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Book II, Chapter III: The Indirect Productivity Theories - Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of Economic Theory 
Capital and Interest: A Critical History of Economic Theory, trans. William A. Smart (London: Macmillan, 1890).
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Book II, Chapter III
The Indirect Productivity Theories
The Indirect26 Productivity theories agree with the Naïve theories in placing the ultimate ground of interest in a productive power of capital. But in the working out of this fundamental idea they show a twofold advance. First, they keep clear of the mysticism of "value-creating powers," and, remaining on solid ground of fact, they always mean physical productivity when they speak of the "productivity of capital." Second, they do not consider it to be self-evident that physical productiveness must be accompanied by surplus in value. They therefore insert a characteristic middle term, with the special function of giving reasons why the increased quantity of products must involve a surplus in value.
Of course the scientific value of all such theories depends on whether the middle term will bear investigation or not; and since the writers of this group differ very considerably as regards this middle term, I shall be obliged in this chapter to state and criticise individual doctrines with much more minuteness than was necessary in the case of the almost uniform naïve theories. In doing so I certainly impose on myself and on my readers no small amount of trouble, but it is impossible to do otherwise without sacrificing honest and solid criticism. When a writer has anything particular to say, the honest critic must allow him to say it, and must answer him point by point: the particular must not be dismissed with a general phrase.
The series of the Indirect Productivity theories begins with Lord Lauderdale.27
In the theoretical history of interest Lauderdale has rather an important place. He recognises, as none of his predecessors did, that here is a great problem waiting on solution. He first states the problem formally and explicitly by asking, What is the nature of profit, and in what way does it originate? His criticism on the few writers who had expressed themselves on the subject of natural interest before his time is well weighed. And, finally, he is the first to put forward a connected and argued theory in the form of a theory, and not in the form of scattered observations.
He begins by pronouncing capital, in opposition to Adam Smith, to be a third original source of wealth, the others being land and labour (p. 121). Later on he goes very thoroughly into consideration of the method of its working as a source of wealth (pp. 154-206); and here at the very first he recognises the importance and difficulty of the interest problem, and takes occasion, in a remarkable passage, to put the problem formally.28
He is not satisfied with the views of his predecessors. He expressly rejects the doctrine of Locke and Adam Smith, who are inclined to derive interest from the increment of value which the worker produces by working with capital. He rejects also Turgot's doctrine, which, much too superficially, connects interest with the possibility of obtaining rent by the purchase of land.
Lauderdale then formulates his own theory in these words: "In every instance where capital is so employed as to produce a profit it uniformly arises either from its supplanting a portion of labour, which would otherwise be performed by the hand of man, or from its performing a portion of labour, which is beyond the reach of the personal exertion of man to accomplish" (p. 161).
In thus proclaiming the power of capital to supplant labourers as the cause of profit, Lauderdale refers, under a somewhat altered name, to the same thing as we have agreed to call the physical productivity of capital. For as a matter of fact Lauderdale himself, many times and with emphasis, calls capital "productive" and "producing," as on pp. 172, 177, 205.
Still the chief question remains, In what way does profit originate from the power of capital to supplant labourers? According to Lauderdale it is, that the owner of real capital29 is able to secure for himself as his share, either wholly or at least in part, the wages of those workers who are replaced by the capital.
"Supposing, for example," says Lauderdale, in one of the many illustrations by which he tries to establish the correctness of his theory,30 "one man with a loom should be capable of making three pairs of stockings a day, and that it should require six knitters to perform the same work with equal elegance in the same time; it is obvious that the proprietor of the loom might demand for making his three pairs of stockings the wages of five knitters, and that he would receive them; because the consumer, by dealing with him rather than the knitters, would save in the purchase of the stockings the wages of one knitter" (p. 165).
An objection obviously suggests itself which Lauderdale thus tries to weaken: "The small profit which the proprietors of machinery generally acquire, when compared with the wages of labour, which the machine supplants, may perhaps create a suspicion of the rectitude of this opinion. Some fire-engines, for instance, draw more water from a coal pit in one day than could be conveyed on the shoulders of 300 men, even assisted by the machinery of buckets; and a fire-engine undoubtedly performs its labour at a much smaller expense than the amount of the wages of those whose labour it thus supplants. This is, in truth, the case with all machinery."
This phenomenon, however, Lauderdale explains, should not mislead us. It simply arises from the fact that the profit obtainable for the use of any machine must be regulated by the universal regulator of prices, the relation of supply and demand. "The case of a patent, or exclusive privilege of the use of a machine... will tend further to illustrate this.
"If such a privilege is given for the invention of a machine, which performs, by the labour of one man, a quantity of work that used to take the labour of four; as the possession of the exclusive privilege prevents any competition in doing the work but what proceeds from the labour of the four workmen, their wages, as long as the patent continues, must obviously form the measure of the patentee's charge—that is, to secure employment he has only to charge a little less than the wages of the labour which the machine supplants. But when the patent expires, other machines of the same nature are brought into competition; and then his charge must be regulated on the same principle as every other, according to the abundance of machines, or (what is the same thing), according to the facility of procuring machines, in proportion to the demand for them."
In this way Lauderdale thinks he has satisfactorily established that the cause and source of profit lies in a saving of labour, or of the wages of labour.
Has he really succeeded in establishing this? Has Lauderdale in the foregoing passages really explained the origin of interest? A careful examination of his arguments will very soon enable us to answer this question in the negative.
No fault can be found with the starting-point that he takes for his argument. It is—to continue Lauderdale's own illustration—quite correct to say that one man with a knitting loom may turn out as many stockings in a day as six hand knitters. It is quite correct, also, to say that, where the loom is an object of monopoly, its owner may easily secure for its day's work the wage of five knitters, or, in the case of unlimited competition, of course a correspondingly less amount; and thus, after deducting the wages of the man who tends the machine, there remains over as the owner's share four days' wages of labour—under free competition, correspondingly less, but always something. Here it is shown that a share in value does really go to the capitalist.
But this share, thus proved to go to capital, is not the thing that was to be explained, the Net Interest or profit; but only the gross return to the use of capital. The five wages which the capitalist secures, or the four wages that he retains after paying the man who attends to the machine, are the total income that he makes by the machine. In order to get the net profit contained in that income we must, evidently, deduct the wear and tear of the machine itself. But Lauderdale, who in the whole course of his reasoning is always looking to profit, has either overlooked this—thus confusing gross and net interest—or he considers it quite self-evident that, after deducting from gross interest a proportion for wear and tear, something remains over as net interest. In the first case he has made a distinct blunder; in the second case he has assumed without proof that very point which is the most difficult, indeed the only difficult point to explain,—that, after deduction from the gross return of capital of so much of the real capital as has been consumed, something must remain over as surplus value, and why it should remain over. In other words, he has not touched on the great question of the interest problem.
As everything turns on this point, let me put it in its clearest light by means of figures. Suppose, for convenience, that the labourers get a pound a week, and that the machine lasts a year before it is entirely worn out. Then the gross use of the machine for a year will be represented by 4 × 52 = £208. To ascertain the net interest contained in that we must evidently deduct the whole capital value of the machine now completely worn out by the year's work. How much will this capital value be? This evidently is the crucial point. If the capital value is less than £208, there is a net interest over. If it is equal to, or higher than £208, there can be no interest or profit over.
Now on this decisive point Lauderdale has given neither proof nor even assumption. No feature of his theory prevents us assuring that the capital value of the machine amounts to fully £208. On the contrary, if, with Lauderdale, we think of the machine as an object of monopoly, there is a certain justification in expecting that its price will be very high. I grant that experience goes to show that machines and real capital in general, be their monopoly price forced up ever so high, never cost quite so much as they turn out. But this is only shown by experience, not by Lauderdale; and by entirely shirking the explanation of that empirical fact he has left the heart of the interest problem untouched.
In that variation of the illustration where Lauderdale assumes that unrestricted competition ensues, it is true that we might consider the value of the machine as fixed (relatively at least) by the amount of its cost of production. But here again we are met by the doubt as regards the other determining factor, the amount of the gross use. Say, e.g. that the machine has cost £100, and that £100 is presumably its capital value, then whether there is any net interest over or not will depend on whether the daily gross return of the machine exceeds £100/365 or not. Will it exceed that? All that Lauderdale says on this point is that the claim of the capitalist "must be regulated on the same principle as everything else," the relation of supply and demand. That is, he says nothing at all.
