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
Historical Development of the Conception
Book I, Chapter III
It will be most convenient to open the discussion by a historical survey of the development of the conception.
Originally the word Capital
Caput) was used to signify the Principal of a money loan
(Capitalis pars debiti) in opposition to the Interest. This usage already foreshadowed in the Greek formation
, became firmly established in mediæval Latin, and appears to have remained the prevailing one for a very long time, even pretty far down in the new era.
*10 Here, therefore, Capital meant the same thing as “an interest-bearing sum of money.”
In the meantime the disputes which had arisen over the legitimacy or illegitimacy of loan interest brought about an essential deepening and widening of the conception.
*11 It had become apparent that the interest-bearing power of “barren” money was at bottom a borrowed one—borrowed from the productive power of things that the money could buy. Money only gave the exchange form—to a certain extent the outward garb—in which the interest-bearing things passed from hand to hand. The true “stock” or parent stem which bore interest was not money but the goods that were got for it. In these circumstances the obvious course was so to change the conception that, besides embracing the representative thing, money, it would embrace the represented thing, goods. And, indeed, popular language seems to have made this change before science did. At least, as early as the year 1678, in a glossary of that year, besides the meaning of a sum of money there appears this further interpretation of the word capital,
“Capitale dicitur bonum omne quod possidetur.”*12 But science was not long behind in sanctioning the adoption of the conception. We find it substantially in Hume in his essay on Interest, when he shows that the rate of interest altogether depends, not on the amount of money, but on the amount of riches or stocks available; the only thing wanting is that he should have formally called these riches or stocks “real capitals.” This formal change was finally made by Turgot: “Whoever,” he says in his
Réflexions sur la Formation et la Distribution des Richesses, “gets possession of more goods in a year than he requires to use, can lay past the surplus and accumulate it. These accumulated goods are what people call Capital…. It is absolutely the same whether this sum of goods, or this Capital, consists of a mass of metal, or of other things, since money represents every kind of goods, just as, on the other side, all other kinds of goods represent money.” Thus Turgot gave the second reading in historical succession to the conception of capital.
It was very soon superseded by a third. For when Turgot designated all saved goods indiscriminately as Capital, he seemed to have gone too far in broadening the conception. To replace the word “money” in the definition by the word “goods” only reflected, indeed, the more thorough grasp which was now taken of the subject. But to give the name of Capital, without any further discrimination, to stocks of goods, was to give up, without sufficient reason, the second feature in the old conception,—the reference that capital had to a capability of yielding interest, to an acquisition of goods. To that extent Turgot’s conception of capital was only in part a development born of the time: in part it was an entirely new reading of the term; a reading which, at the same time, exposed him to the charge that, without due cause, he had neglected the very suggestive differences there are between goods and goods. It was no less a man than Adam Smith who changed and rectified Turgot’s definition. The “saved” stocks, he said, must be distinguished as containing two parts.
*13 One portion is destined for immediate consumption, and gives off no kind of income; the other portion is destined to bring in an income to its owner, and this part alone rightly bears the name of Capital.
With this distinction, however, Adam Smith connected another consideration, which was destined to have very serious consequences on the development of the conception. He remarked that his use of the term was applicable as well to the case of individuals as to that of a whole community; only, with this shifting of the standpoint, the group of things embraced by the conception was also somewhat changed. Individuals, that is to say, can make a gain, not only by the production of goods, but also by lending to other individuals for a consideration goods which are destined in themselves to immediate consumption, such as houses, masquerade dresses, furniture, etc. But the community, as a whole, cannot enrich itself otherwise than by the production of new goods. For the community, then, the conception of “means of acquisition” coincides with the otherwise narrower conception of “means of production.” In harmony with this the conception of capital, from the point of view of the community, must be limited to a complex of the means of production. It is worth our while to put more exactly before us the bearing of this insignificant remark—which, by the way, in Adam Smith is put more unpretentiously, and much less sharply, than in the abstract which I have given of his meaning.
First of all, this was the beginning of the division of capital into two independent conceptions—the conceptions afterwards distinguished as National Capital and Individual Capital. Or, to indicate the relation still more exactly, the parent conception of capital as a stock of goods yielding income lived on under the designation of “private capital,” but, under the name of “national capital,” it sent out an offshoot which quickly grew to independent importance; soon, indeed, to greater importance than the parent conception itself. It was immediately recognised that a very notable importance as regards production attached to that class of goods which people now began to call capital
par excellence; and this became the occasion of a great many profitable applications of the new conception to the theory of production. Thus we find the national conception in a short time taking its place as one of the chief fundamental conceptions of that theory, and engaged in those very important problems that are now associated with its name. In the triad, Land, Labour, and Capital, we find the new conception giving its name to one of the three great sources of wealth, or, as it was put later, to one of the three factors of production.
