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BOOK VII: MINOR SYSTEMS - 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 VII, Chapter I
The difficulties which the interest problem presented to the science of political economy are reflected, perhaps, nowhere more significantly than in the fact, that most economic writers of our century did not form any definite opinion on the subject.
This indefiniteness took a different shape somewhere about the year 1830. Before that date those who were undecided—and at that time there were many such—simply avoided entering on the interest problem. They come under that category which I have called the Colourless school. Later on, when the problem had become a common subject of scientific discussion, this was no longer possible. Economists were obliged to own to an opinion, and those who could not come to a decision of their own became eclectics. Interest theories were put forward in abundance. Writers who neither could nor would make one for themselves, nor decide exclusively on one of those already made, would choose from two or three or more heterogeneous theories the parts that suited them, and weave them into what generally proved a rather badly connected whole. Or, without even trying to obtain the appearance of a whole, they would in the course of their writings employ sometimes one, sometimes another theory, as suited best for the purposes they might happen to have in view.
It need not be said that an eclecticism on which the cardinal duty of the theorist, logical consistency, sat so lightly, does not indicate any very high degree of theoretical excellence. Still, here also, as with the Colourless theorists, among many men of secondary importance we meet with a few writers of the first rank. Nor is this to be wondered at. The development of the theory had been so peculiar that, for capable writers especially, the temptation to become eclectic must have been almost overpowering. There were so many heterogeneous theories in existence that one might be pardoned for thinking it impossible that there should be any more. A critical mind, indeed, could not find any one of them entirely satisfactory. But neither could the fact be ignored that in many of them there was at least a kernel of truth. The Productivity theory as a whole, for instance, was certainly unsatisfactory, but no unprejudiced person could help feeling that the existence of interest must have something to do with the greater return obtained by capitalist production, or, as it was generally called, the productivity of capital. Or, granted that a complete explanation of interest was not to be found in the "abstinence of the capitalist," it could scarcely be denied that the privation which saving usually costs is not a thing altogether without influence on the fact and on the amount of interest. In such circumstances nothing was more natural than that economists should try to piece together the fragments of truth from different theories. This tendency was strengthened by the fact that the social and political question of interest, as well as the theoretical, was now before the public; and many a writer, in his eagerness to justify the existence of interest, preferred to give up the unity of his theory rather than cease heaping together arguments in its favour. As might be expected, the fragments of truth thus collected remained, at the hands of the eclectics, nothing but fragments, their rough edges grating against each other and stubbornly resisting all attempts to work them into a homogeneous whole.
There are many ways in which eclecticism has combined the various interest theories. The greatest preference has been shown towards a combination of those two theories that came nearest the truth, the Productivity and the Abstinence theory. Among the numerous writers who follow this direction Rossi deserves to be mentioned at some length; partly because his rendering of the Productivity theory is not without a certain originality; partly because he may serve as a type of the illogical method usual among the eclectics.
In his Cours d'Economie Politique,67 Rossi makes use of the Productivity and the Abstinence theories alternately, without making any attempt to weld the two into one organic theory. On the whole, on those occasions when he makes general mention of the phenomenon of interest and its origin, he follows the Abstinence theory; while in details, particularly in the inquiry as to the rate of interest, he prefers to follow the Productivity theory. To prove this I may put down in the order of their statement the most important passages, without taking more pains than the author has done to make them consistent with each other.
In the traditionary way Rossi recognises capital as a factor in production by the side of labour and land. In return for its co-operation it requires a compensation—profit. To the question why this is so, the answer is given provisionally in the mystic words, which seem to point rather to the Productivity theory, "on the same grounds and by the same title as labour" (p. 93). More definitely, and here distinctly according to the Abstinence theory, Rossi expresses himself in the summary to the third lecture of the third volume: "The capitalist demands the compensation due to the privation which he imposes on himself" (iii. p. 32). In the course of the following lecture he develops this idea more carefully. First of all, he blames Malthus for putting profit, which certainly is not an expense but an income of the capitalist, among the costs of production,—a criticism, however, which he might have first taken to himself, since in the sixth lecture of the first volume he has formally, and in the most explicit manner, enumerated the profit of capital among the costs of production.68 The true constituent of cost which he puts in the place of profit is, "capitalised saving" (l'épargne capitalisée), the non-consumption and the productive employment of goods over which the capitalist has command. Later too we find repeated allusions (e.g. iii. pp. 261, 291) to the capitalist's renunciation of enjoyment as a factor in the origination of profit.
