The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editor's Preface
• Author's Preface
• Book I: The Elementary Theory of Value
• Chapter I: The Origin of Value
• Chapter II: The Value of Satisfactions of Want
• Chapter III: Gossen's Law of the Satiation of Want
• Chapter IV: The Scales of Satiation
• Chapter V: Marginal Utility
• Chapter VI: The Value of Future Satisfactions of Want
• Chapter VII: The Value of Goods
• Chapter VIII: The Valuation of a Single Commodity
• Chapter IX: The Valuation of Goods In Stocks. the Law of Marginal Utility the General Law of Value
• Chapter X: The Paradox of Value
• Chapter XI: The Antinomy of Value and the Service of Value
• Book II: Exchange Value and Natural Value
• Chapter I: Price
• Chapter II: Exchange Value In the Subjective Sense
• Chapter III: Exchange Value In the Objective Sense
• Chapter IV: The Antinomy of Exchange Value
• Chapter V: The Service of Exchange Value In General Economy
• Chapter VI: Natural Value
• Chapter VII: The Socialist Theory of Value
• Book III: The Natural Imputation of the Return From Production
• Part I: The General Principles of Imputation
• Chapter I: Return Value
• Chapter II: The Problem of Imputation
• Chapter III: The Socialist Reading of the Problem. the Claim of the Labourer to the Entire Return
• Chapter IV: Previous Attempts At Solution
• Chapter V: The Principle of Solution. the Productive Contribution
• Chapter VI: The Principle of Solution (continued) . Contribution and Co-operation
• Chapter VII: The Principle of Solution (continued) . the Economic Service of Imputation
• Chapter VIII: The Principle of Solution (continued) . Imputation and the Marginal Law
• Chapter IX: The Individual Factors of Imputation. I.—SUPPLY
• Chapter X: The Individual Factors of Imputation ( Continued ). II. — Demand and Complementary Goods
• Chapter XI: The Individual Factors of Imputation ( Continued ). III. — Technique
• Chapter XII: The Individual Factors of Imputation ( Continued ). IV. — the Imputation to Cost Goods and to Monopoly Goods
• Chapter XIII: The Individual Factors of Imputation ( Continued ). V. — the Imputation to Productive Factors of Preferable Quality
• Part II: Natural Land Rent
• Chapter XIV: Ricardo's Differential Rent: the First Part
• Chapter XV: Ricardo's Differential Rent: the Second Part
• Chapter XVI: Criticism of Ricardo's Theory
• Part III: The Natural Return to Capital
• Chapter XVII: The Productivity of Capital
• Chapter XVIII: The Calculation of Return to Capital In Primitiive and In Developed Economies
• Chapter XIX: The Imputation of Gross Return and of Net Return
• Book IV: The Natural Value of Land, Capital, and Labour
• Chapter I: Introduction
• Chapter II: The Value of Capital and the Interest On Capital I.—DISCOUNTING
• Chapter III: The Value of Capital and the Interest On Capital (continued) . II.—THE Rate of Interest
• Chapter IV: The Value of Capital and the Interest On Capital (continued). III.— The Law of the Uniform Calculation of the Interest Rate
• Chapter V: The Value of Capital and the Interest On Capital (continued.) IV.—CHANGE In the Rate of Interest
• Chapter VI: The Value of Capital and the Interest On Capital (continued) . V.—THE Valuation of Fixed Capital
• Chapter VII: The Value of Capital and the Interest On Capital ( Continued ) VI.— Capitalisation
• Chapter VIII: Interest On the Consumption Loan. House Rent
• Chapter IX: The Value of Land
• Chapter X: The Value of Labour
• Chapter XI.: The Value of Production Goods, With Reference to the Competition Between Present and Future Interests
• Book V: The Natural Cost Value of Products
• Chapter I: The Law of Costs
• Chapter II: The Conception of Costs
• Chapter III: Foundation of the Law of Costs
• Chapter IV: Conditions Under Which the Law of Costs Obtains
• Chapter V: The Determining Amount of Costs
• Chapter VI: The Law of Costs and the General Law of Value
• Chapter VII: The So-called Costs of Production of Labour
• Chapter VIII: The Cost Theories
• Chapter IX: The Cost Theories ( Continued ). Labour As an Element In Cost
• Chapter X: The Cost Theories ( Continued ). Capital As an Element In Cost
• Chapter XI: The Cost Theories (continued) . Interest As an Element In Cost
• Chapter XII: The Cost Theories (continued) . Land Rent As an Element In Cost
• Chapter XIII: The Service of Individual Economic Value In National Economy 1
• Book VI: Value In the Economy of the State
• Chapter I: Introduction
• Chapter II: The Province of a State Economy
• Chapter III: Value In the Natural Economy of the State
• Chapter IV: Value In the Present-day Economy of the State
• Chapter V: The Fundamental Law of Collective Valuation

