Bohm bawerk – capital and interest; a critical history of economical theory (1922)

Innormal capitalist production, that is to say, not onlyis thevalue surplus of value appears.. The surplus then, which we call interest,appears primarily inthe value or price of products

BOOKSTACKS

CAPITAL AND INTEKEST

BY

EUGEN V BCJHM-BAWEKK

PROFESSOR OF POLITICALECONOMYINTHEUNIVERSITY OF INNSBRUCK

BY

LECTURER ON POLITICALECONOMYINQUEEN MARGARETCOLLEGE

GLASGOW

NEW YORK

BRENTANO'S

1922,

TRANSLATOR'S PREFACE

MY only reasons forwriting a preface to a workso exhaustive,and

Kapi-talzins. are that I think it may be advisable to put the problemwith whichit deals in a way more familiar toEnglish readers, and

to show that the various theories stated and criticised in it are

based on interpretations implicitly givenby practical, men to

com-po nionphenomena

First, to state the problem Amanufacturer whostartsbusiness

22,000 The increment of 2000 he will probably call his

the goods he manufacturesmeeta want feltby a certain section of

productionfor oneyear, to obtainthe profit of 2000

which, as a rule, is not willing to pay more than it can help for

anything, should pay prices such as allow of this profit. The

manufacturer's answer probably would be, that it would not beworth his while toputforth his energies in manufacturingforlessthan this amount of profit, ashe could, withat leastequal safety

and without personal exertion, obtain, say 1000 by lending his

In thisanswer two statements are involved: first, that of the

2000 one partiswage forpersonalexertion, and, second, that the

remainder is the "usual return to capital" without personal

usuallycalled"undertaker's

profit

"

and interest. Interestseemsto

be denned as thatannual returnto capitalwhichmay be obtained,

as a without exertion this answer we

TRANSLATOR'S PREFACE

should expect to find the phenomenon of interest most easily

studied in the case of a Limited Liability Company, where thepersonal exertion of the shareholders is limited to choosing theinvestment, subscribing the capital, and receiving the dividends

The portion of total "

profit

"

obtained bythe privateemployerorundertaker, as such, is here eliminated; or, rather, it is made

director, the ordinary directors, and thesecretary, who are paid a

will guard us againsta commonmisunderstanding. Sucha balance

Insurance Fund Theformer, sometimes calledSinking,Wearand

capital, or its value, is replaced in the proportion in which it isworn out, and thus provides a guarantee that the value of theparent capital is not encroached upon, or inadvertently paid away

individend The latter,sometimescalledEqualisation ofDividendFund, is a provision for averaging the losses that are sure to

occur over aseries of years, andare really a portion of the current

dividend is paid overtothe shareholders, and this accentuates two

important facts: (1) that interest properly so called is something

accountedforby insurance againstrisks.

The question now is, Is such a dividendpure interest? Here

we have to reckon with the familiar factthat limited companies,

under similar conditions, pay the most various rates of dividend

If thenwe accept "dividend" as the equivalent of "

onequalamounts ofcapital.1 Onlooking closer,however, we find

the dividing line again reasserting itself If a sound industrial

companyis known tobe paying a dividend higher than a certain

capital, will rise to the point where dividend corresponds to an

stock of a great railwaypaying 5 per centwill riseto something

1 This consideration of itself suggests the indefiniteness of whatis usually called Undertaker's Profit In the LimitedLiabilityCompanythis"

wageof intellect" is

this "profit." Thesolution probably is that the attempt to assess undertaker'swage

de-pending,among otherthings,on adroitness, foresight,opportunity,and exploitation

of labour four factors scarcely reducible tofigures. Butwith this line of thought, interestingandimportantas itis, wehave nothing todohere.

TRANSLATOR'S PREFACE vii

There is, in short, in every country, although varying from

country to country, acertain annual return which can be obtained

owner Its levelis usually determinedbythemarket price of the

absolutely safe return,because the British Constitutionis pledged

forthe annual paymentofthisamount of interest on itsdebt on

This we should probably consider the propereconomic interest for

should consider, either as dueto the insecurity of the capital as

invested (i.e. as a premium for

quantity called "profit." Thus Ave should probably consider the

4 per cent of our railway stocks as consisting of,say 2| per cent

dividend

of our problem

Inwhichofthemanyformsthatinterest takescanwebeststudy

itsnature] Itmight seemthatthe2fper centofConsolswasthemost

appropriate subject for examination, but a glance will show that

whole cannot pay interest on its debts unless the citizens as

other-wise the nationwill be paying away its capital. To studyinterest

as expressed in the annual payments onthe Consolidated National

Debt would be tomake the common mistake of explaining Natural

ex-plainingwhy people pay interest by showing that theydo pay it.

