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• Translator's Preface
• Introduction: the Problem of Interest
• Book I: The Development of the Problem
• Book I, Chapter I: The Opposition to Interest In Classical and Mediæval Times
• Book I, Chapter II: The Defence of Interest From the Sixteenth Till the Eighteenth Century
• Book I, Chapter III: Turgot's Fructification Theory
• Book I, Chapter IV: Adam Smith and the Development of the Problem
• Book I, Chapter V: The Colourless Theories
• Book II: The Productivity Theories
• Book Ii, Chapter I: The Productive Power of Capital
• Book Ii, Chapter II: The Naïve Productivity Theories
• Book Ii, Chapter III: The Indirect Productivity Theories
• Book III: The Use Theories
• Book Iii, Chapter I: The Use of Capital
• Book Iii, Chapter II: Historical Statement
• Book Iii, Chapter III: The Plan of Criticism
• Book Iii, Chapter IV: The Use of Capital According to the Say-hermann School
• Book Iii, Chapter V: The True Conception of the Use of Goods
• Book Iii, Chapter VI: Criticism of the Say-hermann Conceptions
• Book Iii, Chapter VII: The Independent Use: an Unproved Assumption
• Book Iii, Chapter VIII: The Independent Use: Its Untenable Conclusions
• Book Iii, Chapter IX: The Independent Use: Its Origin In Legal Fiction
• Book Iii, Chapter X: Menger's Conception of Use
• Book Iii, Chapter XI: Final Insufficiency of the Use Theory
• Book IV: The Abstinence Theory
• Book Iv, Chapter I: Senior's Statement of the Theory
• Book Iv, Chapter II: Criticism of Senior
• Book Iv, Chapter III: Bastiat's Statement
• Book V: The Labour Theories
• Book V, Chapter I: [the Labour Theories]
• The English Group
• The French Group
• The German Group
• Book VI: The Exploitation Theory
• Book Vi, Chapter I: Historical Survey
• Book Vi, Chapter II: Rodbertus
• Book Vi, Chapter III: Marx
• Book VII: Minor Systems
• Book Vii, Chapter I: The Eclectics
• Book Vii, Chapter II: The Later Fructification Theory
• Conclusion

The English Group

Under the title of the Labour theories I group together a number of theories which agree in explaining interest as a wage for labour rendered by the capitalist.

As to the nature of the "labour" which furnishes the basis for the capitalist's claim of wage there is very material divergence among the various views. Thus I am compelled to distinguish three independent groups of Labour theories, and as it happens that their respective circles of adherents are marked out very much by nationality, I shall call them the English, the French, and the German group.

The English writers, chiefly represented by James Mill and M'Culloch, explain interest by tracing it to that labour through which real capital itself comes into existence.

James Mill22 chances on the interest problem in his doctrine of price. He has put down the proportion that the costs of production regulate the exchange value of goods (p. 93). At the first glance capital and labour are seen to be constituents of the cost of production. But on looking closer Mill sees that capital itself comes into existence through labour, and that all costs of production may be traced therefore to labour alone. Labour then is the sole regulator of the value of goods (p. 97).

With this proposition, however, the well-known fact, discussed already by Ricardo, that postponement also has an influence on the price of goods, does not appear to agree. If, for instance, in one and the same season a cask of wine and twenty sacks of meal have been produced by the same amount of labour, they will of course, at the end of the season, have an equal exchange value. But if the owner of the wine lays it in a cellar and keeps it for a couple of years, the cask of wine will have more value than the twenty sacks of meal—indeed, more value by the amount of two years' profit.

Now, James Mill gets rid of this disturbance of his law by explaining profit itself as a wage of labour; as a remuneration for indirect labour. "It is no solution to say that profits must be paid, because this only brings us to the question, Why must profits be paid? To this there is no answer but one, that they are the remuneration for labour, labour not applied immediately to the commodity in question, but applied to it through the medium of other commodities, the produce of labour."

This idea is more exactly elucidated by the following analysis. "A man has a machine, the produce of a hundred days' labour. In applying it the owner undoubtedly applies labour, though in a secondary sense, by applying that which could not have been had but through the medium of labour. This machine, let us suppose, is calculated to last exactly ten years. One-tenth of the fruit of a hundred days' labour is thus expended every year, which is the same thing in the view of cost and value as saying that ten days' labour has been expended. The owner is to be paid for the hundred days' labour which the machine costs him at the rate of so much per annum, that is, by an annuity for ten years equivalent to the original value of the machine.23 It thus appears (!) that profits are simply remuneration for labour. They may, indeed, without doing any violence to language (!), hardly even by a metaphor, be denominated wages; the wages of that labour which is applied, not immediately by the hand, but mediately, by the instruments which the hand has produced. And if you may measure the amount of immediate labour by the amount of wages, you may measure the amount of secondary labour by that of the return to the capitalist."

In this way James Mill thinks that he has satisfactorily explained interest, and at the same time maintained in its integrity his law that labour alone determines the value of goods. It is pretty obvious, however, that he has not succeeded in doing either.

It may be allowed to pass that he calls capital "hoarded" labour; that he calls the employment of capital employment of a mediate secondary labour; and that he considers the wearing out of the machine as a giving out of the hoarded labour by instalments. But why then is every instalment of hoarded labour paid by an annuity which contains more than the original value of that labour, namely, the original value plus the usual rate of interest thereon? Allowing that the remuneration of capital is the remuneration of mediate labour, why is the mediate labour paid at a higher rate than the immediate; why does the latter receive the bare rate of wages while the former receives an annuity higher by the amount of the interest? Mill does not solve this question. He takes the fact that a capital, according to the state of competition in the market, has equal value with a certain number of annual payments that already include the interest, and uses this fact as a fixed centre, as if he had not taken upon himself to explain the profit, and therefore also the extra profit, that is contained in the annuity.

He says, I admit, in an explanatory tone, Profit is wage of labour. But he has a very false idea of the explanatory power of this phrase. It might perhaps be satisfactory if Mill could show that there is here a labour which has not yet received its normal wage, and will only receive it in the profit; but it is in no way satisfactory to explain profit as an extra wage for a labour that has already been paid at the normal rate by means of the sum for amortisation contained in the annuities. It is always open to ask, Why should mediate labour be more highly paid than immediate labour? And this is a question towards the solution of which Mill has given not the slightest hint. Moreover by this artificial construction he even loses the advantage of remaining consistent with his Labour theory; for evidently the law that the amount of labour determines the price of all goods is rudely upset if a part of the price is traceable, not to the amount of the labour expended, but to the greater height of the wage that it receives! In this respect, therefore, Mill's theory comes considerably short of its professed object.

A very similar theory was put forward by M'Culloch, in the first edition of his Principles of Political Economy (1825), but omitted in later editions. I have stated it already on an earlier occasion, and need add nothing more to that statement.24 Finally, the same idea was given out cursorily by Read in England and Gerstner in Germany, but these writers we shall have to consider later on among the eclectics.

[22.]Elements of Political Economy, third edition, London, 1826. I was not able, unfortunately, to get sight of the first edition of 1821.

[23.]The author (as is evident from a parallel passage on p. 100) means annuities which replace the original value of the machine in ten years, and at the same time pay interest at the rate fixed by the condition of the market.

[24.]See above, p. 97. The doubtful honour of priority in this theory belongs to James Mill.