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 Nature of Capital
Book I, Chapter II
The end and aim of all production is the making of things with which to satisfy our wants; that is to say, the making of goods for immediate consumption, or Consumption Goods.
*6 The method of their production we have already looked at in a general way. We combine our own natural powers and natural powers of the external world in such a way that, under natural law, the desired material good must come into existence. But this is a very general description indeed of the matter, and looking at it closer there comes in sight an important distinction which we have not as yet considered. It has reference to the distance which lies between the expenditure of human labour in the combined production and the appearance of the desired good. We either put forth our labour just before the goal is reached, or we, intentionally, take a roundabout way. That is to say, we may put forth our labour in such a way that it at once completes the circle of conditions necessary for the emergence of the desired good, and thus the existence of the good
immediately follows the expenditure of the labour; or we may associate our labour first with the more remote causes of the good, with the object of obtaining, not the desired good itself, but a proximate cause of the good; which cause, again, must be associated with other suitable materials and powers, till, finally,—perhaps through a considerable number of intermediate members,—the finished good, the instrument of human satisfaction, is obtained.
The nature and importance of this distinction will be best seen from a few examples; and, as these will, to a considerable extent, form a demonstration of what is really one of the most fundamental propositions in our theory, I must risk being tedious.
A peasant requires drinking water. The spring is some distance from his house. There are various ways in which he may supply his daily wants. First, he may go to the spring each time he is thirsty, and drink out of his hollowed hand. This is the most direct way; satisfaction follows immediately on exertion. But it is an inconvenient way, for our peasant has to take his way to the well as often as he is thirsty. And it is an insufficient way, for he can never collect and store any great quantity such as he requires for various other purposes. Second, he may take a log of wood, hollow it out into a kind of pail, and carry his day’s supply from the spring to his cottage. The advantage is obvious, but it necessitates a roundabout way of considerable length. The man must spend, perhaps, a day in cutting out the pail; before doing so he must have felled a tree in the forest; to do this, again, he must have made an axe, and so on. But there is still a third way; instead of felling one tree he fells a number of trees, splits and hollows them, lays them end for end, and so constructs a runnel or rhone which brings a full head of water to his cottage. Here, obviously, between the expenditure of the labour and the obtaining of the water we have a very roundabout way, but, then, the result is ever so much greater. Our peasant needs no longer take his weary way from house to well with the heavy pail on his shoulder, and yet he has a constant and full supply of the freshest water at his very door.
Another example. I require stone for building a house. There is a rich vein of excellent sandstone in a neighbouring hill. How is it to be got out? First, I may work the loose stones back and forward with my bare fingers, and break off what can be broken off. This is the most direct, but also the least productive way. Second, I may take a piece of iron, make a hammer and chisel out of it, and use them on the hard stone—a roundabout way, which, of course, leads to a very much better result than the former. Third method—Having a hammer and chisel I use them to drill a hole in the rock; next I turn my attention to procuring charcoal, sulphur, and nitre, and mixing them in a powder, then I pour the powder into the hole, and the explosion that follows splits the stone into convenient pieces—still more of a roundabout way, but one which, as experience shows, is as much superior to the second way in result as the second was to the first.
Yet another example. I am short-sighted, and wish to have a pair of spectacles. For this I require ground and polished glasses, and a steel framework. But all that nature offers towards that end is silicious earth and iron ore. How am I to transform these into spectacles? Work as I may, it is as impossible for me to make spectacles directly out of silicious earth as it would be to make the steel frames out of iron ore. Here there is no immediate or direct method of production. There is nothing for it but to take the roundabout way, and, indeed, a very roundabout way. I must take silicious earth and fuel, and build furnaces for smelting the glass from the silicious earth; the glass thus obtained has to be carefully purified, worked, and cooled by a series of processes; finally, the glass thus prepared—again by means of ingenious instruments carefully constructed beforehand—is ground and polished into the lens fit for shortsighted eyes. Similarly, I must smelt the ore in the blast furnace, change the raw iron into steel, and make the frame there from processes which cannot be carried through without a long series of tools and buildings that, on their part again, require great amounts of previous labour. Thus, by an exceedingly roundabout way, the end is attained.