If up to this point Rossi has shown himself for the most part an Abstinence theorist, from the second half of the third volume onwards we come upon expressions, at first occasionally and then frequently, which show that Rossi had also come under the influence of the popular Productivity theory. He begins in somewhat vague terms by bringing profit into connection with the circumstance that "capitals contribute to production" (iii. p. 258). A little later (p. 340) he says quite distinctly, "Profit is the compensation due to productive power"—no longer, be it observed, to privation. Finally, the rate of interest is explained at great length by the productivity of capital. He regards it as "natural" that the capitalist should receive for his share in the product as much as his capital has produced in it, and that will be much if the productive power of capital is great, little if the productive power of capital is little. Thus Rossi arrives at the law that the natural height of profit is in proportion to the productive power of capital. He develops this law first in the case where production requires capital alone in its operations, the factor labour being left out of account as vanishingly small and only the use value of the product being taken into consideration. Under these assumptions he finds it evident that if, for instance, the employment of a spade on a definite piece of ground, after replacing the capital laid out, procures twenty bushels of grain as profit, the employment of a more efficient capital, say a plough, on the same piece of land, after fully replacing the capital, will bring in more profit, say sixty bushels, "because a capital of greater productive power has been employed." But the same natural principle obtains in the complicated relations of our actual economic life. There also it is "natural" that the capitalist should share the product with the labourers in the ratio of the productive power of his capital to the productive power of the labourers. If, in a production that has hitherto employed a hundred workers, a machine is introduced which replaces the power of fifty workers, the capitalist has a natural claim to one-half the total product, or the wage of fifty labourers.
This natural relation is only disturbed by one thing; that the capitalist plays a double rôle. Not only does he contribute his capital to the common co-operation, but he connects with that a second business, the buying of labour. In virtue of the former, he would always receive the natural profit that corresponds to the productive power of capital, and that alone. But in buying labour sometimes cheap, sometimes dear, he may either increase his natural profit at the expense of the natural wage of labour, or may give up a portion of his profit to the advantage of the labourers. Thus if the fifty workers displaced by the machine compete with those left in employment and depress the wages of labour, it may be that the capitalist buys the labour of the fifty still employed for a less share of the total return than would naturally fall to them according to the ratio of their productive power to the productive power of capital. Say that he buys their labour for 40 per cent instead of 50 per cent of the total product, a profit of 10 per cent is added to the natural profit on capital. But this, although usually classed with profit on capital, is in its nature entirely foreign to it, and should be looked on as a profit made by the buying of labour. It is not the natural profit on capital, but this foreign addition that causes an antagonism between capital and labour, and it is only in the case of this addition that the principle of wages falling as profits increase and vice versâ has any validity. The natural and true profit on capital leaves wages untouched, and depends altogether on the productive power of capital (lecture iii. pp. 21, 22).
After all that has been said in former chapters on the Productivity theories, we may well dispense with any thorough and detailed criticism of such views. I shall merely point out one monstrous conclusion that follows logically from Rossi's theory. According to him all the surplus returns obtained by the introduction and improvement of machinery, or from the development of capital in general, must to all eternity wholly and entirely flow in to the pockets of the capitalists, without the labourer getting any share whatever in the advantages of these improvements; for those surplus returns are due to the increased productive power of capital, and their result forms the "natural" share of the capitalist!69
Among Italian economists who follow the same eclectic lines may be mentioned Cossa. Unfortunately this admirable writer, in his monograph on the conception of capital,73 has not extended his researches to the question of interest, and we have to go by the very scanty hints that occur in his well-known Elementi di Economia Politica.74 From it one would judge Cossa to be an eclectic; yet his way of speaking, as if interpreting the ordinary doctrines, appears to me evidently to betray that he has some critical scruples about them. Thus while looking on interest as compensation for the "productive service" of capital (p. 119), he refuses to recognise this service as a primary factor in production, and only allows it the place of a secondary or derivative instrument.75 Again, like the Abstinence theorists, he puts "privations" among the costs of production (p. 65), but in the theory of interest he adopts a tone which seems to imply that this did not express his own conviction, but only that of other people.76
The most interesting of those eclectic systems that combine the Abstinence and the Productivity conceptions I consider to be that of Jevons, with which I shall finish consideration of this group.77
Jevons begins by giving a very clear statement of the economic function of capital, in which he steers clear of the mysticism of any particular "productive power." The function of capital he finds simply in this, that it enables us to expend labour in advance. It assists men to surmount the difficulty caused by the time that elapses between the beginning and the end of a work. It makes possible an infinite number of improvements in the production of those goods the manufacture of which necessarily depends upon the lengthening of the interval between the moment when labour is exerted and the moment when the work is finished. All such improvements are limited by the use of capital, and in making these improvements possible lies the great and almost the only use of capital.78
This being the foundation, Jevons explains interest as follows. He assumes that every extension of time between employment of labour and enjoyment of result makes it possible to obtain a greater product with the same amount of labour. The difference between the product that would have been obtained in the shorter period, and the greater product that may be obtained when the time is extended, forms the profit of that capital by the investing of which the lengthening of the interval has been made possible. If we call the shorter interval t, and the longer interval made possible by an additional investment of capital t + Dt, and further, the product obtainable by a definite quantity of labour in the shorter interval Ft, then by hypothesis the product obtainable in the longer interval will be correspondingly greater; that is F(t + Dt). The difference of these two quantities F(t + Dt) - Ft is profit.