The phenomenon, then, must, primarily, be studied as it appears

in some or other of the forms of production of wealth. Let ustake the case ofa manufacturingcompany

whichnot only covers the valueof raw materials, reimburses thevarious wagesof manual and intellectual labour, and replaces the

is divided out among the capitalist shareholders as interest. Innormal capitalist production, that is to say, not onlyis thevalue

surplus of value appears. It has not always been perceived by

economists that this surplus value is the essential phenomenon

of what wecall interest,^-that interest oncapital consistsof this

very surplus valueand nothing else, but whenever it isperceivedthe question almost suggests-itself, What does this surplus value

TRANSLATOR'S PREFACE

represent? Is itmerely a surplus,oris itof the nature ofa wage?

In other words, is it something obtained either by chance orforce,

and corresponding to no servicerenderedby anybody oranything;

or is it something connected with capital or the capitalist that,economically speaking, deserves a return or awage?

A little consideration will show that the idea ofa "mere

sur-plus" is untenable When a manufacturer engages his capital in

production he, asit were, throwsit into solution,and risksit allon

the chance of the consuming public paying acertain price for theproducts into which his capital is transformed If they will not

pay any price at all the capital never reappears; even the labour,

which bound upits fortunes with the materials and machinery of

manufacture, loses its wage, or would do so except for the wage

contractwhich pays labour in advance If the consumers, again,

various workers, including the employerproper,will get theirwage,

and the value of the capital itself will be unimpaired, but there

will be no interest It is onlyif the consumers are willing to pay

a higherprice that capitalcan getits interest.

The surplus then, which we call interest,appears primarily inthe value or price of products that is to say, interest is, in the

first instance,paid overbythe consumerofgoodsin the price oftheproducts he buys.

Nowitseemsintelligible,althoughit isnotreally sointelligibleas

isusually assumed, that thepublicwillalwayspayaprice forproducts

sufficient to reimburse the wages paid in producing them. The

givenit here and wages are supposed,primafacie, to represent an

equivalent invalue contributed tothe product bythe worker But

that the consuming world, over and above this wage, will paya

product,is only conceivable on the supposition that the publicis

unconsciousthatit ispaying such asurplus This supposition,

a game of Beggar myNeighbour which would scarcely commend

itselfto businessmen

The surplus then may be assumedtorepresent something

con-tributed by capital to the value of products. This view is

supported by the common consciousness of practical men,

"

who

production

If, now, we appealto thecommon consciousness to say what it

we shallprobably gettwo answers Onewill be thattheowner of

TRANSLATOR'S PREFACE ix

On one or other of these grounds, the capitalistissaid to deserve

a remuneration, and this remuneration is obtained by himin theshape of interest.

Now it mightpossiblybe the case that both answers point to

elements indispensable in the explanation of interest,but a slightconsideration will show that the two answers are very different

the other negative thatthe capitalist abstains from doing

ispaid because the capital he lends produces, or helps to produce,

new wealth; in the other he is paid because he abstains from

diminishing wealth already produced

Itwill becomeevident as wego on that, on these twoanswers,

whichspring to the lips of any business manasked to accountfor

interest, are based the most important of the theoriescriticised in

the present book Thefirst answeris thebasis ofthe Productivity

Abstinence.theory.

The argument of the Productivity theory may be put thus

and making use of no powers beyond the natural forces which

manifest themselvesalike in the labourer and in his environment,can alwaysproduce a certain amount of wealth But when wealth

takenasinstanceandtype andcapitalbecomesintermediarybetween

man and his environment of nature, the result is -that the duction ofwealth is indefinitely increased Thedifference between

interest.

The simpler forms of thistheory (wherecapital is creditedwith

where, for instance,emphasis is laidon the displacementoflabour

bycapital,and interest is assumed tobe the value formerly obtained

as wage, or where prominence is given to the work of natural

powers which, though in themselves gratuitous, are made available

onlyintheformsof capitalistproduction hehas calledtheIndirecttheories

\

TRANSLATOR'S PREFACE

whole return to capitalist production which is not accounted for

in comparison withthat of many ofthe economists who profess theProductivitytheory Their usual treatment of theinterestproblem

of capital, aswageisforthe services of labour,giveample

the riseandfall ofits rate.

If, however, we demand an answerto what wehave formulated

as the true problemof interest, we shall make the discovery thatthe Productivity theory has not even putthatproblem before itself.

The amountoftruth inthe theory isthatcapitalis a mostpowerful

highly valued. But to say that capital is "

the value of which fell in inverse ratio, or if its products were,

both as regards quantityandvalue, greater than the products ofunassisted labour The theory, that is to say, explains why the

manufacturer has to pay a high price for raw materials, for the

manufactured commodity, which is simply these materials andmachines transformed by labour into products, at a higher price

work of two labourers is valued at 100, but itdoes not explain

105 twelvemonths hence; in other words, whycapital employed

inproduction regularly increases toa value greater thanitself.

It mustbe admitted that there is something veryplausible in

Apoorwidow owns achest of toolsvaluedat 50 Anunemployed

carpenterborrows them Thefiftyshillings interesthe pays seems

almostan inadequate return forthe added productiveness giventohislabour over the year. Isnot theinterest made possible by the

pro-duction there would be nointerest. So without land there would

cause of the turnips. Suppose the widowsold thechest of tools to

another carpenter for 50 His labour also would be renderedproductive, andin the samedegree, but hewould pay no interest.