And yet it was very necessary to say something, and, moreover, to prove what was said. For it is not in the least self-evident that the gross use is higher than the capital value of the machine, if that value is pressed down by free competition to the amount of its cost. It is just where unrestricted competition prevails in the use of the machine, that it presses down the value of the products of capital also—in this case, the stockings—and thus presses down the gross return to the machine. Now, so long as the machine produces more than it costs, there remains a profit to the undertaker; and the existence of a profit, one would think, will act as inducement to the further multiplication of the machines till such time as, through the increased competition, the extra profit entirely vanishes. Why should competition call a halt earlier? Why, e.g. should it call a halt at the time when the gross use of a machine which costs £100 has sunk to £110 or £105, when a net interest of 10 per cent or 5 per cent is thereby assured? This calls for a satisfactory explanation of its own, and Lauderdale has not said a word about it.
His explanation has therefore shot beside the mark. What it actually explains is something that had no need of explanation, viz. the fact that capital gives a gross interest, a gross return. But what had great need of explanation, viz. the remainder of a net return in the gross return, remains as obscure as before.
The test by which Lauderdale attempts to confirm the accuracy of his theory, and on which he lays great weight, will not do much to change our opinion. He shows that where a machine saves no labour—where, e.g. the machine takes three days to make a pair of stockings, while the hand-worker does the same in two days—there is no "profit." This, according to Lauderdale, is an evident proof that profit does come from the power of capital to replace labourers (p. 164).
The reasoning is weak enough. It shows of course that the power of the machine to replace labour is an indispensable condition of the profit—which is tolerably self-evident, since, if the machine had not this property, it would have no use at all, and would not even belong to the class we call "goods." But it is very far from showing that interest is fully explained by this power. By using a strictly analogous test he might have proved a totally opposite theory, viz. that profit comes from the activity of the workman who tends the machine. If nobody tends the machine it stands still, and if it stands still it never yields any profit. Consequently it is the workman who creates the profit!
I have purposely taken the greater care in examining the blunders into which Lauderdale's method of explanation leads him, because the criticism applies not to Lauderdale alone, but to all those who, in trying to trace interest to the productivity of capital, have fallen into the same errors. And we shall see that the number of those who have thus been criticised in advance is not small, and embraces many a well-known name.
Lauderdale found his first important follower, though by no means his disciple, in Malthus.31
With his usual love of exact definition Malthus has carefully stated the nature of profit. "The profits of capital consist of the difference between the value of the advances necessary to produce a commodity and the value of the commodity when produced" (p. 293; second edition, p. 262).
"The rate of profit," he continues more exactly than euphoniously, "is the proportion which the difference between the value of the advances and the value of the commodity produced bears to the value of the advances, and it varies with the variations of the value of the advances compared with the value of the product."
After expressions like these the question would seem to suggest itself, Why must there be this difference between the value of the advances and the value of the product? Unfortunately Malthus does not go on to put this question explicitly. He has given all his care to the inquiry as to the rate of interest, and has left only a few rather inadequate indications as to its origin.
In the most complete of these Malthus, quite in the style of Lauderdale, points to the productive power of capital. "If by means of certain advances to the labourer of machinery, food, and materials previously collected, he can execute eight or ten times as much work as he could without such assistance, the person furnishing them might appear at first to be entitled to the difference between the powers of unassisted labour and the powers of labour so assisted. But the prices of commodities do not depend upon their intrinsic utility, but upon the supply and the demand. The increased powers of labour would naturally produce an increased supply of commodities; their prices would consequently fall, and the remuneration for the capital advanced would soon be reduced to what was necessary, in the existing state of society, to bring the articles, to the production of which they were applied, to market. With regard to the labourers employed, as neither their exertions nor their skill would necessarily be much greater than if they had worked unassisted, their remuneration would be nearly the same as before.... It is not, therefore," continues Malthus, making his point of view more precise by a polemical remark, "quite correct to represent, as Adam Smith does, the profits of capital as a deduction from the produce of labour. They are only a fair remuneration for that part of the production contributed by the capitalist, estimated exactly in the same way as the contribution of the labourer" (p. 80).
In this analysis the reader will have no difficulty in recognising the principal ideas of Lauderdale's Productivity theory, only put in a somewhat modified form and with somewhat less precision. There is only one feature that points in another direction; that is, the prominence—if we may use so strong a word—given to the fact that the pressure of competition must always leave over a share to the capitalist—as much as may be "necessary to bring the articles, to the production of which the capital was applied, to market." Malthus indeed has not said anything in further explanation of this new feature. But the fact of his mentioning it at all shows distinctly his feeling that, in the formation of profit, something besides the productivity of capital must be concerned.
The same idea comes out more forcibly in Malthus's direct statement that profit is a constituent part of the costs of production.32
The formal enunciation of this proposition, to which Adam Smith and Ricardo inclined without explicit mention of it,33 was, as things have turned out, a literary event of some importance. It started the stirring controversy which was carried on for some decades with great vigour, first in England, and then in other countries, and this controversy was, indirectly, of great use in developing the interest theory. For when economists were eagerly discussing whether profit should belong to the costs of production or not, they could scarcely avoid making a more thorough investigation into its nature and origin.
The proposition that interest is a constituent portion of the costs of production is likely to be judged in an essentially different way by the theorist, and by the historian of theory. The former will pronounce it a gross mistake, as did Malthus's contemporary Torrens, and as lately Pierstaff has done in harsh terms—much too harsh, in my opinion.34 Profit is not a sacrifice that production requires, but a share in its fruits. To pronounce it a sacrifice was only possible by a somewhat gross confusion of the national economic standpoint with the individual economic standpoint—the standpoint of the individual undertaker who, of course, feels the paying out of interest on borrowed capital as a sacrifice.
But still, even in this unfortunate form, there lies an idea which is full of significance, and which points beyond the inadequate Productivity theory; and this Malthus evidently had in his mind. It is the idea that the sacrifices of production are not exhausted in the labour which is employed in production, whether that labour be directly, or—as embodied in real capital—indirectly employed; that beyond this there is a peculiar sacrifice demanded from the capitalist which equally demands its compensation. Malthus of course was not able to indicate more accurately the nature of this sacrifice. Yet in this somewhat unusual mention of profit as a constituent of costs the historian of theory will recognise an interesting middle course between Adam Smith's first suggestion,—that the capitalist must have a profit, because otherwise he would have no interest in the accumulation of capital,—and the more precise theories; whether, with Say, these theories pronounce productive services to be a sacrifice demanding compensation and a constituent part of the costs of production, or, with Hermann, pronounce the use of capital to be that sacrifice, or, like Senior, find this sacrifice and cost in the capitalist's abstinence. In Malthus, indeed, the first notes of these more precise doctrines are yet too lightly sounded to drown the ruder explanation, which, like Lauderdale, he deduced from the productive power of capital.
But that neither the one explanation nor the other really passed into a substantial theory is shown by his remarks on the rate of profit (p. 294). Instead of deriving the current rate of interest, as one would naturally have expected, from the play of those same forces that bring interest into existence, he explains it as determined by influences of a different kind altogether; by the height of wages on the one hand and the price of products on the other.
He calculates in the following manner. Profit is the difference between the value of the costs advanced by the capitalist, and the value of the product. The rate of profit will, accordingly, be greater, the less the value of the costs and the greater the value of the product. But as the greatest and most important portion of the costs consist in wages of labour, we have as the two determinants which influence the rate of profit, the height of wages on the one hand and the price of products on the other.
However logical this way of explanation seems to be, it is easy to show that it does not, at any rate, go to the heart of the matter. To show what I mean, perhaps I may be allowed to make use of a comparison. Suppose we wish to name the cause that determines the distance between the car of a balloon and the balloon itself. It is clear at the first glance that the cause is to be found in the length of the rope that fastens the car to the balloon. What should we say if some one were to conduct the investigation thus: the distance is equal to the difference in the absolute height of the balloon and of the car, and is therefore increased by everything that increases the absolute height of the balloon and diminishes the absolute height of the car; and is diminished by everything that diminishes the absolute height of the balloon and increases the absolute height of the car? And now the explainer would call to the assistance of his explanation everything that could have any possible influence over the absolute elevation of the balloon and of the car—such as density of the atmosphere, weight of the covering of balloon and car, number of persons in the car, tenuity of the gases employed to fill it—only omitting the length of the rope that tied the two!