To ascertain the rate of interest represented by this amount of profit we must calculate the profit on that amount of capital by which the extension of the time was made possible. If Ft is the invested capital, then this is the amount of produce that could have been obtained on the expiry of t, without any additional investment. The duration of the additional investment is Dt. The whole amount of the additional investment is therefore represented in the product = (Ft ·Dt). Dividing the above increment of produce by the latter amount, the rate of interest appears thus—
The more abundantly a country is supplied with capital, the greater is the product Ft obtainable without any new investment of capital; the greater also is the capital on which the profit made by additional extension of time is calculated, and the less is the rate of interest corresponding to that profit. Hence the tendency of interest to fall with advancing prosperity. Since, further, all capitals tend to receive a similar rate of interest, they must all be content to take that lowest rate obtained by the additional capital last invested. Thus the advantage conferred on production by the last addition of capital determines the height of the usual rate of interest in the country.
The resemblance of this line of thought to that of the German Thünen is obvious. It presents the same weak points to criticism. Like Thünen, Jevons too lightly identifies the "surplus in products" with the "surplus in value." What his statement seems actually to point to is an "increment of produce" due to the assistance of the last increment of capital. But that this surplus in produce indicates at the same time a surplus in value over the capital consumed in the investment, Jevons has nowhere proved. To illustrate by a concrete case. It is easy to understand that a man employing imperfect, but quickly made machinery, may produce in a year's time 1000 pieces of a particular class of goods, and by employing machinery which is more perfect, but takes longer to make, may produce in the same time 1200 pieces of the goods. But there is nothing here to show that the difference of 200 pieces must be a net surplus in value. Two things might prevent its being so. (1) It might be that the more perfect machinery to which the increment of 200 pieces is due should obtain so high a value on account of this capability that the increment of 200 pieces is absorbed by the amount set aside for depreciation. (2) It is conceivable that the new method of production, which gives these good results, might be employed so extensively that the increased supply of products would press down the value of the present 1200 pieces to the same level as the former 1000 pieces. In neither case would there be any surplus value. Jevons, therefore, has here fallen into the old error of the Productivity theorists, and mechanically translated the surplus in products, which everybody would grant, into a surplus in value.
Of course in his system there are attempts at explanation of this difference of value. But he has not brought these attempts into connection with his Productivity theory; they do not complete that theory, but traverse it.
One of these attempts is where he accepts parts of the Abstinence theory. Jevons quotes Senior with approval; he explains what Senior called "abstinence" as that "temporary sacrifice of enjoyment that is essential to the existence of capital," or as the capitalist's "endurance of want"; and he gives formulæ for calculating the amount of the sacrifice of abstinence (p. 253, etc.) He reckons this abstinence—sometimes indeed, writing loosely, he reckons even interest—among the costs of production; and in one place he expressly speaks of the capitalist's income as "compensation for abstinence and risk" (p. 295).
Jevons has some very interesting remarks on the effect of time on the valuation of needs and satisfactions. He points out that we anticipate future pleasures and pains, the prospect of future pleasure being already felt as anticipated pleasure. But the intensity of the anticipated pleasure is always less than that of the future pleasure itself, and depends on two factors— the intensity of the pleasure anticipated, and the time that intervenes before the emergence of the pleasure (p. 36, etc.) Somewhat strangely Jevons holds that the distinction we thus make in immediate valuation between a present and a future enjoyment is, rightly considered, unjustifiable. It rests only, he says, on an intellectual error, or an error of natural disposition; and, properly speaking, time should have no such influence. All the same, on account of the imperfection of human nature, it is a fact that "a future feeling is always less influential than a present one " (p. 78).