Orsuppose she sold thetools for 50, but did not getpaymentfor

a year; the reason shewould give for asking fifty shillings extra

would be, not that the tools wereproductive,but thatthe payment

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is thatthe productiveness of concrete capitalis already discounted

inits price. The chest of tools wouldbe of no value but forthenatural forces embodiedin themor made availablebythem To

double charge for natural forces inthe price and in theinterest.Meanwhile we may note one significant circumstance in all these

Itcannotbe too often reiteratedthat the theorywhich explains

may obtain value and maynot; not a surplus of value over the

amount of value produced by labour unassisted bycapital; but asurplus of value in the product of capital over the value of the

present theory to meet these requirements may be shown inanother way. It is often assumed that, if a labouring man

during his week'swork consumes the value of, say 20s in food,

tools, etc., andduring thatweek turns 20s worthof raw material

themarket for something over 40s Butthe ordinary lifeof many

a peasant proprietorwho lives bycontinualtoil, and never "gets

out of thebit," that is, never doesmore than reproduce hisbare

and that labourby no means always produces more value than it

consumes But the plausibility of the Productivity theory is the

emer-gence of surplus value in the case of simple labour needs

What is a product or commodity but raw material plus labour?

Labour and capital co-operate in making it, and the individual

form and share of eachis lost inthe joint product. But, of thetwo, labouris the livingfactor, and ifsurplus value doesemerge in

Thus the Productivity theory ends in suggesting that other and

andis only snatched away bycapital.

But the factis that, in all this,we have anentire misconception

Neithercapitalnorlabour can produce it. Whatlabour doesis to

produce a quantity of commodities, and what capital co-operating

with labour usually does is to increase that quantity. -Thesecommodities, under certain known conditions, will usually possess

1

TRANSLATOR'S PREFACE

indeed, is often ininverseratio. Butthe valuedoes notarise intheproduction, nor is it proportional to the effortsand sacrifices ofthatproduction The causal relation runs exactly the oppositeway To

putit in terms of Monger's law, the means of productiondo notaccount for normeasure thevalueofproducts; onthecontrary,thevalueofproducts determinesand measuresthevalueofmeansof pro-

human satisfactions,and,ifmen do not "value" commodities when

made,allthelabourandcapitalexpendedinthemakingcannot confer

onthem the value ofthe smallest coin. But if neither capitalnor

labour can create value, how can it be maintained that capital

employed in production not only reproduces its own value, but

produces a value greaterthan itself ?

of whatour author has called the Use theory ofinterest, and I am

almostinclined to thinkthathe hasdone too muchhonourtosome

economists in ascribing tothem this theory,or, indeed, anydefinite

theory at all.

have accepted thisformulawithout translating it If the formula,however, isconsidered to containa scientific description ofinterest,

we must take theword "use" in somethinglike itsordinary cation,and consider the "use of capital"as somethingdistinct from

theendofthe loariperiod,thecapital lentisreturned undeteriorated

in value; itwas.not thecapital thatwas lent, but theuse of the

capital. ToputitintermsofBastiat's classical illustration : James,

who lends a plane to William, demands at the year's end a new

planein place of the oneworn out,and asksin addition a plank, on

If, however, we lookcarefully into this illustration, we shall see

that Williamnot onlyhadthe useofthe planebutthe planeitself, as

appears from the fact that the plane was worn out during the

consumptionof the plane; paymentforayear's"use"ispaymentfor

thewholecapitalvalueoftheplane. Yetthepayment demandedat

way If William on the 1st of January had bgught the planeoutrightfrom James, he would havepaid him onthat date a value

"use" ofthe plane over 365 days; andby31stDecemberthe plane

TRANSLATOR'S PREFACE xiii

would have been consumed As thingsare, he pays nothing on 1st

January; he has the use of the plane over the year; by 31st

Decemberthe plane isconsumed; and next day he hasto payover

to James a precisely similar plane plus a plank. The essential

it is a planeplus a plank

This again suggests a verydifferentsourceofinterest,viz. thatit

istobe foundinthe differenceoftime betweenthetwopayments.

regards theword "use." It isnotdifficultto findthe origin ofthe

thereby It has arisen in too exclusivelystudying the loan under

theformproperlycalledHire that is,where adurable goodislent

and is returned at the year's end, deteriorated indeed but notdestroyed If welend out a horseand cart, a tool,a house,we areaptto conclude that theinterestpaid us is aprice for the "use"of

somewhat deteriorated in value, butvisibly the same goods; andprobably mostof uswould fallinto the common errorof supposing

of the parent capital. This is rendered more plausible by the

assume the gold or notes wereceive to be the same gold or notes

we lent. Butif wetake the case of coals, or grain, or perishable

goods generally, and ask how it is possible to conceive of these

goods giving off a use and being returned to us substantially the

butfortheconsumption ofthem,forthe goods themselves Are we

to conclude then that durable goods admit of an independent usepossessing independentvalue, and that perishable goods do not?