And just in this way does Malthus act. In page after page of research he inquires why wages are high or low. He is never tired of controverting Ricardo, and proving that the difficulty or ease of production from land is not the only cause of a high or a low wage, but that the abundance of capital which accompanies the demand for labour has also its influence on wage. In the same way he is never tired of asserting that the relation of supply and demand for products, by fixing their price higher or lower, is the cause of a high or a low profit. But he forgets to put the simplest question of all—the question on which everything hinges, What power is it that keeps wage of labour and price of product apart in such a way that, no matter what be their absolute level, they leave a space between them which is filled up by profit?
Only once, and then very faintly—even more faintly than Ricardo on a similar occasion—does Malthus hint at the existence of a power of this sort, when he remarks on p. 303 that the gradual diminution of the rate of profit must, in the long run, bring "the power and the will to accumulate capital" to a standstill. But he does not make any more use of this element to explain the height of profit than did Ricardo.
Finally, Malthus's explanation loses any force it had through the fact that, to determine the prices of products—price being one of his two standard factors—he cannot bring forward anything more substantial than the relation of supply and demand.35 Here the theory finds a conclusion where it is, I grant, incontrovertible, but where at the same time it ceases to say anything. That the rate of interest is influenced by the relation between the demand and the supply of certain goods is, considering the fact that interest is itself a price, or a difference in price, a little too obvious.36
After Malthus the theory of the productive power of capital was only handed on in England by Read.37 As Read, however, took elements from other theories, we shall have to speak of him again among the eclectics. But very similar views are to be found somewhat later in the writings of certain celebrated American economists, particularly Henry Carey and Peshine Smith.
Carey38 offers one of the very worst examples of confused thinking on a subject where there has already been much confusion. What he says on interest is a tissue of incredibly clumsy and wanton mistakes—mistakes of such a nature that it is almost inconceivable how they should ever have received any consideration in the scientific world. I should not express this opinion in such severe terms if it were not that Carey's interest theory even yet enjoys a reputation which I consider very ill deserved. It is one of those theories which, to my mind, cast discredit not only on their authors, but on the science that lets itself be seduced into credulous acceptance of them; not so much that it errs as for the unpardonably blundering way in which it errs. Whether I speak too harshly of it or not let the reader judge.
Carey has not given any abstract formulation to his views on the source of interest. Following his favourite plan of explaining economical phenomena by introducing simple situations of Robinson Crusoe life, he contents himself, in the present case, with giving a pictorial account of the origin of interest, so that we discover his opinion on its causes only by the characteristic features which he gives to imaginary transactions. It is from such pictures that we have to put together Carey's theory.
He deals with our subject ostensibly in the forty-first chapter of his Principles, under the title, "Wages, Profit, and Interest." After a few introductory words the following picture occurs in the first paragraph:—
"Friday had no canoe, nor had he acquired the mental capital required for producing such an instrument. Had Crusoe owned one, and had Friday desired to borrow it, the former might thus have answered him—
" 'Fish abound at some little distance from the shore, whereas they are scarce in our immediate neighbourhood. Working without the help of my canoe, you will scarcely, with all your labour, obtain the food required for the preservation of life; whereas, with it, you will, with half your time, take as many fish as will supply us both. Give me three-fourths of all you take, and you shall have the remainder for your services. This will secure you an abundant supply of food, leaving much of your time unoccupied, to be applied to giving yourself better shelter and better clothing.'
"Hard as this might seem, Friday would have accepted the offer, profiting by Crusoe's capital, though paying dearly for its use."
Up to this point one can easily see that Carey's theory is a tolerably faithful copy of Lauderdale's. Like him Carey starts by making capital the cause of a productive surplus result. This forms the occasion for the capitalist receiving a price for the use of his capital, and this price—as appears from many passages—is without further examination identified by Carey, as it was by Lauderdale, with interest, although obviously it only represents the gross use of the capital. It makes no difference that Carey, unlike Lauderdale, does not look on capital as an independent factor in production, but only as an instrument of production. The essential feature remains that the surplus result from the production, associated with the employment of capital, is put down as the cause of interest.
But while Lauderdale is only open to the charge of having mixed up gross and net use, Carey plays fast and loose with a whole row of conceptions. Not only does he confuse net and gross use, but he confuses these two conceptions again with real capital itself, and that not occasionally but consistently. That is to say, he deliberately identifies the causes of a high or low interest with the causes of a high or low value of real capital, and deduces the height of the interest rate from the height of the value of real capital.
This almost incredible confusion of ideas shows itself in every passage where Carey treats of interest. For statement of his argument I shall use chap. vi. (on Value) and chap. xli. (on Wage, Profit, and Interest), where he expresses himself most connectedly on the subject.
According to Carey's well-known theory of value, the value of all goods is measured by the amount of the costs required for their reproduction. Progressive economical development, which is simply man's progressive mastery over nature, enables man to replace the goods he needs at a steadily decreasing cost. This is true, among other things, of those tools that form man's capital; capital shows, therefore, the tendency to fall steadily in value with the advance of civilisation. "The quantity of labour required for reproducing existing capital and for further extending the quantity of capital diminishes with every stage of progress. Past accumulations tend steadily to decline in value, labour rising not less steadily when compared with them" (iii. p. 130; so also i. chap. i. passim).
Accompanying this and as result of the decrease in the value of capital comes a fall in the price paid for its use. This proposition is not actually stated by Carey; he evidently thinks it too self-evident to require that,—as indeed, rightly understood, it is,—but it is assumed and referred to in his pictures of Crusoe's economical development. He relates how the owner of the first axe may have been able to demand for the loan of it more than half the wood that could be cut by it, while later, when better axes can be made at a cheaper price, a lower (relative) price is paid for their use (i. p. 193).
On these preliminary facts, then, Carey builds his great law of interest;—that, with advancing economical civilisation, the rate of profit on capital—that is, the rate of interest—falls, while the absolute quantity of profit rises. The way in which Carey arrives at this law can only be adequately appreciated by reading his own words. The reader may therefore pardon the somewhat lengthy quotation that follows.
"Little as was the work that could be done with the help of an axe of stone, its service to the owner had been very great. It was therefore clear to him that the man to whom he lent it should pay him largely for its use. He could, too, as we readily see, well afford to do so. Cutting with it more wood in a day than without it he could cut in a month, he would profit by its help were he allowed but a tenth of his labour's products. Being permitted to retain a fourth, he finds his wages much increased, notwithstanding the large proportion claimed as profit by his neighbour capitalist.
"The bronze axe being next obtained, and proving far more useful, its owner—being asked to grant its use—is now, however, required to recollect that not only had the productiveness of labour greatly increased, but the quantity required to be given to the production of an axe had also greatly decreased, capital thus declining in its power over labour, as labour increased in its power for the reproduction of capital. He, therefore, limits himself to demanding two-thirds of the price of the more potent instrument, saying to the woodcutter: 'You can do twice as much work with this as you now do with our neighbour's stone axe; and if I permit you to retain a third of the wood that is cut, your wages will still be doubled.' This arrangement being made, the comparative effects of the earlier and later distributions are as follows:—
"The reward of labour has more than doubled, as a consequence of the receipt of an increased proportion of an increased quantity. The capitalist's share has not quite doubled, he receiving a diminished proportion of an increased quantity. The position of the labourer, which had at first stood as only one to three, is now as one to two; with great increase of power to accumulate, and thus to become himself a capitalist. With the substitution of mental for merely physical power, the tendency to equality becomes more and more developed.
"The axe of iron next coming, a new distribution is required, the cost of reproduction having again diminished, while labour has again increased in its proportions as compared with capital. The new instrument cuts twice as much as had been cut by the one of bronze, and yet its owner finds himself compelled to be content with claiming half the product; the following figures now presenting a comparative view of the several modes of distribution:—
"The axe of iron and steel now coming, the product is again doubled, with further diminution in the cost of reproduction; and now the capitalist is obliged to content himself with a less proportion, the distribution being as follows:—
"The labourer's share has increased, and, the total product having largely increased, the augmentation of his quantity is very great.
"That of the capitalist has diminished in proportion, but, the product having so much increased, this reduction of proportion has been accompanied by a large increase of quantity. Both thus profit greatly by the improvements that have been effected. With every further movement in the same direction the same results continue to be obtained—the proportion of the labourer increasing with every increase in the productiveness of effort—the proportion of the capitalist as steadily diminishing, with constant increase of quantity and equally constant tendency towards equality among the various portions of which society is composed....