The lesson to be drawn from all these examples alike is obvious. It is—that a greater result is obtained by producing goods in roundabout ways than by producing them directly. Where a good can be produced in either way, we have the fact that, by the indirect way, a greater product can be got with equal labour, or the same product with less labour. But, beyond this, the superiority of the indirect way manifests itself in being the only way in which certain goods can be obtained; if I might say so, it is so much the better that it is often the only way!
That roundabout methods lead to greater results than direct methods is one of the most important and fundamental propositions in the whole theory of production. It must be emphatically stated that the only basis of this proposition is the experience of practical life. Economic theory does not and cannot show
a priori, that it must be so; but the unanimous experience of all the technique of production says that it is so. And this is sufficient; all the more that the facts of experience which tell us this are commonplace and familiar to everybody. But
why is it so? The economist might quite well decline to answer this question. For the fact that a greater product is obtained by methods of production that begin far back is essentially a purely technical fact, and to explain questions of technique does not fall within the economist’s sphere. For instance, that tropical lands are more fruitful than the polar zone; that the alloy of which coins is made stands more wear and tear than pure metal; that a railroad is better for transport than an ordinary turnpike road;—all these are matters of fact with which the economist reckons, but which his science does not call on him to explain. But this is exactly one of those cases where, in the economist’s own interest—the interest he has in limiting and defining his own task—it is exceedingly desirable to go beyond the specific economic sphere. If the sober physical truth is once made clear, political economy cannot indulge in any fancies or fictions about it; and, in such questions, political economy has never been behind in the desire and the attempt to substitute its own imaginings! Although, then, this law is already sufficiently accredited by experience, I attach particular value to explaining its cause, and, after what has been said as to the nature of production, this should not be very difficult.
In the last resort all our productive efforts amount to shiftings and combinations of matter. We must know how to bring together the right forms of matter at the right moment, in order that from those associated forces the desired result, the product wanted, may follow. But, as we saw, the natural forms of matter are often so infinitely large, often so infinitely fine, that human hands are too weak or too coarse to control them. We are as powerless to overcome the cohesion of the wall of rock when we want building stone as we are, from carbon, nitrogen, hydrogen, oxygen, phosphor, potash, etc., to put together a single grain of wheat. But there are other powers which can easily do what is denied to us, and these are the powers of nature. There are natural powers which far exceed the possibilities of human power in greatness, and there are other natural powers in the microscopic world which can make combinations that put our clumsy fingers to shame. If we can succeed in making those forces our allies in the work of production, the limits of human possibility will be infinitely extended. And this we have done.
The condition of our success is, that we are able to control the materials on which the power that helps us depends, more easily than the materials which are to be transformed into the desired good. Happily this condition can be very often complied with. Our weak yielding hand cannot overcome the cohesion of the rock, but the hard wedge of iron can; the wedge and the hammer to drive it we can happily master with little trouble. We cannot gather the atoms of phosphorus and potash out of the ground, and the atoms of carbon and oxygen out of the atmospheric air, and put them together in the shape of the corn of wheat; but the organic chemical powers of the seed can put this magical process in motion, while we on our part can very easily bury the seed in the place of its secret working, the bosom of the earth. Often, of course, we are not able directly to master the form of matter on which the friendly power depends, but in the same way as we would like it to help us, do we help ourselves against it; we try to secure the alliance of a second natural power which brings the form of matter that bears the first power under our control. We wish to bring the well water into the house. Wooden rhones would force it to obey our will, and take the path we prescribe, but our hands have not the power to make the forest trees into rhones. We have not far to look, however, for an expedient. We ask the help of a second ally in the axe and the gouge; their assistance gives us the rhones; then the rhones bring us the water. And what in this illustration is done through the mediation of two or three members may be done, with equal or greater result, through five, ten, or twenty members. Just as we control and guide the immediate matter of which the good is composed by one friendly power, and that power by a second, so can we control and guide the second by a third, the third by a fourth, this, again, by a fifth, and so on,—always going back to more remote causes of the final result—till in the series we come at last to one cause which we can control conveniently by our own natural powers. This is the true importance which attaches to our entering on roundabout ways of production, and this is the reason of the result associated with them: every roundabout way means the enlisting in our service of a power which is stronger or more cunning than the human hand; every extension of the roundabout way means an addition to the powers which enter into the service of man, and the shifting of some portion of the burden of production from the scarce and costly labour of human beings to the prodigal powers of nature.