If so,interestcannotbethe price ofthe "use"ofcapital,as interest

is paid forall capital, whether durable orperishable.

has revenged itself for our unscientific treatment of it It was

almosta misfortune thatAdamSmith putits first great treatise in

an emulation among economists to keep their work at the same

severe attention to scientific method In no other way can I

account for the fact that, a hundred years after the appearance

TRANSLATOR'S PREFACE

should be devoting so much of their time to elementary andneglected conceptions One of these neglected conceptionsis that

Bohm-Bawerk to that subject Briefly it amounts to this, that all

material "goods," theobjects ofeconomical attention as distinctfrom

imaginary Every good isnothing but the sum ofits uses, andthevalue ofa good is the value of all the uses containedin it If agood, such as gunpowder, can only serveits purpose or afford its

by whichthegood gives forth its use. If, on thecontrary, it is so

exhaustiveuse, and Use isonly a prolonged consumption

Thisat once enables usto estimate the Use theory of interest

goods whichconstitute thecapital

; it is their consumption, fastorslowas the case may be; and a payment for the use of capital

isnothingbut apaymentforthe consumption ofcapital. Thetrue

nature of the loan transaction is, not that in itwe get the use of

consume it, and payforit bya new sumof valuewhich somehow

old problem once more how do goods, when used as capital in

production, increase in value to a sum greater than their own

ofthe Productivitytheories.

We haveseen that the previous theories were founded on some

by the capitalist. Wealth once produced can be used either in

immediate consumption that is, for the purposes to which, in the

last resort, allwealth is intended

; or it can be used as capital

that is, to producemore wealth, and so increase the possibilities of

latter purpose deserves a compensation for his abstinence from

usingit inthe former, and interest isthis compensation Itmust

absti-nence from personal employment of capital in production that

would simplythrow usback onthe previous question, viz. how the

ownercould make interest(as distinct from wage) bythe useof his

formsofpersonal enjoymentor gratification.

TRANSLATOR'S PREFACE xv

At the back of thistheory of interest is that theory of value

whichmakesitdependuponcostsofproduction Senior,thefirstand

language

The word"Cost" impliessacrifice,not surplus. Butinproduction,

asitseemedtohim, therewasanothersacrificebesidestheprominent

one of labour, thatof abstinence, and interest in his view wasthe

compensationfor this sacrifice.

It must be confessed that to those who are in the habit of

looking uponall work assacrifice, and all wage as compensation,

The "abstinence"'of a rich man from what he probably cannot

consume, the capitalist's "compensation" for allowing others topreservehiswealth frommothandrustby usingit,themillionaire's

weaponsof those who consider the evils of interestaggravated by

world would have been what it is if it had not been for the

"abstinence" of those who had the commamd over wealth, to

accumulate or dissipate it, we can see that such jibes are more

catchingthan convincing. Thestrength of the Abstinencetheory

isthat the facts itrestson reallygive the explanationhow capital

comesintobeingin primitive conditionsand in newcountries Thefirst efforts to accumulatecapital must be attended bysacrifice ; atemporary sacrifice, of course, to secure a permanent gain, but, in

the first instance at least, a material sacrifice It is with thebeginnings of national capital as it is with the beginnings of

product pays wage andanother pays interest,as compensation for

a sacrifice, but because it makes products whichobtain valuefrom

humanwants; and capital does not deserve to be paid because itmake sacrifices whichis a matter of no concern to any one but

the capitalist but because of some useful effect produced by its

accumulatesitshould get a perpetualpayment1 Andif, aswe saw,productivity cannot accountfor interest, nomore canabstinence

Dr Bohm-Bawerk'schiefcriticism,however, isdirected toa more

fundamental mistake in Senior'sfamous theory. Senior includedabstinence among the costs of production as a second and

xvi TRANSLATOR'S PREFACE

independentsacrifice. In asingularly subtle analysisBohm-Bawerk

shows that abstinence is not an independent sacrifice but an

the following concrete example An ownerof capital embarksit in

a productive undertaking In doing so hedecides to undergo thesacrifice of labour (in personally employing his capital),and that

labour is made productive and remunerative by the aid of the

the immediate enjoymentof his own wealth,he reallymakes thedoublecalculation familiarlyknown as eating one's cakeand having

it. His labourwould not haveyielded the profitable resultwhich

returns him the (undertaker's) wage withoutthe assistance of the

and.for the sacrifice of his wealthas capital. Thetruth is that,in

this case, the one sacrifice of labour admits of being estimatedin

two ways: one bythe costtovital force; the other andmore mon, bythe greater satisfaction which would have been got from

com-theimmediate use ofcapital aswealth atan earlierperiod of time.

our problemit is easyto seehow another answerwould arise. The

powerwielded by the owners of wealth in the presentday needs

no statement It isnot only that "everygateis barredwith gold,"butthat,yearbyyear,the burdenof the pastisbecomingheavieron

more and more out of thehands of theworker and given tothe

capitalist. Of two men, in other respects equal, the one whohaswealthis able not only to preserve the value of his wealth intact,

buttoenjoyan annualincome withoutriskortrouble, and, ing that he lives well within his income, can add steadily to the

time does nothing forhim Ifhesaves it is at a sacrifice; yetonly

in this sacrifice is thereanychanceof his risingoutofthedullroundwhich repeats each day thelabour of thelast thatis, only as hebecomes an ownerofcapital. Thus,in courseoftime there appears

afavouredclass who are able not only to live withoutworking, but

to direct, control, and even limitthe labour ofthemajority.