"Such is the great law governing the distribution of labour's products. Of all recorded in the book of science, it is perhaps the most beautiful, being, as it is, that one in virtue of which there is established a perfect harmony of real and true interests among the various classes of mankind" (iii. pp. 131-136).
I beg the reader to stop for a moment at this point of the quotation, and to decide exactly what it is that Carey has up to this point asserted, and, if not strictly speaking proved, has at least made quite clear. The object of Carey's inquiry was the price paid for the use of the axe—that is, its hire. The amount of this hire was compared with the amount of the total return which a worker could obtain by the help of the axe. The result of this comparison is the proposition that, with advancing civilisation, the hire paid for capital forms an always decreasing proportion of that total return. This and nothing else is the substance of the law which Carey up till now has expounded and proved, and which he often abridges in the words, "The proportion of the capitalist falls."
Let us hear Carey further. "That the law here given as regards the return to capital invested in axes is equally true in reference to all other descriptions of capital will be obvious to the reader upon slight reflection." He demonstrates its efficacy first in the reduction of the rent of old houses, on which there is nothing particular to remark, and then goes on. "So, too, with money. Brutus charged almost 50 per cent interest for its use, and in the days of Henry VIII the proportion allotted by law to the lender was 10. Since then it has steadily declined, 4 per cent having become so much the established rate in England that property is uniformly estimated at twenty-five years' purchase of the rent; so large, nevertheless, having been the increase in the powers of man that the present receiver of a twenty-fifth can command an amount of convenience and of comfort twice greater than could have been obtained by his predecessors who received a tenth. In this decline in the proportion charged for the use of capital we find the highest proof of man's improved condition" (iii. p. 135).
In these words Carey has suddenly performed a bold volteface. He speaks as if the proof adduced in the foregoing passages referred to the rate of interest, and thenceforth treats it as an established fact that the depreciation of the value of capital brings about a depreciation of the rate of interest!39
This change of front rests on as gross a piece of juggling as can well be imagined. In the whole course of the preceding argument Carey has never once mentioned the rate of interest, much less made it the subject of any proof. To apply the argument to the rate of interest Carey has now to make a double perversion of his conceptions—first, of the conception of "use"; second, of the conception of "proportion."
In the course of his argument he has always employed the phrase "use of capital" in the sense of "gross use." He who hires out an axe sells its gross use; the price which he receives for it is a hire or gross interest. But now all at once he employs the word use in the sense of net use, the use to which the net (money) interest corresponds. While the argument therefore, was that gross interest has a tendency to fall (relatively), the conclusion drawn by Carey from his argument is that net use has this tendency.
But the second perversion is even more gross.
In the course of the argument the word "proportion" had always referred to the relation between the amount of the interest and the total return to the labour done by the help of capital. But now, in his application of the argument, Carey interprets the word proportion as expressing a relation between the amount of the use and the value of the parent capital—in other words, the rate of interest. He speaks of a "proportion of 10 per cent," by which he does not mean as formerly 10 per cent of the return obtained by the assistance of the capital lent, but 10 per cent on the parent capital. And in the fall of the interest rate from 10 per cent to 4 per cent—"the decline in the proportion charged for the use of capital"—he sees a simple application of the law just proved, without a suspicion that the proportion spoken of earlier means something quite different from that now referred to.
In case the reader may think that this criticism is mere hair-splitting, I would ask him to consider the following concrete illustration, which I adapt as closely as possible to Carey's line of argument.
Suppose that with a steel axe a worker, in a year's time, can cut down 1000 trees. If only one such axe is to be had, and no other of the same kind can be made, its owner may ask and receive for the transference of its use a large part of the total return—say one-half. Thanks to the monopoly, the capital value which the single axe obtains in these circumstances will also be high; it may, e.g. amount to the value of as many trunks as a man can fell with it in two years—that is, 2000 trunks. The price of 500 trees which is paid for the year's use of the axe represents in this case a proportion of 50 per cent of the total yearly return, but a proportion of 25 per cent only of the value of the capital. This by itself proves that the two proportions are not identical; but let us look further.
Later on people learn to manufacture steel axes in any quantity desired. The capital value of the axes falls to the amount of the costs of reproduction at the time. Say that these costs are equal to eighteen days of labour; then a steel axe will be worth about as much as fifty trees, since the felling of fifty trees also costs eighteen days' labour. Naturally if the owner lend the axe he will now be content to take a much smaller proportion of the 1000 trees that represent the year's work; instead of receiving the half, as before, he now gets no more than a twentieth—that is, fifty trees. These fifty trees represent, on the one hand, 5 per cent of the total return, and, on the other hand, 100 per cent of the capital value of the axe.
What does this prove? The one proportion, 50 per cent of the gross return, represented only 25 per cent of the capital value of the axe; the smaller proportion, 5 per cent of the total return, represents 100 per cent of the capital value. In other words, while the proportion of the total return fell to a tenth part of what it was at first, the rate of interest represented by this proportion rose fourfold. So little necessity is there that the proportions which Carey lightly confuses with one another should run parallel; and so little does Carey's law of the "falling of the capitalist's proportion" show what he intended to show—the course pursued by the rate of interest.
It scarcely needs further proof that Carey's contributions to the explanation of interest are entirely worthless. The peculiar problem of interest, the explanation why it is that the return falling to the share of capital is worth more than the capital consumed in obtaining it, is not even touched. That this sham-solution has, nevertheless, found admission into the writings of many most respectable economists of our own and other nations is a proof of the very small degree of thoroughness and discrimination with which, unfortunately, our most difficult subject is usually treated.
Scarcely more correct—if at all—than Carey himself is his disciple E. Peshine Smith, whose Manual of Political Economy (1853) has lately obtained a wide circulation in Germany through Stöpel's translation.
Peshine Smith finds the origin of profit in a partnership between workman and capitalist. The object of the partnership is "to change the form of the commodities contributed by the capitalist, and increase their value by combining them with a new infusion of labour." The return, "the new thing produced," is divided, and divided in such a way that the capitalist receives more than the replacement of the capital he has contributed, and so makes a profit. Smith obviously considers it self-evident that it must be so. For without taking the trouble of a formal explanation, he points out, in quite general terms, that the bargain must promote the interests of both, and that "both the capitalist and the labourer expect to derive their respective shares in the advantages of their partnership." Beyond this he simply appeals to the fact: "In point of fact, they do so, however long may be the series of transformations and exchanges before the division is made" (p. 77).
A purely formal distinction of profit emerges according as, in the partnership, it is the capitalist or the labourer who takes the risk on himself. In the former case "the share in the product which the workman obtains is called wages; and the difference in value between the materials as turned over to the workman, the food, raiment, shelter, etc., furnished to the workman in kind, or commuted in wages, the deterioration of the tools employed, and the finished product, is termed profits. If the workman takes the risk upon himself, that share which he gives to the capitalist, in addition to replacing the capital he had borrowed, is called rent" (p. 77).
In this passage, where Smith speaks for the first time of profit, the superficial way in which he evades any deeper explanation of it clearly shows that he has not grasped his problem at all. Yet what he has said up till now, if not of much importance, is not incorrect.
But even this modest praise cannot be given to what follows, where he goes on to examine the influences which the growth of capital exerts on the rate of profit. Here he copies faithfully not only Carey's method of statement and his final conclusions, but even all his mistakes and blunders.
First of all, quite in Carey's style, he introduces a couple of economical pictures drawn from primitive conditions. A savage goes to the owner of a stone axe, and gets permission to use the axe under the condition that he builds one canoe for the owner of the axe, as well as one for himself. A generation passes away, and copper axes are substituted, by the aid of which three times as much work can be done as by the stone axe. Of the six canoes that the worker now builds in the same time as formerly he built two, he may retain four for himself, while two are claimed by the capitalist. The share of the labourer has thus increased both in proportion and in quantity; that of the capitalist has also increased in quantity, but has decreased in relative proportion,—it has fallen from a half to a third of the product. Finally, the celebrated "American axes" of the present day come into use. With them three times the work can now be done that used to be done by the copper axes, and of the eighteen canoes, or other products of labour, which the borrower of the axe can now make, he will have to pay four for the use of the axe, and fourteen are left him as the share of his labour. In this case again the share of the worker has proportionally advanced, and that of the capitalist diminished.
Arrived at this point, Smith begins to apply his rules to modern economic life and its forms.
