Front Page Titles (by Subject) CHAPTER XI: the cost theories (continued) . interest as an element in cost - Natural Value
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Also in the Library:
CHAPTER XI: the cost theories (continued) . interest as an element in cost - Friedrich von Wieser, Natural Value 
Natural Value, edited with a Preface and Analysis by William Smart (London: Macmillan, 1893).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
the cost theories(continued). interest as an element in cost
In calculating the cost value of his products every undertaker, in addition to the value of the capital consumed, includes interest upon the whole capital sunk and bound up in the production, even on that which remains unconsumed, for the period during which the capital must remain sunk. It is a matter of familiar observation that the exchange value of products, in so far as it is influenced by costs, expresses also the interest thus calculated. If the production of one article costs merely labour and circulating capital, while that of another requires, in addition to the same expenditure of labour and circulating capital, a large outlay of fixed capital, the second product (neglecting, of course, the quota for amortisa-tion) will be considered the more valuable by the interest on the whole fixed capital. The question now arises whether we have, in this circumstance also, a phenomenon of natural value; whether it is in the interest of society generally, or merely in that of the individual undertaker, that interest should be calculated among costs, and whether this principle would require to be observed in the communistic state also.
There is something that strikes one as peculiar in the idea of including interest among costs. Torrens' objection is well known. Interest, he says, is profit, and must first be earned through production as the surplus of return over costa Thus it is impossible to reckon it among costs.
From the point of terminology Torrens' objection is certainly justified. If we wish, on the one hand, to fix the net return, we shall not impute interest to costs, but if, on the other hand, we are seeking for the cost value of products, interest must be included. In these two cases the term “costs” is used in an entirely different sense. And this is an error in so far as the double meaning remains unnoticed, and is, in any case, a misfortune, whether noticed or not. It would be better to have a second name for the second use of the term.
When we put the name on one side, and examine the actual matter of Torrens' objection, we come to a different conclusion Here the objection entirely breaks down. It proves too much. It is not only interest that is derived from the return and its value, but the value of capital itself. Torrens' argument expanded runs thus:-—the value of products is first; interest, capital value, the value of production goods generally, second. Right enough up to this point. We have come to the same conclusion, and argued from it that production goods have, as against products, no independent power to create value. On the other hand, we have acknowledged that they do possess the power to equalise the value of products. In virtue of this power, and of no higher one, do they influence cost value generally, and this power cannot be denied to interest, on account of its origin in the return, so far, that is to say, as the conditions in this case are similar to those which hold as regards the elements of costs hitherto considered.
This, as a matter of fact, is the case. As we know, there is a constant tendency towards a uniform rate of increment for all capital in one and the same market, and, on the whole, the rate is realised. From this it follows, on the one hand, that nothing can be produced whose use value does not at least yield the universal increment on capital-—which is an indirect determination of the value of products by interest, in the way of determining the amounts produced. And it follows, on the other hand, that every product whose use value, regarded by itself, might yield a somewhat higher increment, can be valued only according to the universal rate of interest, to the extent that it can be reproduced at the price of the same-—which is a direct determination of value. If things may not be produced under the general rate of interest, and if they cannot be valued above the general rate of interest, their final value must, along with the other elements of costs, include the interest according to the amount and duration of the capital employed.
The principle of including interest among costs follows from a plan of production which aims at obtaining the highest rate of increment from every employment of capital. And as it results from this, so again has it a reflex influence in controlling the plan and giving it definite limits. If interest were not estimated among costs, or were not estimated on the whole amount of capital expended, or for the entire length of time during which the capital remains employed, the distribution of capital goods among the individual branches of production could not be so regulated as to attain the highest possible rate of increment. It would then be permissible to employ capital where it only covered its consumption, but brought no increment, or where it did not obtain the highest increment, or the increment on the whole amount of capital sunk, or the increment over the whole period of time when it was sunk in the productive process.
Under certain circumstances it is necessary to include even compound interest among costs; that is to say, when the period of time during which the capital is sunk exceeds the period at the end of which interest would usually be expected. Products are themselves re-employed as interest bearing capital, and it is therefore so far profitable to find productions which have a shorter process, The products of longer processes of production must receive an equivalent against this advantage of having interest on interest at an earlier date, and they obtain it by a corresponding increase in their use value. Only in this way is the highest degree of utilisation in production as regards time obtained and regulated.
Connected with this is an exceedingly curious conclusion.
In the cost value of products, undertakers include the interest due to that portion of their money capital which they must hold, for paying the wages of their labourers, until the sale of the products takes place. In the communistic state this money capital would not be required. It would, therefore, appear that, in the communistic state, the interest expenditure in production would be correspondingly lower, and that the present manner of doing is so far opposed to the natural laws of valuation. As a matter of fact this is not the case; in this point also the interest of the undertaker is identical with that of the community at large, and leads to the economic valuation of goods. The undertaker, in including the interest on his wage fund, simply estimates and expresses-—with reference to human labour-—the differences in time of employment. It is not the same thing to employ ten labourers during one year or to employ one labourer during ten years, any more than it is the same thing to employ a capital of £100 for one year or a capital of £10 for ten years. In the former case as in the latter, the principles of economic action require that, besides ordinary interest, compound interest also be reckoned to the value of the product, if a proper distribution of production is to be attained.
It needs no explanation that, in virtue of this, production is the more limited the longer the period of the process, for the reason that a corresponding increase in the value of the product is required to make the longer process appear sufficiently profitable. Productions of very long duration must yield a very rich return if they are to bear the burden of the interest which accumulates up till the time when they yield their first return.