But all the time, in virtue of the old parent conception—that known later as Private Capital—the term capital remained connected with the phenomenon of interest, which belonged to the theory of distribution or income. Thus, from that time onward appeared the peculiar phenomenon which was to be the source of so many errors and complications, that two series of fundamentally different phenomena and fundamentally different problems were treated under the same name. Capital, as National Capital, became the central figure of the weightiest problems of Production; as Private Capital, of the fundamentally distinct problem of Interest.
In view of this it becomes of consequence to state clearly that Adam Smith’s two varieties of the conception of capital are, properly, two entirely independent conceptions, resting substantially on quite different foundations, and only connected externally by a very loose bond. As chance, however, would have it, it was just this secondary and external relation that caused the name to be given to the younger conception, and brought about the identity of name between the two. The centre of gravity of the conception of private capital, as has been pointed out, lies in the acquisition of interest, in the characteristic of being a source of income: the centre of gravity of the conception of national capital, on the other hand, lies in production, in the characteristic of being a tool of production; and the loose bond that connects them is the accidental circumstance that the goods of which men make use in production are the same goods as are the source of profit and interest to a people considered as a whole, and are, therefore, capital in the original sense. Now this latter reference to income gave the national conception of capital its name, but it was very far from giving it its living substance. This was found so exclusively in the relation to production that, in a short time, the formal definition of capital was based upon that relation alone. It was defined as a complex of “produced means of production,” and such like, and in the end it scarcely caused any misgiving when, on closer consideration, the produced means of production seemed never to be quite identical with those stocks which constitute the income-bearing capital of a people. For there can be no question that communities obtain income from consumption goods loaned to other countries against interest. When this incongruity was expressly noted, and yet, notwithstanding, national capital was quietly defined as a complex of means of production, it amounted to a practical and emphatic recognition of the fact that people were interested in capital solely on account of its relations to production, and not at all on account of its accidental characteristic of being the source of interest to the community. To put it shortly: in National Capital the characteristic of being the national source of interest came to the front only for a moment, but this moment was long enough to attach the name of “capital” to it. Scarcely was this done when the centre of gravity was shifted, and placed in its relation to production, and since then National Capital has been looked on as an independent conception, substantially quite foreign to its namesake, Private Capital.
Clearly as the historian of economic theory may now distinguish between these conceptions as developed, the distinction was not seen at the time, nor for long afterwards. With Adam Smith himself the whole matter lies, I might say, in embryo. His ideas were so far from being fixed that he could occasionally ascribe to them meanings which were quite distinct from and did not at all fit in with the fundamental conception. An instance of this is his extension of the national conception to all sorts of personal properties, talents, skill, etc.,—which seem a little out of place as elements of a “stock,” and which, like spirits rashly conjured, banished peace for many a long day from the theory of capital. This, however, is an episode of only secondary importance. The principal point is that the followers of Adam Smith not only failed to get rid of the confusion in which he had left the conception of capital, but, on the contrary, positively put their seal to one of its worst mistakes. They did not notice that, in what Adam Smith and they themselves called “capital,” there were two fundamentally distinct conceptions; they considered the capital of which they spoke in the theory of production as identical with the capital which bears interest. As we know, Adam Smith had already noticed that there was a certain difference in the meanings usually given to the word capital, and that, for instance, rented houses, hired furniture, or masquerade dresses were capital in one sense and not in another, and his followers had not failed to loyally transmit the remark. But obviously they attached no importance to it,—what was the use of making a fuss about a distinction which referred only to a few hired fancy dresses and such like?—and held fast by their conception of capital, the factor of production being capital, the source of interest. And now one confusion resulted in another. Before, it was the conceptions that were mixed; now, it was the phenomena and the problems. Capital produces, and it bears interest. What more natural than to say shortly;—it bears interest
because it produces. And thus, introduced and made possible by the confusion in the conception of capital, originated that naïve and one-sided theory of the Productivity of capital which, from Say’s days to our own, has held, and still, in some measure, holds economic science under its baneful influences. The Socialist or semi-socialist writers of our time were the first to face in earnest the confusion of conceptions by distinguishing capital into “pure economic capital,” and capital as a “historico-legal category.”
*14 This distinction, as we shall see, did not indeed hit the nail on the head; but it was at least a distinction which, of necessity, finally distinguished between the object of the production problem and the object of the interest problem, and thus paved the way for an advance in the treatment of the still viciously confused problems. But this is to anticipate the course of development: to resume the methodical narrative we must go back to Adam Smith.