First, for the form of contract with the savage is substituted the modern loan contract.
"The cases we have put represent the capitalist agreeing to make a fixed payment out of the product of the capital which he entrusts to the labourer, and of the mechanical force of the latter. In so doing he runs a risk that the labourer may not exert himself to his full ability, and that the residue after payment of wages, upon which he depends for profits, may be less than he calculates. To insure himself against this contingency, he naturally seeks to bargain for less wages than he is confident that the earnest and honest exertion of the workman's strength would enable him to pay, without impairing his expected profit. The workman, on the contrary, knowing what he can do, and unwilling to submit to any reduction, prefers to guarantee the profit which the capitalist desires, taking upon himself the risk that the product will leave a margin broad enough to provide for the wages which the capitalist is afraid to guarantee. The contract thus becomes one of hiring capital" (p. 80).
The careful reader will remark that in these words not only is the new form of contract substituted for the old,—to which there is no objection, but, quite unexpectedly, for the price of the use, which was the thing formerly mentioned, and which was a gross interest, is now substituted the "profit" (net interest),—to which there are very serious objections.
But Peshine Smith goes still farther. Without hesitation he substitutes for the proportion of the product the proportion of the parent capital, or the rate of interest. Carey had made this confusion blindly; Smith makes it with all deliberation, which is more singular and more difficult to excuse. "Men reckon their gains by a comparison between what they previously possessed and what is added to it. The capitalist reckons his profits not by his proportion of the product which has been won by the combination with labour, but by the ratio which the increment bears to the previous stock. He says he has made so much per cent on his capital; he rents it for so much per cent for a year. The difference is one of arithmetical notation, not of fact. When his proportion of the product is small, it being composed of the original capital and the increment, the ratio of the latter to the capital will also be small" (p. 82).
That is to say, a small proportion of product and a small rate of interest are substantially identical, and only different arithmetical notations for the same thing. For judgment of this strange doctrine I need only refer the reader to the illustration already given when criticising Carey. We there saw that the half of the product may represent 25 per cent of the capital, and that a twentieth part of the product may represent 100 per cent of the capital. This does seem something more than a mere difference in arithmetical notation!
Substituting one term for another in this way, Smith is able, finally, to proclaim Carey's "great law" that as civilisation advances the share of the capitalist—that is, the rate of interest—falls; and to verify it by the historical fact that in rich countries the rate of interest does fall. At the same time his own example illustrates how a tolerably true proposition may be deduced from very false reasoning.
In favourable contrast to the shallowness of the American writer is the homely but conscientious and thorough-going way in which the German investigator, Von Thünen, has dealt with our problem.40
Like Carey, Thünen investigates the origin of interest genetically. He goes back to primitive economical relations, follows the first beginnings of the accumulation of capital, and inquires in what manner and by what methods capital comes into existence in these circumstances, as well as under what laws it develops. Before beginning the inquiry itself he is careful to put down with minute exactitude all the assumptions of fact with which he starts, as well as the terminology he means to use (pp. 74-90). This is valuable to Thünen as an aid to literary self-control, and is a characteristic example of his conscientious thoroughness.
From this introduction we find that Thünen starts by supposing a people living in a latitude of tropical fruitfulness, equipped with all the capacity, knowledge, and skill of civilisation, but still, so far, absolutely without capital, and without communication with other peoples; so that the accumulation of capital must come from within, and not be influenced at all from outside. Land has as yet no exchange value. All men are equal in position, equally capable, and equally saving, and get their means of support from labour.
The standard of value which Thünen makes use of for the scope of his inquiry is the labourer's means of subsistence, taking as unit the hundredth part of the means of subsistence required by a labourer during a year. The year's need he calls s, the hundredth part he calls c; so that s = 100c.
"Suppose," he begins (p. 90), "that the worker, if diligent and saving, can produce by his hands 10 per cent more than he requires for his necessary subsistence—say 110c in the year. Then, after deducting what he must spend for his own support, there remains over 10c.
"In the course, then, of ten years he may accumulate a store on which he can live for a year without working; or he may for the one whole year devote his labour to the making of useful tools—that is, to the creation of capital.
"Let us follow him now in the labour that creates the capital.
"With a hewn flint he manages to make wood into a bow and arrow. A fish bone serves for the arrow's point. From the stalk of the plantain, or the fibrous covering of the cocoanut, he makes string or packthread; the one he uses to string the bow, with the other he makes fishing nets.
"In the following year he applies himself again to the production of means of subsistence, but he is now provided with bow, arrows, and nets; with the help of those tools his work is much more remunerative, the product of his work much greater.
"Suppose that in this way the result of his work, after deducting what he must spend to keep the tools in an equally good state, rises from 110 to 150c, then he can lay by in one year 50c, and he only needs to devote two years now to the production of the means of subsistence, when he is free again to spend a whole year in the making of bows and nets.
"Now he himself can make no use of these, since the tools made in the previous year are sufficient for his needs; but he can lend them to a worker who up till now has worked without capital.
"This second worker has been producing 110c; if then he is lent the capital, on which the labourer who made it has expended a year's labour, his production, if he keeps up the value of the tools lent him and returns them, is 150c.41
"The extra production got by means of capital amounts therefore to 40c.
"This worker can consequently pay a rent of 40c for the borrowed capital, and this sum the worker who produced the capital draws in perpetuity for his one year's labour.
"Here we have the origin and ground of interest, and its relation to capital. As the wages of labour are to the amount of rent which the same labour, if applied to the production of capital, creates, so is capital to interest.
"In the present case the wage of a year's work is 110c; the rent brought in by the capital—that is, the result of a year's labour—is 40c.
"The ratio therefore is 110c : 40c = 100 : 36.4, and the rate of interest is 36.4 per cent."
The passage that follows refers not so much to the origin as to the rate of interest, and I shall only make a brief abstract of such of the leading ideas as may illustrate Thünen's conception still further.
According to Thünen, as capital increases, its productive efficiency declines, each new increment of capital increasing the product of human labour in a less degree than the capital formerly applied. If, e.g. the first capital increased the return to labour by 40c—say from 110c to l50c—the capital next applied may bring a further increase of only 36c, a third capital 32.4c, and so on. This on two grounds.
1. If the most efficient of the tools, machines, etc., which constitute capital, are to be had in sufficient quantity, then the further production of capital must be directed to tools of less efficiency.
2. In agriculture the increment to capital, if it everywhere finds employment, leads to the cultivation of less fertile and less favourably situated lands, or to a more intensive cultivation that necessitates greater costs; and in these cases the capital last employed brings a less rent than that formerly employed (p. 195, and more in detail, p. 93).
In proportion as the extra return produced by the efficiency of capital declines, naturally the price that will and can be paid for the use of the capital transferred to the borrower also declines; and since there cannot be alongside each other two different rates of interest—one for the capital first applied and another for the capital applied later—the interest on capital as a whole adjusts itself to "the use of that portion of capital which is last applied" (p. 100). In virtue of these circumstances the rate of interest tends to sink with the increase of capital, and the reduction of rent that follows from this is to the advantage of the labourer, inasmuch as it raises the wage of his labour (p. 101).
We see then that Thünen very distinctly makes the productive efficiency of capital his starting-point. Not only is this productive efficiency the origin of interest, but the current degree of the efficiency exactly determines the rate of interest.
Now the value of this theory depends altogether on the way in which is explained the connection that exists between the greater productiveness of labour supported by capital and the obtaining of a surplus value by the owner of capital.
Thünen happily keeps clear of two dangerous pitfalls. He has no fiction of a value-creating power in capital; he only ascribes to it what it actually has, viz. the capacity to assist towards the production of more products—in other words, physical productivity. And second, he has escaped the fatal confusion of gross and net interest. What he calls net interest, the 40, 36, 32.4c, etc., which the capitalist receives, is really net interest, it being expressly assumed (p. 91) that the debtor, over and above that interest, fully replaces the value of the capital.
But by this very hypothesis Thünen has laid his interest theory open to attack from another side.