PART III

the natural return to capital

CHAPTER XVII

the productivity of capital

Land being permanent and indestructible, it is not a matter of surprise that it should continue yielding, year after year, that return which it yields in one year. And if we designate a continually-recurring return as “rent,” the rent of land requires no special explanation. It is much the same with the fact that human labour is source of a permanent return. In the case of a healthy person, labour power is renewed constantly after pauses for rest and refreshment.

On the other hand, it is a matter for wonder to find that the perishable powers of the soil, and an the movable means of production, raw materials, auxiliary materials, implements, tools, machinery, buildings, and other productive apparatus and plant, which are consumed, quickly or slowly, in the service of production, are sources of permanent returns,—returns which are constantly renewed, although the first factors of their production may have been long before used up. This brings us face to face with one of the most important and difficult problems of economic theory; with the question, namely, how we are to explain the fact that capital yields a net return.1

All capital yields, proximately and directly, only a gross return; that is to say, a return purchased by a diminution of the parent capital. The condition under which this gross return may be the source of a net return is very easily formulated. In the gross return must be found newly produced all the consumed capital, and beyond this there must be a certain surplus. This surplus will be net return;—a return which may, permanently and without diminution of the parent capital, be obtained and consumed.

If now we ask whether this condition is actually fulfilled, we find, in the first place, that the nature of capital does permit of it. If capital is, on the one side, perishable, on the other, it is reproducible. It serves for production and it is produced. Is it, however, produced in sufficient quantity, and produced from capital itself in sufficient quantity, to fully replace what has been consumed, and leave a surplus beyond? Before trying to answer this question I should like to make one observation of a formal nature.

Capitals which yield gross return may undoubtedly be designated “ productive goods ” on this account alone. They certainly produce; they transform themselves from an unfinished form of goods to a finished one, or to one that comes nearer a finished one. It is, however, preferable to speak of capital as productive only when it yields a net return. And in this sense exclusively we shall understand the “ Productivity of capital.”

As Böhm-Bawerk has shown, productivity may be either physical productivity or value productivity. It is important that this distinction should be clearly kept before us. Physical productivity exists where the amount of goods which form the gross return is greater than the amount of capital goods destroyed; and in the foregoing deduction of the conceptions of gross and net return we have assumed this physical productivity. Value productivity exists where the value of the gross return is greater than the value of the capital consumed. The task of our theory is, in the last resort, to prove the value productivity of capital; but for this purpose it is necessary first to prove the fact of physical productivity, as the scaffolding on which the other rests. The value productivity already presupposes the determination of the value of capital, but the value of capital can only be determined when the question of how to impute the physical return has been answered, because the value of capital rests on the share of return imputed to it. Just as the rent must first be ascertained before the value of any land can be calculated, and just as, generally speaking, the rules of imputation must be recognised before the value of production goods can be determined, so must also the imputation of the return to capital first be settled before we can take up the problem of its value. In pursuance of our division of the subject, we have meanwhile only the problem of the physical productivity of capital to deal with.

There is no doubt that the total return of all three productive factors, land, capital, and labour, taken together, is large enough to replace the capital consumed, and give a net return. This is a notorious economic fact, and as little in need of proof as the fact that there are such things as goods, or such a thing as production. Of course, now and then, a productive undertaking may be unsuccessful, and fail to cover its outlay; indeed many undertakings furnish no usable product whatever. But these are exceptions. The rule is that net returns are obtained,—indeed, net returns of such enormous magnitude, that not only can the millions of human beings be supported, but capital can go on accumulating out of the surpluses.

There remains, therefore, but one thing to ask—whether a share in this undoubted net return can be imputed to the factor capital. But the question can not be put seriously. Why to capital alone should no such share be imputed? Once understood and granted that capital is one of the economic factors of production, to which, with the others, the productive return is ascribed (Book III. chap. iii.), it is also understood and granted that to it belongs by right a share in the net return in which the productive return first embodies itself. Are we to suppose that capital is always in a position to produce only somewhat less than replace itself? This would obviously be an arbitrary supposition. Are we, then, to suppose it capable only of replacing its own loss, however various the success of production may be? This supposition would clearly be no less arbitrary. Whoever denies net return to capital can only do so by denying it any return.