capital, economic theory can only account for this income without

risk and withoutwork bypointing to the"productive power" of

capital, or to the "sacrifice of the capitalist,"it is easyto see how

another theory should make its appearance, asserting that interest

isnothing else than aforced contribution from helplessor ignorant

TRANSLATOR'S PREFACE xvii

people; a tribute, not a tax Rodbertus's picture of theworking

man as the lineal descendantof the slave "hungera good

chief "

degra-dation of labour, are all based on generous sympathy with the

inviewofthe strength of Socialistethics.

The Exploitation theory thenmakes interest a concealed

contri-bution; not a contribution,however, fromthe consumers,but from

the workers Interest isnot a pure surplus obtainedbycombination

ofcapitalists. Itdoes represent asacrificemadein production,butnotasacrificeofthe capitalists. Itisthe unpaidsacrifice of labour

coun-try, can produce enough to support himself and the average

labourer into a wage earner under capitalism, pay him the wage

whichisjust sufficient to support himself and his family, andhere

alsoit isthecasethathecanproducemorethanhis wage Suppose

the labourer to create thevalue of his wage, say 3s. in six hours'

work, then,ifthe capitalistcan get the workerto worklonger than

sixhoursfor the samewage, he may pocket the extravaluein the

favour thecapitalist. The workingday often totwelvehours is a

sortof divine institution tothe ignorantlabourer Asthe productdoes not pass into hisownhand, he hasno meansof knowing what

therealvalueof his day's work is. The onlylowerlimitto hiswage

is that sum which will just keep himself and his family alive,

although, practically, there is a lower limit when the wife and

childrenbecomethebreadwinnersandthecapitalistgetsthelabour of

over population gradually displaces labour, and allows the same amountofworktobe donebyfewer hands; thisbringsintoexistence

a"reserve"totheindustrialarmy, always competing withthoseleft

in work, and forcing down wages. Thus the worker, unprotected,

gets simply the reproduced value of a portion of hislabour; the

restgoestocapital, andis falsely, ifconscientiously, ascribed tothe

efficiencyofcapital.

I feelthatitwould beimpertinence inme tosay anything herethat wouldanticipate the complete and masterlycriticismbrought

against this theoryin BookVI The crushing confutation of the

LabourValuetheory iswork thatwill not require tobe done twice

in economicscience,andthe vindicationofinterest as a

economic service or good suggested by thevery nature of things

necessi-TRANSLATOR'S PREFACE

basis.

But it would beeasy tomisunderstand the precise incidence of

this criticism, and perhaps it iswell to point outwhat itdoes and

what itdoes notaffect.

Itproves with absolutefinalitythatthe Exploitation theorygives

noexplanation ofinterest proper But this is far from saying that

Exploitation may not explain a verylarge amount of that furtherreturntothejoint operationof capitaland labour whichis vaguely

Companyasdividend, or the returnto capitalwhichaprivate owner

generally calls his profit, consists of two parts: of interestproper

andof undertaker'sprofit. The latter, rightly considered,isawage

forwork, for intellectualguidance, organisation,keen vision, all the

thiswage may be obtained: to use aSocialist phrase, byexploiting

nature and byexploiting man To the first categorybelongs allworkof whichthefarmer's isthe natural type: that whichvisibly

producesits own wages, whetherbydirectlyadding to theamount

or changingit into higher forms, or making it available to widercircles. In this category A's gain is B's gain. To the secondcategorybelong those perfectlyfairmodes ofbusinessactivitywhere

his fellows,and "take the trade" fromthem HereA's gain is B's

loss, but the communityshare in A's gain,and even B shares init,

bybeing better servedas a consumer But to this categoryalsobelong those numerous forms of occupationwhich involve taking

advantage of poor men's wants and necessities to snatch a profit,

and oneof those forms isthe underpayingof labour

willunderstand thatthis underpaying may bequite unintentional

capitalist system, and, under the steady pressure of competition,

it is difficult for an employerto be just, not to say generous His

ofhis rivals

; andyethisworkers'wages havetobe regulatedbyan

equationbetween these prices, and the wages of labour in similar

determin-ing a"just"wageare so great that the temptation isoverwhelming

what labour will take, and if

fifty women are atthe gate offering

determine whata "fair wage

"

is 1

It shouldthen beat onceand frankly confessed that the Socialist

TRANSLATOR'S PREFACE xix

contentionmay afford an explanationof agreat proportionofwhat

isvaguelyknownas "undertaker's profit." Togo fartherhowever,

and extendthis explanation to all return to capitalist production

which is not definitely wage, is economic shortsightedness, that

bringsits ownrevenge.