The connection of ideas which in Thünen's theory leads from the physical productivity of capital to the obtaining of surplus value by the capitalist may be put as follows:
1. Labour supported by capital can obtain a greater amount of products. This assumption is undoubtedly correct.
2. The plus, which is traceable to the employment of capital, is made up, in Thünen's illustration, of two components: first, of the 40, 36, or 32.4c, which the capitalist receives in means of subsistence; and second, of the replacement of the real capital consumed in the employment. It is the two components together that make up the gross return to the employment of capital. A little calculation will show that this important proposition, although not plainly stated by Thünen, is really contained in his doctrine. According, to Thünen, a year's labour unassisted by capital produces 110c. A year's labour assisted by capital is sufficient, not only to renew the capital so far as it has experienced wear and tear, but to produce 150c besides. The difference of the two results, which represents the plus due the employment of capital, presents, therefore, as a fact 40c and the upkeep of the capital. Still it must be confessed that Thünen has kept the existence of the second component very much in the background—not indeed mentioning it again except in two passages of p. 91, and entirely omitting to notice it in making out his later tables (pp. 98, 110, etc.) The exactness of these tables is thus marred in no slight degree. For it may be imagined that, when capitals representing six or ten years' labour are employed, the yearly labour spent in replacing them must absorb a considerable portion of the whole labour power of the user.
3. The excess production called forth by the employment of capital42 (= renewal + 40 or 36 or 32.4c, as the case may be) falls to the capitalist as such. This assumption of Thünen's is, in my opinion, on the whole correct, even if the war of prices may often modify the share of the capitalist in individual cases.
4. This gross production of capital that falls to the capitalist is regularly more valuable than the real capital consumed in obtaining it, so that a net production, a net interest, an excess value remains. This proposition forms the natural conclusion to the chain of thought. Thünen has not put it any more than the others in the form of a general theoretical proposition. It only appears in the fact that his illustration shows a regular surplus value in the amount received by the capitalist over the amount given out by him, and this of course—seeing that the illustration chosen is meant to be a typical one—comes pretty much to an express formulation of the theoretical proposition; all the more so that Thünen was bound to maintain and explain a permanent surplus value of the return to capital over the sacrifice of capital, if he meant to explain the interest which is this very surplus value.
At this point we come to the last and the decisive stage in Thünen's argument. Hitherto we have found nothing essential to object to, but just at this critical point the weakness of his theory betrays itself.
When we ask, In what way does Thünen explain and give reasons for the existence of this surplus value? it must be answered that he does not explain it, but assumes it. Indeed the decisive assumption has merely slipped in at that very insignificant passage where Thünen says that the possession of a capital enables the worker to produce a surplus product of 40, 36, and so on, after deduction of what is necessary to give back the capital "in equally good condition" and "equal in value."
If we look more closely at this apparently harmless proposition, we find it to contain the assumption that capital possesses power (1) to reproduce itself and its own value, and (2) over and above that, to produce something more. If, as is here assumed, the product of capital is always a sum of which one constituent alone is equal to the whole sacrifice of capital, then it needs no explanation that the whole sum must be worth more than that sacrifice, and Thünen is quite right not to trouble with any further explanation. But the question is, was Thünen justified in assuming any such efficiency in capital?
To my mind this question must be answered distinctly in the negative. It is true that, in the concrete situation first supposed by Thünen, that assumption may appear to us quite plausible. We find nothing at all out of place in assuming, not only that the hunter equipped with bow and arrows is able to bring down forty more head of game than he could without those weapons, but that he might also have time enough over to keep his bow and arrows in good condition, or to renew them; so that his renewed capital was worth as much at the end of the year as it was at the beginning. But is it allowable for any one to make analogous suppositions in regard to a complicated condition of economical affairs—that is, a condition in which capital is too various, and the division of labour too complete, to allow of the capital being renewed by the labourer who has been using it? If this labourer must pay for the renewal of the capital, is it self-evident that the excess in products obtained by the help of the capital will exceed the costs of the renewal, or the value of the capital consumed?
Certainly not. There are, on the contrary, two conceivable possibilities by which the surplus value might be swept away. First, it is conceivable that the great productive utility assured by possession of the capital increases the economical estimate of this capital so much that its value comes up to the value of the expected product; that, e.g. bows and arrows which, during the whole term of their existence, secure the obtaining of 100 head more of game become equal in value to the 100 head. In that case the hunter, in order to replace the weapons worn out, would be obliged to give to the maker of the weapons the whole surplus return of 100 head (or the value of the 100 head), and would retain nothing to pay surplus value or interest to the man who lent him the weapons.
Or, second, it is conceivable that the competition in the making of weapons is so severe that it presses down their price below that very high economical estimate. But will this same competition not also, of necessity, press down the claims which the capitalist may impose when lending the weapons? Lauderdale has assumed such a pressure; so has Carey; and our experience of economical life leaves no doubt that such a pressure will be exerted. Now here we ask, as we did in the case of Lauderdale, Why should the pressure of competition on the capitalist's share never be so strong as to press down its value to the value of the capital itself? Why is it that there is not so great a quantity of any particular form of capital produced and employed that its employment returns just enough to replace the capital and no more? But if this were to happen, the surplus value, and with it the interest, would, in this case also, disappear.
There are, in short, three possibilities in the relation between the value of the product of capital and the value of the capital that produces that product. Either the value of the product raises the value of the real capital to the level of its own value; or, through competition, the value of the real capital brings down the value of the return to capital to its own value; or, finally, the share of capital in the product remains steadily above the value of the real capital. Thünen presupposes the third of these possibilities without either proving or explaining it; and thus, instead of explaining the whole phenomenon which is ostensibly the subject of explanation, he has assumed it.
Our final judgment must, therefore, be expressed as follows. Thünen gives a more subtle, more consistent, more thorough version of the Productivity theory than any of his predecessors, but he too stumbles at the most critical step; where the problem is to deduce surplus value from the physical productivity of capital,—from the surplus in products,—he includes among his assumptions the thing he has to explain.43
Thünen's method marks a high level of solid and well considered investigation. Unfortunately this level was not long maintained, even in the literature of his own nation. In his successors, Glaser44 and Roesler,45 who wrote on the same lines, we see a distinct falling off in thoroughness of conception and strictness of method.
In the interval, however, the Productivity theories had become the object of serious and weighty attacks. Rodbertus, in a quiet but effective criticism, had accused them of confusing questions of distribution and questions of production; pointing out that, in assuming the portion of the total product called profit to be a specific product of capital, they had committed a petitio principii; at the same time enunciating his own formula that the sole source of all wealth was labour. Then Lasalle and Marx had varied this theme, each in his own way; the one with vehemence and wit, the other bluntly and ruthlessly.
These attacks called out a reply from the camp of the Productivity theorists, and with this we shall conclude a chapter already too long. It comes from the pen of a still youthful scholar, but it commands our full consideration; partly from the position of its author, who, as a member of the Staatswissenschaftliche Seminar in Jena, and therefore in close scientific relation with the leading representatives of the historical school in Germany, may well be taken as representing the views ruling in that school; partly from the circumstances which called out that reply. For, as it was written with full knowledge of the weighty attacks which Marx in his great book had directed against the productivity of capital, and in refutation of these attacks, we are justified in expecting it to contain the best and the most cogent that its author, after full critical consideration, was able to say in favour of the Productivity theory.
The reply is to be found in two essays of K. Strasburger, published in 1871 in Hildebrand's Jahrbücher für National-Oekonomie und Statistik.46
The substance of his theory Strasburger has condensed in the second of these essays as follows:—
"Capital supplies natural powers which, while accessible to every one, can often be applied to a definite production only by its help. Not every one possesses the means of subordinating those natural powers. The power of the man who works with a small capital is spent in doing things that are done for another man who is amply supplied with capital by natural powers. On this account the work of natural powers, if effected through the medium of capital, is no gift of nature; it is taken into account in exchange; and he who has no capital must give over the product of his own labour to the capitalist for the work of the natural powers. Capital, therefore, produces values, but the rôle it plays in production is quite different from that played by labour."
And a little farther on (p. 329) he says: "What has been already said will show how we understand the productivity of capital. Capital produces values inasmuch as it gets natural powers to do work which otherwise would have to be done by man. The productivity of capital, therefore, rests upon its activity in production being distinct from that of living labour. We have said that the work of natural powers is considered in exchange as an equivalent of human labour. Marx maintains the contrary. He thinks that, if one worker is assisted in his work by natural powers more than another, he creates more use values—the quantity of his products is greater; but that the action of the natural powers does not raise the exchange value of the commodities produced by him. For refutation of this view it is sufficient to remember what we have already noted above—that it is not every one who possesses these means of subordinating natural powers; those who possess no capital must buy its work by means of their own labour. Or if they work by the help of another man's capital, they must give over to him a share of the value produced. This share of the value newly produced is profit: the drawing of a certain income by the capitalist is founded on the nature of capital."