It may be said that Adam Smith’s fundamental conception was never afterwards quite neglected; the relation of capital to acquisition and to production, which in opposition to Turgot he had again imported into the conception, has, in some form or other, been retained by all later writers. On the other hand, it very soon became manifest that, within the common fundamental conception, there was a surprising amount of latitude for different readings of it, and, as it chanced, there were certain circumstances which very much favoured the taking advantage of this latitude. First of all, economists fell heir not only to the fundamental conception, but to the seed of ambiguity which Adam Smith had planted in it. This seed now burst into full life. Almost everybody, entangled in the confusion we have just described, thought that “Capital” must be defined by
one uniting conception. But the one party, and indeed the majority, thought more about the instruments of production, while the other thought more about the source of income; and thus they attached to capital the characteristics of two different conceptions. This was one fruitful cause of divergent definitions, but there was another still more fruitful. Whether the theoretical conception of capital was made to include productive instruments only, or whether, more liberally, it was made to embrace acquisitive instruments as well, in any case there are many different kinds both of productive and of acquisitive instruments. Now, in proportion as economists discovered more similarities or more contrasts between the various groups of goods which serve for production and for acquisition, they considered it appropriate to group together, under the conception which they called capital, sometimes all acquisitive or all productive instruments without exception, sometimes only a certain circle of the same. And this circle again, according to the tendencies of the writer, might be larger or smaller; sometimes of moderate dimensions, and sometimes, again, very closely limited. It may be said, indeed, that of all combinations and permutations which were logically and mathematically conceivable, economical science in this case was not spared one.
Without attempting either to give a complete tale of these, or to keep to the chronological order, I shall shortly collocate the more important of them.
Numerous writers define capital as a group of “products that serve towards production,” or as groups of “produced means of production.” This conception, which is expressly based on the relation of capital to production, excludes, on the one hand, land (as not produced) and, on the other hand, all goods that serve for immediate satisfaction of wants. This conception I have followed in defining capital as a group of Intermediate Products. In so far as it is not so much an alteration as a more distinct formulation of Adam Smith’s (national) conception, I do not reckon it an independent variation.
The variation which Hermann, however, has given must be considered an independent one, and is the fourth reading in arithmetical order given to the conception. He goes back to capital as the source of income, and makes this the object of his definition: Capital, he says, is “every durable foundation of a utility
(Nutzung) which has exchange value.”
*15 In opposition to the last definition this one includes under the conception of Capital all land, and besides embraces such consumption goods as are durable, like furniture, houses, etc., even if they are personally used by the owners.
A fifth variation is given by Menger. He defines capital as such groups of economic goods of higher rank (productive goods) as are now available to us for future periods.
*16 This definition is, in one way narrower, in another, wider than Hermann’s. It excludes durable consumption-goods (“goods of the first rank”), but it is wide enough to take in the productive services of labour,
*17 which Hermann had not reckoned as capital.
A sixth variation comes from Kleinwächter. He finds it a characteristic mark of capital that it
lightens the toil of acquisition or productive labour. Now this characteristic appears to him not to belong to all means of production, but only to one category of these, the tools of production, while the matter or materials of production are absolutely passive during the whole production process; they are worked up or used up but give no assistance in working. “Logically,” therefore, “the conception of capital should be limited to tools of production.”
A seventh interpretation has Jevons for its author. It runs parallel to a certain extent with the foregoing. That is to say, Jevons also considers it proved that by capital is to be understood “wealth employed to facilitate production,”
*19 But he finds this characteristic in quite another group of concrete goods from that of Kleinwächter. “The single and all-important function of capital,” he says, “is to enable the labourer to await the result of any long lasting work—to put an interval between the beginning and the end of an enterprise.” Capital, then, “consists merely in the aggregate of those commodities which are required for sustaining labourers of any kind or class engaged in work. A stock of food is the main element of capital; but supplies of clothes, furniture, and all the other articles in common daily use are also necessary parts of capital.” The true and only capital thus, according to Jevons, is the sustenance of the labourers.
Marx arrived at an eighth reading of the conception. As every one knows he sees in interest a profit got by the capitalist at the expense of the wage-earner. This element of exploitation seems to him so important that he brings it in to the conception of capital as a constitutive feature of it: he conceives of capital as only those productive instruments which, in the hand of the capitalists, serve as “instruments for the exploitation and enslaving of the labourer.” The same things in the possession of the labourer, on the other hand, are not capital.
A ninth variation we owe to the distinguished critic of the theory of capital, Karl Knies. It originates in a well-meant attempt to settle the terribly tangled controversy to the satisfaction of everybody. To this end Knies endeavours to construct a conception of capital which will be so wide that the most important of the contending interpretations may find room in it beside each other. The uniting element in the conception he imagines he finds in the devotion of goods to the service of the future. Accordingly he defines the capital of a community as “its available stock of goods (whether for consumption, acquisition, or production) which may be applied to satisfying wants in the future.”