Bohm-Bawerk's refutation of the Exploitation theory is not a

for that social, industrial, and political reconstitution of things

which is Socialism Morality and practical statesmanship may

determine that, in theinterests of the community, purely economic

laws be subordinated tomoraland political laws; or,to putitmore

"perfect competition," belimitedbyasocialsystem whichsubstitutes

production maybe quite definitelymarked out, and itsproper

given over to the corporate owning of the state. Butwhile the

advantage accruingfromthe use of capital would herebe regulated

bya mechanical system,interestwouldremain, economically, exactly

as Bohm-Bawerk has stated it.

As toDr Bohm-Bawerk'sown theoryof interest I do notfeel at

second volume now published, Die Positive Theorie des Kapitals.

The readerwill find the essence ofitin pp 257-259 of the presentwork

It might be advisable, however, to put his theory into concrete

nation or to individuals, the interest we get is the difference in

popular estimation and valuation between a present and a futuregood If we lendto direct production, the reason we get interest

isnot that our capital iscapable of reproducing itself and more

The explanation of this reproduction is tobe found inthe work of

thosewho employthecapital,both manual and intellectualworkers

result It is not that by waiting we get more than we give

;

value of what welenta yearbefore Capital plus interest on 31st

December is the full equivalent of capital alone on 1st January

toa present one enables the worker to realise his labourin

under-xx TRANSLATOR'S PREFACE

takings that save labour and increase wealth But as capital

takes no active role in production, but is simply material on

which and tools by which labour works, the reward for workingfallsto the worker,manual andintellectual; the rewardfor waiting,

to the capitalist only. Economically speaking, as wage is a fair

bargain with labour,because labour canproduceits own wage,so is

capitalist merelyputs into figures the universal estimate made by

men between present and future goods, and the capitalist is as

blameless ofrobbery as thelabourer.

Dr.Bohm-Bawerk's theory of Interest, then,is an expansion of

an ideathrown out byJevonsbut not applied. "The single and

labourer to await the result of anylong-lasting work to put an

methods ofproduction.

over the labour of others, wemightsaythat interestis a premium

paid to those who do not present their claims on society in the

In concluding,Ishouldlike tosaywithDr.James Bonar1

that,

while itwould be bold to affirm that Professor Bohm-Bawerk has

said the last word on the theory of Interest, his book must be

regarded as one with which all subsequent writers will have to

reckon

My thanks are due to Professor Edward Caird, of Glasgow

University, at whose instance this translation wasundertaken, for

many valuable suggestions, and, notless, for the stimulusafforded

by hope of his approval; to my former student Miss Christian

Brown,of Paisley, whoseassistance inminute andlaborious revision

of the English rendering has been simply invaluable; and not

least,to Professor Bohm-Bawerk himself, who has most patientlyanswered all questions as to niceties of meaning, and to whose

The time I have given to this work may excuse my suggesting

that a valuable service might be rendered to the science, and avaluable training in economics given, if clubs were organised,underqualified professors, to translate, adapt, and publish workswhich are now indispensable tothe economic student

1

QuarterlyJournalof Economics, April 1889.

ANALYTICAL TABLE OF CONTENTS

INTRODUCTION

TJie ProblemofInterestThe phenomenon of an income flowing constantly from all

Tlte theoreticalmustbe distinguishedfromthesocialandpolitical

Dangerofconfoundingthetwo; itscommoneffects 3-4Ourtaskisthecritical history ofthetheoretical problem 5

of acquisition" 6

Thedifferencebetween NationalandIndividual capital 6

betweenGross interestandNetinterest 7

between Naturaland Contract(orLoan)interest

* 8

Interest asdistinguished fromUndertaker'sProfit 8-9

BOOK I

The Development ofthe Problem

Loan interest, or Usury, as evidently income without labour,

The first period a rather barren one, extending to the

againstusury 14-15

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PAGE

Hostility ofthe philosophicwriters 16

Aristotle'sargument, thatmoneydoes not breed . 17

asanestablished institution 17-18

legislation ; prohibitionof interest . .18

The subject treated theologicallytilltwelfth century,whenbegin

prohibi-tion on industry, and thenecessity for rationaldefence of it 20

Stock arguments,6f thisperiod

(3)The Usetransferredwiththecapital . 23(4)The selling ofTime, agoodcommon to all 23

Thestraggle of practicallife. Direct exceptions to the

The effect on theory. Compromise of the reformers with the

"

parasitic profit

"

. .27

Riseof directoppositionto the prohibition 28

Molinaeus; his scholasticreviewand criticism ofthe canonments; his conclusionsand concessions . 30-31