If we condense the substance of this still further we get the following explanation.
While it is true that natural powers are in themselves gratuitous, it is often only by the help of capital that they can be made of use. Now since capital is only available in limited quantity, its owners are able to obtain a payment for the co-operation of the natural powers thus made available. This payment is profit. Profit, therefore, is explained by the necessity of paying a price to the capitalists for the co-operation of natural powers.
What success has this theory in explaining the phenomena under discussion?
Strasburger's premises may be readily conceded. I grant at once that many natural powers can only be utilised through the mediation of capital; and I also grant that, the amount of capital being limited, the owner of it may be able to get paid for the co-operation of the natural powers thus made available. But what I cannot grant is, that these premises tell us anything at all of the origin of interest. It is a hasty and unreasoned assumption of Strasburger that the existence of interest follows from these premises, so long as these premises, in their very nature, lead to entirely different economical phenomena. It should not be difficult to expose Strasburger's mistake.
Only one of two things is here possible: either capital can only be had in such a limited quantity that the capitalists can obtain a payment for the powers of nature made available; or it can be had in unlimited quantity. Strasburger's theory assumes the former of these to be the case. Accepting this we ask, How does the capitalist, in practical business life, actually obtain payment for the natural powers?
It would be a hasty petitio principii to answer, Simply by pocketing the profit. A very little consideration will make it clear that, if interest comes from the payment of natural powers, it can only make its appearance as a secondary result of more complicated economical processes. That is to say, since natural powers reside in capital, it is obvious they can only be made use of at the same time as the services of capital are made use of. But, further, since capital has come into being through the expenditure of labour, and when used either perishes in a single use or wears itself out gradually, it is clear that, wherever the services of capital are made use of, the labour that is embedded in the capital must be paid for also. The payment for natural powers, therefore, can only accrue to the capitalist as a constituent portion of a gross return, which, over and above that payment, contains a second payment for expenditure of labour.
To be still more exact. The economical process by which the capitalist receives payment for natural powers is the sale of the services of his capital at a higher price than that which represents the expenditure of labour made in producing the concrete capital in question. If, e.g. a machine which lasts for a year is made at the expenditure of 365 days of labour, and if the customary day's wage is half a crown, to sell the daily services of the machine for half a crown would only just pay for the labour embedded in the machine, and leave nothing over for the natural powers that it makes available. No payment for these natural powers emerges until the daily services of the machine are paid for by more than half a crown—say by 2s. 9d.
Now this general process may take place under several different forms.
One of these forms is when the owner of the capital uses it himself in production as an undertaker. In this first case, the payment of the total services of capital consists in that proportion of the product which remains over after deducting the other expenses of production, such as use of ground and direct labour. This constitutes the "gross return to capital." If this gross return, calculated by the day, amounts to 2s. 9d., and if 2s. 6d. only is required to pay for the labour which has created the capital used up in a day, the surplus of 3d. a day represents the payment for natural powers. It must not be taken for granted, however, that this surplus is profit on capital. On that we shall decide later.
In a second and more direct way, the services of capital may obtain payment by hiring. If our machine obtains a day's hire of 2s. 9d., in exactly the same way 2s. 6d. will represent the payment of the labour expended in making the machine, and the surplus of 3d. again represents the payment for natural powers.
But there is still a third way in which a man may part with the services of capital—that is, by parting with the capital itself; which, economically, amounts to a cumulative parting with all the services which that capital is able to perform.47 Now in this case will the capitalist be content if he is compensated for the labour embedded in the machine? Will he not also demand a compensation for the natural powers that are made available by its use? Of course he will. There is absolutely no ground to conceive why he should get paid for natural powers in the case of a successive parting with the machine's services, and not in the case of a cumulative parting with them; especially when, with Strasburger, we have assumed that the quantity of capital is so limited that he can compel such a payment.
What form, then, will the payment for natural powers take in this case? Quite naturally they will take this form: the price of the machine will rise above that amount which represents the customary payment of the labour employed in making the machine. Therefore, if the machine has cost 365 days of labour at 2s. 6d. a day, its purchase price will amount to more than 365 half-crowns. And since there is no reason why, in cumulative parting with the services of capital, natural powers should be paid for at a cheaper rate than in successive partings, we may, as in our former suppositions, assume in this case also a payment for natural powers at 10 per cent of the labour payment. Consequently the capital price would be fixed at 365 + 36.5 = 401.5 half-crowns, or £50:3:9.
Now what about interest under these suppositions? There is no difficulty in answering this. The owner of the machine, who employs it in his own undertaking, or hires it out, draws 2s. 9d. a day for its services during the year which it lasts. That yields a total income of 365 × 2s. 9d. = £50:3:9. But since the machine itself is worn out through the year's use, and its capital value amounted to quite £50:3:9, there remains as surplus, as pure interest, nothing. Although, therefore, the capitalist has got paid for natural powers, there is no interest; a clear proof that the cause of interest must lie in something else than payment for natural powers.
An objection may very probably be made at this point. It may be said, It is not possible for the value of real capital to remain so high that its producers obtain in the price a premium for natural powers; in such a case the production of capital would be too remunerative, and would certainly call out a competition that, in the long run, would press down the value of the real capital to the value of the labour employed in its production. E.g. if a machine that had cost 365 days' labour should, in consequence of natural powers being made available by it, fetch a price of £50:3:9; then, supposing the usual wage in other employments to be 2s. 6d. a day, the labour directed to the making of such machines would be more remunerative than any other kind of labour; as a consequence there would be a great rush into this branch of production, and the manufacture of those machines would be multiplied till the increased competition had pressed down their price to 365 half-crowns per machine. At the same time the advantage obtainable by the labourer from their use would be pressed down to the normal standard.
I grant at once the possibility of such an occurrence. But I ask, on the other hand, If the machines have become so numerous, and competition so strong that their producer is glad to sell them at a bare compensation for his labour, and can calculate nothing for the use of the natural powers which he makes available, how should he, in hiring out these machines, or employing them himself, be able all at once to demand something for natural powers? There is only one alternative. Either the machines are scarce enough to allow of a calculation for natural powers; in which case their scarcity will serve as well in selling as in hiring, and the capital value of the machines will rise to the point of absorption of gross interest, if no other thing prevents it. Or the machines are made in such quantity that any calculation for natural powers is made impossible by the pressure of competition; in which case it will be as true for the hiring as for the selling, and gross interest will fall till it is once more absorbed in the cost of replacement—always supposing, again, that there is not some factor, outside of the payment for natural powers, which keeps the two quantities apart.
Thus Strasburger, like many of his predecessors, has missed the very point which was to be explained. He shows, perhaps, why the gross interest which capital yields is high—in our illustration, why the machine yields 2s. 9d. instead of half-a-crown per day—but he does not show why the value of the capital itself does not rise in the same proportion. He does not explain why a machine which yields 2s. 9d. per day for 365 days is not valued at 365 × 2s. 9d.=£50:3:9, but only at 365 half-crowns = £47. But the writer who means to explain net interest must explain just this difference between the value of the capital itself and the sum of its total gross productiveness.
It is characteristic of the Indirect Productivity theories that after almost seventy years' development they should end nearly at the same point as that from which they started. What Strasburger teaches in the year 1871 is in substance almost exactly what Lauderdale taught in 1804. The "power of capital to replace labourers," which power, on account of its scarcity and in the measure of its scarcity, enables the capitalist to obtain a payment, is only different in name from the natural powers which the possession of capital makes available, and which, equally in the measure of the scarcity of capital, compel a payment. Here as there is the same confounding of gross interest and capital value on the one side, and gross interest and net interest on the other; the same misinterpretation of the true effects of premises assumed; the same neglect of the true causes of the phenomenon under discussion.