I should fear to repeat myself were I to bring forward any formal proof of the fact that capital does have a share in the productive net return I shall content myself with mentioning one or two cases which show, in eminently clear fashion, the necessity for attributing net return to it. 1

Wherever labour is crowded out by capital, as, e.g., where a machine takes over the work hitherto accomplished by human labour—a thing which will happen no less frequently in the communistic state than it does now,—the capital, or machine, must be credited with at least the same return as that formerly imputed to labour. But this was a net return: therefore, the capital or machine must also be credited with a net return. Were the machine capable of reproducing only its own substance as that is worn away in course of use, it would be less effective than human labour, and would not have had power to displace it, But why should a machine such as this be favoured in the imputation more than any other form of capital? What experience would speak for this?

In accordance with the universal law of differential imputation, every form of concrete capital of better quality has a higher return imputed to it than the concrete capital of lower quality, and this return is measured by the amount of increase in productive results which the employment of the better qualities brings. And as, when we look at production and its results as a whole, it is only net returns that are taken into consideration, it is thereby proved that, in comparing qualities of capital, the standard of imputation must be taken from the net return.

Whoever employs his capital according to the measure in which he sees it influence the productive net return, employs it well; whoever does otherwise, employs it badly. On this point universal opinion is united now, as it will be in the communistic state. The universal opinion to which we refer is not, however, the untrained judgment of the public in matters of theory, but the ripe expression of experience.1

CHAPTER XVIII

the calculation of return to capital in primitiive and in developed economies

Those writers who maintain the productivity of capital prefer to take the most primitive economic circumstances in order to make their meaning clear. Thünen, for instance (in his Isolirter Staat, 2nd edition, Book II., division I., p. 74) takes his readers to a land in which there is no capital to begin with. In its tropical climate the inhabitants live, in the most literal sense, by the labour of their hands. There a labourer is in a position to produce yearly the total amount required to maintain him for a year—we shall put this down at 100—and, besides that, 10 % more, or 110 units in all. At that he can live and also lay past. And now some man, supporting himself meantime upon his savings from former years, succeeds, after a whole year's labour, in producing a bow, arrows, and a net. He is rewarded for this by being enabled, with the assistance of the new tools, to obtain henceforward a yearly return of 150 units, by means of which he finds time to repair the damage suffered by his little capital through wear and tear, and to maintain it always in the same condition. The total increase to his income per year amounts to 40 units, and this increase is a permanent one in spite of the perishable nature of the capital, because not only is the capital perishable, but it can also be, and is continually being, reproduced. To what factor is this increase to be imputed? Obviously to the capital To its credit alone can the increase be attributed. This will be seen, e.g., in the fact that every other labourer will be inclined to hire the capital at a price which is based on the calculation and ascription to it of this surplus result.

Similar statements are given by other writers. They are, indeed, well adapted to clear up our ideas concerning the productivity of capital in its most general outlines, and to persuade the reader to its acceptance. On the other hand, they are misleading almost in every detail as regards our developed conditions of production, and, in particular, they give a thoroughly false impression as to the measure of productivity.

In such primitive conditions as those pictured by Thünen, where capital emerges for the very first time, the return to capital is calculated at the entire increase of income, which labour assisted by capital obtains as against labour unassisted. In other words, the whole “ share dependent upon its co-operation” (see p. 91) is imputed to capital as its “contribution.” And rightly so. In these most primitive conditions there is a considerable supply of labour power; indeed, as compared with the scant occasions for using it, almost too much; on the other hand, capital is scarce and greatly in demand. Much labour must be expended without aid from capital, and the comparison between labour assisted by capital and labour unassisted, forces itself naturally upon every one. This is no fact found out by subtle economic investigation; it is seen practically in men having constantly to choose between the two kinds of labour.

But this is very different from the conditions under which we now live. Practically such a choice is never placed before any one. It would never occur to any one but a theorising economist, to measure the value of capital by estimating what would be the amount of loss if capital should not co-operate at all in the production,—any more than it would occur to any one to measure the value of labour by estimating the amount of loss that would ensue should labour refuse its co-operation. All labour is judged on the quite intelligible assumption that it is brought into co-operation with capital; all capital under the assumption that it is brought into co-operation with labour. Production has become ever so much more complicated, and with it the art of calculating production. The simple formulæ of former times are not now adequate, and examples based on them can only be misleading.

How, then, are capital and labour under present conditions to be distinguished? The answer is not doubtful. According to that complicated formula, and according to all those rules which obtain, as regards the imputation of return in general.