Bacon sees in interest an economical necessity, but only

especially inthe mercantile Netherlands Grotius ally condemns interest 34

theoretic-ANALYTICAL TABLE OF CONTENTS

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butpracticallyallowsit. Afewyearslaterthetidefairlyturns

wouldprevent the lending ofperishable thingseven without

interest,and (2) thatthe perishableness isanotherargument

His worksmark highwaterforahundredyears . 40

In Germany after the seventeenth century there is not much

Justi saysnothing about it Sonnenfels, whohas nothing good

tosayofit, ridiculesthecanondoctrine andthe prohibition 41-42

In England the prohibition was removed before the theoretic

as to legal fixed rates of interest 43

Lockegoesdeeperintothesubject. Money,headmits,is barren,

but interest is justified ; for, owingtobad distribution,one

interest fortheoneis as fair asrentforthe other . 45-46

By the time of Bentham(1787) the canon doctrine is only a

subject for ridicule 48

InItaly the legalprohibitionwas quiteinoperative . 48

Galiani'spregnantidea (1750) From the analogyof bills of

repre-sentsthedifference .49

Butheascribes this to thedifferentdegreeof their security, and

somakesinterestamereinsurancepremium . ^0Beccaria. In France legislation and theory held by the canon

Finally, Turgot gave the canon doctrine its coup-de-grace.

SummaryoftheMe'moire 55-5G

xxiv ANALYTICAL TABLE OF CONTENTS

PAOE Critical retrospect. The canon had said that interest was a

moneyis not barren whenthe owner, employing it himself,

can make a profit by it, and (2) there is a use of capital

In short, it

makea profit? .60

an incomesui generis .60

CHAPTER-III

Scientific research now replaced the outside motive The

Economists: Quesnay, DelaRiviere . 62

be-comesthe equivalentin value of a piece of land. Capital

mustthereforebearasmuchprofit asland bears rent;

This, however, is arguing in a circle. Land is priced by

ADAM SMITH AND THE DEVELOPMENT OF THE PROBLEM

Adam Smith hasnodistinctivetheory of interest 70

His principalsuggestion its necessity asan inducement to the

While Adam Smith is thus neutral, these suggestions formed

the ermsof later theories 74

ANALYTICAL TABLE OF CONTENTS xxv

PAGEThegrowthof capital and the antagonism of capitaland labour

interest asincome obtainedwithoutwork . 75-76Hencethe appearanceofanumberofinterest theories 77

to the central question: Why is Surplus Value a constant

phenomenon of capitalistproduction? 78-79

THE COLOURLESS THEORIES

Sartorius, Lueder, Kraus, Hufeland, Seuter, Politz, Murhard,

CountSoden on interest asdiverted fromtheproductoflabour 82

Lotzmakesthecapitalist'ssoleclaim replacementof hisexpenses; 83but thiswould not be sufficient inducement to the

productive

employmentofcapital; hence the necessity of interest . 84

Insufficiency of this illustratedfrom rent 85

(1) Oftheorigin of interest theinducementtoproductive

employmentof capital .87-88

(2) Of the rate of interest. As result of his rent theo'ry,

profit and wage together are determined by the

Butwagesbeingdetermined by the"Iron Law,"profit

less to profit 90

But profit cannot disappear, otherwise accumulation

would cease, and wealth and population would be

checked . .91

preventthe absorptionofprofitby wage; 92

for the weakening of the motives of accumulation

a cost; butsaysnothingas to its origin 96 f>"'

xxvi ANAL YTICAL TABLE OF CONTENTS

PAGE

M'Culloch finds that value is determined by labour alone,

capital being only the product of previous labour; includes

profit among costs; andatthe same timedefines profit asa

His absurdillustrations of the caskofwine; .99

ofthetwocapitals inleatherand wine; ofthe timber General

Possibleagreement ofCanard with Turgot'stheory . 106

Droz makessavingan elementof productive power,but devotes

BOOK II

THE PRODUCTIVE POWER OF CAPITAL

Apparentsimplicityofthenewexplanation that Capitalproducesitsowninterest .111

Real ambiguity of the word "productive," as () producing

moregoods, (ft)producingmorevalue . 112

(6) ValueProductivity; its twopossiblemeanings . 113

Danger of confusing these. The task assigned to productive

powerby the Productivity theories 115Restatementof the problem as essentially aproblem of SurplusValue . .116

Surplus Value may conceivably be explained from productive

powerbyascribingto capital (1) direct creation ofvalue

; (2) direct creation of goods possessing surplusvalue, this value

ANALYTICAL TABLE OF CONTENTS xxvii

PAGE

(1) The Naive Productivity theory; (2) the Indirect

THE NAIVE PRODUCTIVITY THEORIES

J B.Saytheirfounder . .120

Adapting the problem to Say's termsweget two answers:

(1)