In this return to the starting-point is seen the whole barrenness of the development that lies between. This barrenness was no accident. It was not simply an unfortunate chance that no one found the Open Sesame which had the power to discover the mysterious origination of interest in the productivity of capital. It was rather that on the road to the truth a wrong turning had been taken. From the first it was a hopeless endeavour to explain interest wholly and entirely from a productive power of capital. It would be different if there were a power that could make value grow directly, as wheat grows from the field. But there is no such power. What the productive power can do is only to create a quantity of products, and perhaps at the same time to create a quantity of value, but never to create surplus value. Interest is a surplus, a remainder left when product of capital is the minuend and value of consumed capital is the subtrahend. The productive power of capital may find its result in increasing the minuend. But so far as that goes it cannot increase the minuend without at the same time increasing the subtrahend in the same proportion. For the productive power is undeniably the ground and measure of the value of the capital in which it resides. If with a particular form of capital one can produce nothing, that form of capital is worth nothing. If one can produce little with it, it is worth little; if one can produce much with it, it is worth much, and so on;—always increasing in value as the value that can be produced by its help increases; i.e. as the value of its product increases. And so, however great the productive power of capital may be, and however greatly it may increase the minuend, yet so far as it does so, the subtrahend is increased in the same proportion, and there is no remainder, no surplus of value.
I may be allowed, in conclusion, one more comparison. If a log is thrown across a flooded stream the level of water below the log will be less than the level of water above the log. If it is asked why the water stands higher above the log than below, would any one think of the flood as the cause? Of course not. For although that flood causes the water above the log to stand high, it tends at the same time, so far as that is concerned, to raise the level of the water below the log just as high. It is the cause of the water being "high"; what causes it to stand "higher" is not the flood, but the log.
Now what the flood is to the differences of level, the productive power of capital is to surplus value. It may be an adequate cause of the value of the product of capital being high, but it cannot be the adequate cause that the product is higher in value than the capital itself, seeing that it feeds and raises the level of the capital in the same way as it does that of the product. The true cause of the "plus" in this case also is—a log, and a log which has not been so much as mentioned by the Productivity theories proper. It has been sought by other theories in various things; sometimes in the sacrifice of a use, sometimes in the sacrifice of abstinence, sometimes in a sacrifice of work devoted to make capital, sometimes simply in the exploiting pressure of capitalist on labourer; but so far as we have gone there has been no satisfactory recognition of its nature and action.48
THE USE THEORIES
[26.]I use the unsatisfactory word Indirect for the German Motivirte (reasoned or motivated). The place taken by philosophy in German culture allows the use of many philosophical terms in general literature that we could not employ in English without pedantry. Our political economy, as we are often told, must use the language of the market and the shop.—W.S.
[27.]An Inquiry into the Nature and Origin of Public Wealth, Edinburgh, 1804.
[28.]"By what means capital or stock contributes towards wealth is not so apparent. What is the nature of the profit of stock, and how does it originate? are questions the answers to which do not immediately suggest themselves. They are indeed questions that have seldom been discussed by those who have treated on political economy, and important as they are, they seem nowhere to have received a satisfactory solution" (p. 155). I may here note that Lauderdale, like Adam Smith and Ricardo, does not distinguish between interest proper and undertaker's profit, but groups both under the name of profit.
[29.]Compounds like Kapitalstücke and Kapitalgüter I usually translate "Real Capital."—W.S.
[30.]Lauderdale with great patience and thoroughness applies his theory to all possible employments of capital. He distinguishes five classes of such employment—building and obtaining machinery, home trade, foreign trade, agriculture, and "conducting circulation." The illustration quoted in the text is from the first of these five divisions. I have chosen it because it most clearly illustrates the way in which Lauderdale puts before himself the connection of profit with the labour-replacing power of capital.
[31.]Principles of Political Economy, London, 1820, third edition; Pickering, 1836.
[32.]Principles, p. 84, and many other places; Definitions in Political Economy Nos. 40, 41.
[33.]A note which may be found in Ricardo's Principles at the end of § 6, chap. i. (p. 30 of 1871 edition), has sometimes given the impression that Ricardo had by that time stated the above proposition explicitly. This, however, is not the case. He only suggested the idea to Malthus, who put it into words. See Wollenborg, Intorno al costo relativo di Produzione, Bologna, 1882, p. 26.
[34.]Lehre vom Unternehmergewinn, p. 24.
[35.]"...the latter case shows at once how much profits depend upon the prices of commodities, and upon the cause which determines these prices, namely, the supply compared with the demand" (p. 334).
[36.]I think I may pass over Malthus's wearisome and unfruitful controversy against Ricardo's interest theory. It offers many weak points. Those who wish to read an accurate judgment on it will find it in Pierstorff, p. 23.
[37.]An Inquiry into the Natural Grounds of Right to Vendible Property or Wealth. Edinburgh, 1829.
[38.]His chief work is the Principles of Social Science, 1858.
[39.]E.g. iii. p. 119: "The proportion of the capitalist (profit or interest, as the following lines show) declines because of the great economy of labour." P. 149: "Decrease of the costs of reproduction and reduction of the rate of interest consequent on that," etc.
[40.]Der isolirte Staat, second edition, Rostock, 1842-63. The page numbers quoted in the text refer to the first division of the second part (1850).
[41.]"But how can the object lent be kept and returned in equally good condition and equal in value? This, I admit, does not hold in the case of individual objects, but it certainly does in the totality of objects lent within a nation. If, e.g. any one hires out one hundred buildings for one hundred years, under the condition that the hirer annually erects a new building, the hundred buildings do retain equal value in spite of the annual wear and tear. In this inquiry we must necessarily direct our attention to the whole, and if here only two persons are represented as dealing with one another, it is simply a picture by which we may make clear the movement that goes on simultaneously over the whole nation" (note by Thünen).
[42.]To avoid misunderstandings I should emphasise that Thünen assumes the surplus production of the capital last applied to be the standard for the whole amount of capital.
[43.]Not to burden the statement in the text by more difficulties than I am compelled to bring before the reader, I shall put a few considerations supplementary to the above criticism as a note. Thünen makes two essays which, possibly, may be interpreted as attempts to justify the above assumption, and thus to give a real explanation of interest. The first essay is the remark he very often makes (pp. 111, 149), that capital obtains its highest rent when a certain amount of it has been laid out, and that rent sinks when that limit is overstepped; so that capitalist producers have no interest in pushing their production beyond this point. It is possible to read this proposition as explanatory of the fact that the supply of capital can never be so great as to press down the net interest to zero. But this consideration of the totality of profits made by capitalists has no deciding influence, perhaps no influence at all on the action of individual capitalists; it cannot, therefore, prevent the further growth of capital. Every one ascribes, and rightly ascribes, to the increase of capital formed by his own individual saving, an infinitely small effect on the height of the general interest rate. On the other hand, every one knows that this individual saving has a very notable effect in increasing the income that he individually gets in the shape of interest. For this reason every one who has the inclination, and who has the chance, will save, undisturbed by any such considerations; just as every landowner improves his land and betters his methods of cultivation, even when he knows, as a matter of theory, that if all owners were to do the same it would necessarily be followed, if the state of population remain unchanged, by a fall in the price of products and, notwithstanding reduced costs, by a fall in rent.
[44.]Die allgemeine Wirthschaftslehre oder National-Oekonomie, Berlin, 1852.
[45.]Kritik der Lehre vom Arbeitslohn, 1861. Grundsätze der Volkswirthschaftslehre, 1864. Vorlesungen über Volkswirthschaft, 1878. In the German edition Professor Böhm-Bawerk has devoted several pages to statement and criticism of these two writers; but in the present edition he wishes me to omit them as of little importance.—W.S.
[46.]"Zur Kritik der Lehre Marx' vom Kapitale" and "Kritik der Lehre vom Arbeitslohn," vols. xvi. and xvii. of above.
[47.]See Knies, Kredit, part ii. pp. 34, 37.
[48.]Many readers may wonder why a writer who shows himself so very decidedly opposed to the Productivity theory, does not at all avail himself of the abundant and powerful support given by the socialist criticism; in other words, why I do not dismiss the theory with the argument that capital itself is the product of labour, and thus its productivity, whatever else it be, is not an originating power. The reason simply is that I attribute to this argument only a secondary importance in the theoretical explanation of interest. The state of the case seems to me to be as follows. No one will question that capital, once made, manifests a certain productive erect A steam-engine, e.g. is in any case the cause of a certain productive result. The primary theoretic question suggested by this state of matters now is, Is that productive capacity of capital—of capital made and ready—the quite sufficient cause of interest? If this question were answered in the affirmative, then of course, in the second place, would come the question whether the productive power of capital is an independent power of capital, or whether it is only derived from the labour which has produced the capital; in other words, whether (manual) labour, through the medium of capital, should not be considered the true cause of interest. But having answered the first question in the negative, I have no occasion to enter on the secondary question, whether the productive power of capital is an originating power or not. Besides, in a later chapter I shall have the opportunity of taking a position on the latter question.