The “contribution” of capital is to-day far from amounting to the whole “share dependent upon its co-operation.” While that share is very much equal to the total return of production, the “contribution” is merely one single quota alongside of the quotas of land and labour.

Only in one connection has the illustration of Thünen anything to teach us about the measure of the return to capital. It proves clearly that, in any case, there is a net return to be imputed to capital—in so far as it is properly employed; a return which can be permanently obtained in spite of the perishable nature of the various items forming the capital, and in spite of their continual transformation in consumption and reproduction. Capital, rightly employed, does more than simply renew itself; it yields beyond this a surplus which must be imputed to it. This proposition is proved beyond a doubt, as regards primitive economic conditions, by Thünen and others; and in these primitive conditions the progress of economy generally is shown through the discovery and development of forms of capital. But will any one assert that what was the due of primitive capital is not also the due of the developed modern capital?

CHAPTER XIX

the imputation of gross return and of net return

We have said that capital, rightly employed, shows itself productive, inasmuch as it reproduces itself with a surplus This proposition, although undoubtedly correct as a conclusion, requires one essential modification.

Do the arrows, bows, and nets—the capital of Thünen's illustration—really reproduce themselves in the strictest sense of the term? Certainly not. They produce nothing but fish and the spoils of the chase; in this they exhaust their direct and proximate activity. They do not in the least degree themselves bring forth new arrows, bows, and nets, nor do they give direct assistance in doing so. The return which, in the first place, falls to be imputed to them is, consequently, a gross return in foreign things; things, that is, from among which they cannot replace themselves; things with which they may possibly be compared in value but not in quantity, and by means of which a physical net return cannot therefore be represented. But we cannot stop short in our consideration at this point: as a matter of fact the indirect efficiency of capital goes much further. The bows, arrows, and nets once obtained lighten the conditions of their reproduction, if they do not actually co-operate in it. They lighten it by means of the extraordinary increase in the gross return of fish and game, as consequence of which immensely more labour than formerly is free to be employed in the creation of capital Therefore, in the total result, a net return does come in the end to be imputed to these concrete forms of capital, just as if they did directly reproduce themselves with a surplus.

The same argument holds for capital in the developed economy, only that here the conditions are much more complicated and the process, consequently, more difficult to follow. No capital, even in the most highly developed economy, directly reproduces itself; each produces first a gross return in foreign things, in which, physically, its productivity cannot be seen. The capital of a baker produces bread, that of a miller, meal, that of a peasant, grain. In order that the baker may replace his capital again, he must turn to the miller, and to all the other persons who can provide him with the necessary materials and apparatus for his production. The gross return of every capital must be exchanged against the gross returns of other capitals,—indeed, against those returns which are attributed to land and labour,—in order that the capital may be replaced, and the net return become physically cognisable. The only imputation that ever takes place directly is an imputation of gross return, but from that follows, as a final consequence, an imputation of net return, however circuitous the route may be,—so long, I mean, as the efficiency of capital is considered undiminished, and so long as it is suitably employed. It is just as though every capital did directly reproduce itself with a surplus.

In most cases the return to all the capital invested in one business or one undertaking is grouped in one estimate. It requires no proof, however, that, from the total return, each separate bit of capital (assuming suitable employment) will have its share. Every bit of capital, rightly employed, produces directly a gross return of goods different from itself, and finally, after the necessary exchange between similar gross returns, reproduces itself and yields a net return. In this sense machines, tools, raw materials, auxiliary materials, in short, all forms of concrete capital, the smallest and the most perishable, even those from which, materially speaking, nothing passes over into the product, replace themselves and yield a surplus. From this point of view every piece of coal which is burned for purposes of production creates, in the last resort, another similar piece of coal, and, beyond that, a perishable net return. And, inasmuch as the replaced portions of capital are employed again and yet again, each piece of capital — the smallest and most perishable — becomes the source of a permanent rent. 1

BOOK IV

THE NATURAL VALUE OF LAND, CAPITAL, AND LABOUR

[1]In what follows I understand by the term capital the perishable or (with the extended meaning explained in the text) the movable means of production. This conception is adapted to the conditions of a communistic state, in which the national income is obtained solely through production. To take note of those forms of capital which serve in the formation of income outside of production, seemed to me out of place, these being too closely connected with the specific conditions of the existing economic order of things. For the same reason I also refrain from taking into consideration those constituent parts of an undertaker's capital which do not belong to the technical means of production. I have, however, appended, in Book IV. chap. viii., a discussion of the interest on consumption loans and house rent, and, at the end of Book V. chap. xi., I have looked at the interest which comes from the undertaker's wage fund.