payment (thus making it a production problem); (2) the

payment(thusadistributionproblem) . 123-25ThedevelopmentafterSay . .126

Schon and Riedel consider it self-evident that Capital must

producea "rent"or surplus . .127

Criticism. Division ofthe theoryinto itstwo forms . 132

Thefirstform that capital directlyproduces value rests onthe

But to find the origin of value in production involves an

and though production turns out valuable goods, it is not

factor ofproduction, labour, cannot conferit 137

self-evident .138

Summary: failure of thistheory ineitherformtoexplainValue,

and thereforeSurplus Value . .140

xxviii ANALYTICAL TABLE OF CONTENTS

PAGE

with the phenomenon of surplus value which also appears

in capitalist production, and capital is made the cause of

THE INDIRECT PRODUCTIVITY THEORIES

Thesetheories do not assumeas self-evident that surplus value

is bound up with increased quantity of products, but give

andcriticism .142

Lauderdalefindsthe sourceof profit inthe powerof capital to

wages he explainsby referenceto competition . 144-145

butgross returnto capital ; and noproofis offered that net

interestmust remainafterdeductionof tearand wear 146-147

Malthus correctly states the nature of profit as the difference

betweenthe valueoftheadvancesand the valueofproducts,

His most important contribution to the subject is the formal

of sacrifice,but by the level ofwage on the one side, and

thelevel of prices onthe other; 152

level of pricethan Supply and Demand . .153

Hisillustration ofthe axes 156158

In which he confuses (1) gross usewithnet use; (2) the

cap-italist'sproportionofthetotal returntocapitalistproduction

withtherate of interest ; i.e.confounds the returnto capital

withcapital itself 159-160

repeats Carey's

Tinmen,amostcareful investigator 164

Hisgenetical accountofthegrowthofcapital, origin of interest,

andrate of interest 165-167

In which we find (1) labour, assisted by capital, obtaining a

greater amountofproducts; (2) thissurpluscomposedof net

interestand replacementof capitalconsumed

; (3) this excess

real capital consumed . 168-169But noproofis offered for this last proposition, which assumes

that capital has the powertoreproduce its ownvalue and

reducedto itssimplereplacement? 170-171

aremadeavailable to production by capitalonly . 173-174But in actual life howdoes the capitalist get paid for natural \

powers? By selling the services of his capital at a higher

price thanthe priceofthelabourembodiedinthe capital 175

(1) as Undertaker,getting agross return

Seller ofthe capitalitself,includingall its services 176

But in this latter case also the natural powers here made

available will raise the value of the capital above the

paymentof the labourwhich produced it. But if capital

(products),thereis nointerest, although naturalpowers have

downthe capitalvaluetothe valueof the labour embodied,

powers mayincreasethe gross returnto capital abovewhat

was paid to produce the capital. Butwhatever raises the

betweencapitalandproducts, whichis interest 178-179

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PAQBSummary: interest is the difference between the minuend

other, leaving the difference between them unchanged, and

BOOK III

The Use Theories

THE USB OF CAPITAL

Thegrowingrecognitionofthe identity betweeti valueofproduct

something had been overlooked among the sacrifices of

Storch'sperverted explanation . 190-191

Hermann elaborates the fundamental conception of the

inde-pendent "use

"

of goods. Distinguishing first between

so long as they last, have a use which may be conceived

trans-formedby manufacture intodurable goods,mayalso acquire

this use. Onthis capability of affordingan independentuse

ANALYTICAL TABLE OF CONTENTS xxxi

PAGE

andtools),andbesideslabour(manual andintellectual),there

isthusanothersacrifice,the Usesof fixedandfloating capital

of capital isengaged in production, the disposalofitinany

value, into the product,andissuspended tillthe sale of the

but a new use, consisting in the holding together of the

Hermann's views onthe rateofprofit. A product ultimatelyis

an exchange of laboursanduses against other labours and

uses, either direct or embodied in products. The rate of

profit, then, depends on the amount of labours and uses

moreuses areoffered, andthe exchange, value ofuse againstuseisunchanged; but, if labouris stationary,the exchange

profit falls Ifcapital, again, increasesin productiveness, the.

result isthe same, exceptthat, f>r their reduced profits,the

capitalists receivemore meansofenjoyment thanthey formerly

is certainly incorrect What his argument proves is the

relation between total profit and total wage; not between

profitandparentcapital 202-204

Hermann's viewsonproductivity . .204

Schaffle has two conceptions of Use: in his Gesellschaftlidie

whichconnectsitwiththeundertaker; . 206

interest aspart equivalent ofparent loan, 208

of late years,in Geld und Kredit,conceivesof theUse asquite

distinct from the good itself,the ft

describes it as obtaining value as all goods obtain value

bysatisfyinghumanneeds . .209

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Menger, who represents the highest point of the Use theory,

deter-mined by thevalue ofgoodsoflowerrank (products) 209-211

Hisanswer: the productionprocessrequires the"disposal

"

over

capital for periods of time. Thisdisposalis, economically,

theUseof capital

; it enters, asan economic good,into the

PLAN OF CRITICISM

Thetheses to beproved are : (1)that there is no independent

useof capital asassumed; (2) that, if thereweresuch a use,

itwouldnot explaininterest .214

THE USE OF CAPITAL ACCORDING TO THE SAY-HERMANN SCHOOL

Defin-itions ofSay, Hermann, Knies, Schaffle . 216

These definitions, in correspondence with popular usage, are

divisible intotwoconceptions a subjectiveandanobjective.

Obviously it is the latteralone whichcorrespondswith the

Whatthenisthe objective useofgoods? 218

THE TRUE CONCEPTION OF THE USE OF GOODS

"

things,"isthat,in them, theworkingofthenaturalpowers

available energy,and the useofgoods consists in the

receiv-ing of useful resultsfromthisforth-puttingofenergy . 220