*22 This definition does, as a fact, afford room both for Turgot’s “saved stocks of goods” and for the “produced means of production” of Adam Smith’s school, as also for all goods embraced in Hermann’s definition as affording the foundation of a durable—and therefore a conspicuously future—utility.
Quite by itself stands the tenth interpretation, that of L. Walrus. He divides all economic goods into “capital” and “income”
(revenu). All kinds of goods, irrespective of their destination, which can be used more than once—that is, all durable goods—he calls capital; while all perishable goods are income. Going into details he mentions the following as capital:—Land
(capitaux fonciers), persons
(capitaux personnels), and movable durable goods
(capitaux proprement dits or
capitaux mobiliers), while he considers food, the raw materials of industrial production, fuel and the like, as income.
If the interpretations just mentioned are divided in opinion as to the goods which should be designated capital, they are, at any rate, all agreed that it is
goods that are to bear that name. But, finally, an eleventh reading of the conception calls this in question, and, instead of making capital a real concrete quantity, distils out, as it were, some kind of abstraction as the essence of capital. Thus M’Leod, who sometimes recurs to a favourite metaphor of earlier writers and defines capital as a “stock of accumulated labour;” sometimes goes still deeper in abstraction and defines it as “purchasing power” or “circulating power.” These phrases are not meant as illustrations, but explanations given in full earnest; he gives us to understand this in the most emphatic way by saying, in one place, that the application of the word capital to goods is a simple metaphor, and on another occasion, in so many words, that capital does not represent goods in any way whatever.
*24 Quite recently too we have a strikingly similar conception in the suggestive work of a juristic writer, Kühnast. He also tells us emphatically that capital is of an immaterial nature, and does not consist of material objects at all—of goods themselves, that is to say—but only of their value. “Capital is… the value of the productive power contained in material goods… or a complex of productive material values.”
Numerous as are these various readings of the conception, our list does not by any means exhaust the divisions and subdivisions that might be given. In addition to the above interpretations which differ in form—which are, that is, different definitions—there may be complete unanimity as to the formula of the definition, and yet a good deal of disagreement as to the essence of it. This might happen where a word employed in all the definitions as characteristic and distinctive was not used in all of them in the same sense. Not to speak of less important instances, there are two characteristic terms which, as capable of different readings, involve materially different interpretations of the conception of capital. One of these is the word “good.” Of the many economists who were agreed in defining capital as a stock or group of goods, some, taking the word in its narrower sense, thought only of a supply of material goods; some, extending it to immaterial objects, thought of things like the state, peace, law, national honour, virtue;
*26 some again, under the same term, included useful personal properties and powers;
*27 while others took man himself into the conception.
*28 A similar ambiguity has attended the use of the characteristic term “means of production,” or simply “production.” While some economists, and those the majority, understood by production simply a producing of materials for the satisfaction of human want, others included the producing of what they called “inward goods,” the creation of satisfactory conditions for and in the human person. The consequence of this was that the significant term “means of production” lost every possible limitation, and that even goods for immediate enjoyment were received into the conception of capital on the ground of being instrumental in producing the “inward goods” of content, health, culture, etc. The greatest sinner in this respect is Roscher. He first defines capital to be “every product which is dedicated to further production,” but then divides this general conception into “Productive capital” and “Use capital,” according as these products affect the production of material goods or “the production of personal goods or useful relations.”
*29 Thus, notwithstanding the difference in definition, his conception of capital practically comes very near to that of Turgot.
Das Geld, Berlin, 1873, p. 6 (second edition, p. 24); Ricca-Salerno,
Sulla Teoria del Capitale, 1877, chap. ii.; and Schönberg’s
Handbuch, second edition, vol. i. p. 206.
Das Kapital in seiner Kulturbedeutung, Würzburg, 1879, p. 32.
Grundlegung, second edition, p. 39.
Der Unternehmergewinn, 1884, p. 180.
Das Geld, first edition, p. 53.
(Mathematische Begründung der Volkswirthschaftslehre, Leipsic, 1885, § 2) has closely followed Walras.
(Elements of Political Economy, 1858, pp. 66 and 69).
Beiträge zur Erläuterung des Deutschen Rechtes, 1884, p. 356; and particularly pp. 385-387.
Das Geld, p. 17 (second edition, p. 38).
(Principles of Political Economy, 1825, p. 319): “A labourer is himself a part of the national capital.” Elsewhere he explains the wage of labour as an interest on capital of the “machine called man.”