lives on under the most varied metamorphoses, and, even to-day, constitutes the better part of its substance.
But how far does the Ricardian, or any other rent theory, take us, even if it were correct in every point where it is disputable? It takes us no further than we get in the question of interest, when it has been shown that a threshing-machine, after deducting all other costs, yields an annual
gross interest, and why it does so. Where Ricardo ends his rent theory, there in truth ends the intercalation, which, because of its obviousness, did not require to be made in the case of movable capital. But it is just then that the chief question of the problem suggests itself: why there is a net interest within that gross interest which is yielded by the year’s use or service of the threshing-machine or the field, after deduction of all other costs. And to this question—which the rent theory up till now has entirely omitted to put—no answer can be given, either as regards the field or the machine, but to point to the under-valuation of future goods and future services.
e.g., which an agricultural implement affords in farming, cannot possibly be obtained on 1st January, for the whole year in advance: obviously it can be realised only at the end of the year, in the harvest.
e.g. the cotton yarn spun by a machine—is immediately sold to another undertaker by whom the process is completed, and the yarn made into thread or cloth. All increment of value which the intermediate product, the yarn, thus obtains, is now naturally put to the account of this particular intermediate product (or the money capital for which it is sold) and not to that of the parent durable good.
Tables, p. 121.
Quarterly Journal of Economics, October 1888.
Jahrbücher, vol. xvii. p. 48, has ably put forward the necessity of a comprehensive “universal theory of the return to wealth.” I trust that, in the contents of the present chapter, he will see an earnest attempt to develop such a theory.