And now we may put into words an idea which has long waited for expression, and must certainly have occurred to the reader; the kind of production which works in these wise circuitous methods is nothing else than what economists call Capitalist Production, as opposed to that production which goes directly at its object, as the Germans say,
“mit der nackten Faust.”*7 And Capital is nothing but the complex of intermediate products which appear on the several stages of the roundabout journey.
It is in this way I interpret the most important fundamental conception in the theory of capital, and I should be very glad to stop here. But, like so many another conception in the theory of capital, this conception of capital itself has become a veritable apple of discord to the theorists. A perfectly amazing number of divergent interpretations here confront each other, and block the approach to the theory of capital with one of the most vexatious controversies in which our science could be involved. This uncertainty as to the conception of capital, bad enough in itself, becomes worse in proportion as Capital gives modern science new questions to consider and discuss. It is certainly very unfortunate when a science already earnestly, even acrimoniously engaged on the solution of questions which affect society to its depths,—questions which all the world knows, ponders, and discusses as the great “problems of capital,”—is struck, as it were, by a second confusion of tongues, and becomes involved in an endless wrangle as to what kind of thing it is that properly is called Capital! Such a controversy at such a point is more than embarrassing; it is a calamity; and has been found so in the history of Political Economy. Almost every year there appears some new attempt to settle the disputed conception, but, unfortunately, no authoritative result has as yet followed these attempts.
*8 On the contrary, many of them have only served to put more combatants in the field and furnish more matter to the dispute.
I confess that, to me, the settlement of the real problems connected with the name of capital seems more important, and certainly is more attractive, than the cataloguing of controversies as to the proper use of the word. All the same the fact remains that the confusion about the name has brought a great amount of confusion into the matter; and, again, it might be open to misconstruction—and not without reason,—if the author of a somewhat comprehensive work on capital were to pass over the discussion of what is certainly the most noisy, if not the most weighty controversy about capital. On these two accounts I feel obliged again to tread the heated path of controversy, in the hope that impartial and sober inquiry into the matter in dispute may succeed in ending it.
Grundsätze, p. 8, and Böhm-Bawerk’s
Rechte and Verhältnisse, p. 101.—W. S.
(Das Geld, Berlin, 1873, pp. 1-56); of Cossa
(La Nozione del Capitale, 1874, published in the
Saggi di Economia Politica, Milan, 1878); of Ricca-Salerno
(Sulla Teoria del Capitale, Milan, 1877); of Umpfenbach
(Das Kapital in seiner Kulturbedeutung, Würzburg, 1879); of Kühnast
(Ueber den rechtlichen Begriff des Kapitales in
Beiträge zur Erläuterung des Deutschen Rechtes, 1884); of Supino
(Il Capitale nell’ Organismo Economico e nell’ Economia Politica, Milan, 1886). Meanwhile we have the well-known works of Rodbertus and Marx, both bearing the title
Das Capital, and again the elaborate statements in the more comprehensive systems, particularly those of Wagner
(Grundlegung, second edition, 1879, p. 36); of Kleinwächter (Schönberg’s
Handbuch, first edition, p. 170; second edition, p. 206); and of Cohn
(Grundlegung der Nationalökonomie, Stuttgart, 1885, § 145-147).