To avoid misunderstanding, I wish once more to emphasise the fact that, among the technical means of production, I do not include the means of subsistence which must be held ready at hand for the labourers. These are conditions of production, but not its causes. The cause is here the labourer alone. And this is no contradiction to our previous statement in Book III. chap. iii. The things on which the labourer employs his strength, and the things which maintain his strength, stand in totally different relations to the productive return. The former have a direct influence upon return; the latter influence it only through the medium of the labour power into which they must first transform themselves. If we wish to make the latter factors of production, it can only be done by regarding the labourer as their first product (compare Book V. chap. vii., on the “costs of production “of labour). So far as regards his conception of the means of subsistence for labourers I am thoroughly at one with Sax (in particular p. 324), although I explain otherwise the emergence of interest from this part of an undertaker's capital

Immediately before these pages went to press, Menger's treatise Zur Theorie des Capitals appeared in Conrad's Jahrbūcher. In this treatise he defends in animated fashion the popular as against the scientific conceptions of capital, and interprets the popular conception as embracing all the parent wealth of an acquisitive economy existing in or calculated in money, without respect to the technical nature of the instruments of acquisition. As a matter of fact, the circumstance that acquisitive instruments are calculated in money is of decisive importance for their valuation. To calculate in money means-—leaving the form out of consideration-—first, to calculate exactly, and second, to calculate with reference to exchange and the unit of all exchange goods which it creates. We also look at valuation entirely under these two assumptions, although we substitute the internal exchange of goods in a state economy for the exchange of private individuals. The natural laws we have deduced hold only as regards industries on a large scale and under a highly developed economy.

[1]Among such cases I should include also those where the use of capital in-creases the previous productiveness of production. Here we see with particular clearness that the additional net return must be credited to the capital. It would, however, be an error to believe that capital can receive a share of net return only when its use has directly increased the previous productiveness of production, or that it would be deprived of this share as soon as the world became accustomed to the increased effects. Experience shows us the productivity of capital even in a stationary economy. On this account all theories are inadequate which derive the productivity of capital solely from its capacity to promote the development of economic life.

[1]The theory of interest, like that of rent, has always been discussed very much by itself; discussed. I mean to say, without any previous examination of the general laws of imputation. The result, however, as regards interest, has been immensely less satisfactory than as regards rent. It is easy to understand that in the case of interest we have to deal with the essential point in the problem of imputation, while in the case of rent we have to deal substantially with a detail capable of being conceived by itself,—that, namely, of the differential imputation. Bö hm-Bawerk's great work Geschichte und Kritik der Capitalzins-theorien (Innsbruck, 1884), translated as Capital and Interest (Macmillan), has clearly shown to the scientific world how unsatisfactory all previous attempts at explanation have been.

Ties of family and of friendship bind me too closely to the author to allow of any praise of his work from my lips being counted of value by outsiders. I there-fore confine myself to remarking that everything contained in the following pages on the subject of the return to capital and the value of capital, was written under the influence of his penetrating criticism, and that, if there is aught of value to be found in it, it could never have originated without that influence. It is not inconsistent with this that I should, nevertheless, arrive at other conclusions than those towards which Bö ohm-Bawerk—so far at least as may be recognised from the critical and preparatory work already published— appears to point.

Note.— Since writing the above, Böhm-Bawerk has published the second part of his work, Dis Positive Theoris des Capitals (Innsbruck, 1888), translated by me as. The Positive Theory of Capital (Macmillan, 1891).— W. S.

[1]In the exchanges necessary to procure the goods which are to replace the capital, in lieu of the directly obtained goods which form the gross return, goods are, of course, estimated according to their value. Capital goods, are, therefore, estimated at their capital value. To this extent it appears that the knowledge of the value of capital and of the laws which regulate it, must precede the imputation of net return. Only in such a simple instance as that given by Thünen can an imputation of net return be made without a previous knowledge of the value of capital, and this destroys our proof that the imputation of net return is fundamentally independent of the valuation of capital. It is, of course, practically impossible to employ this fundamental principle so soon as production becomes complicated. But whenever production becomes complicated every new calculation must practically be laid on the lines of the old ones; otherwise no conclusion could be come to. Every new determination of value practically presupposes old ones (compare Book III. chap. v. at end). As little, then, as the conclusion can be drawn from this, that theory requires value in order to explain value, so little can it be concluded that, theoretically, the value of capital conditions the imputation of net return.