Now Jevons is quite correct in saying that this power of anticipation must exert a far-reaching influence in economics, for, among other things, all accumulation of capital depends upon it (p. 37). But, unfortunately, he is satisfied with throwing out suggestions of the most general description, and applying them quite fragmentarily.80 He fails to develop the idea, or to give it any fruitful application to the theory of income and value. This omission is the more surprising that there are some features in his interest theory which strongly suggested the possibility of making a very good use of the element of time in the explanation of interest. With more emphasis than any one before him, he had asserted the rôle played by time in the function of capital. The next step evidently would have been to inquire whether the difference of time might not also exert an immediate influence on the valuation of the product of capital, of such a kind that the difference of value, on which interest is founded, might be explained by it. Instead of this Jevons, as we have seen, persists in the old method of explaining interest simply by the difference in the quantity of the product.
Still more obvious, probably, would it have been to connect his other conception of "abstinence" with the difference that we make in the estimation of present and future enjoyments, and to account for the sacrifice that lies in the postponement of enjoyment by that lesser valuation of the future utility. But Jevons gives no positive expression to this. Indeed, indirectly, he even excludes it; for, as we have seen, on the one hand he pronounces the lesser valuation to be a simple error caused by the imperfection of our nature, and, on the other hand, he pronounces the abstinence to be a real and true sacrifice, viz. the continuance in the (painful) state of need.
Thus there is no reciprocal fructification between the many interesting and acute ideas that Jevons throws out regarding our subject; and Jevons himself remains an eclectic of genius perhaps, but still an eclectic.
A second group of eclectics add on ideas taken from the Labour theory in one or other of its varieties. First may be mentioned Read,81 whose work, appearing as it did at the period when English economic literature on the subject of interest was most confused, shows a peculiarly inconsistent heaping together of opinions. He begins by laying the greatest emphasis on the independent productive power of capital, regarding the existence of which power he has no doubt. "How absurd," he exclaims on one occasion (p. 83), "must it appear to contend that labour produces all, and is the only source of wealth, as if capital produced nothing, and was not a real and distinct source of wealth also!" And a little farther on he finishes an exposition of what capital does in certain branches of production by saying, quite in the spirit of the Productivity theory, that everything remaining over, after payment of the workers who co-operate in the work, "may fairly be claimed as the produce and reward of capital."
Later still, however, he sees the matter in an essentially different light. He now puts in the foreground the fact that capital itself comes into existence through labour and saving, and builds on that an explanation of interest, half in the spirit of James Mill's Labour theory, and half in that of Senior's Abstinence theory. "The person who has laboured before, and not consumed but saved the produce of his labour, and which produce is now applied to assist another labourer in the work of production, is entitled to his profit or interest (which is the reward for labour that is past, and for saving and preserving the fruits of that labour) as much as the present labourer is entitled to his wages, which is the reward for his more recent labour" (p. 310). That eclectic hesitation of this kind must result in all sorts of contradictions goes without saying. Thus in this latter passage Read himself resolves capital into previous labour, although earlier he had protested against this in the most stubborn way.82 Thus too he explains profit to be wage for previous labour, while in a previous passage83 he had blamed M'Culloch most severely for effacing the distinction between the conception of profit and that of wage.
With Read may be appropriately classed the German economist Gerstner. The "familiar question" whether capital by itself, and independently of the other two sources of goods, is productive, he answers in the affirmative. He believes that the part played in the production of the total product by the instrument of production we call capital, can be determined with mathematical exactitude, and without more ado looks upon this share as the "rent in the total profit that is due to capital."84 With this frank and concise Productivity theory, however, Gerstner combines certain points of agreement with James Mill's Labour theory; as when (p. 20) he defines the instruments of production as "a kind of anticipation of labour," and on that basis calls "the rent of capital that falls to the instruments of production the supplementary wage for previously performed labour" (p. 23). But, like Read, he gives no thought to the question that naturally suggests itself, whether in that case the previously performed labour has not previously received its wages from the capital value of the capital, and why, over and above that, it still gets an eternal contribution in the shape of interest.
To the same division of the eclectics belong the French economists Cauwes85 and Joseph Garnier.
I have already pointed out86 how Cauwes, with some reservation, shows himself an adherent of Courcelle Seneuil's Labour theory. But at the same time he puts forward a number of views that have their origin in the Productivity theory. Arguing against the socialists he ascribes to capital an independent "active rôle" in production by the side of labour (i. p. 235). In the "productivity of capital" he finds what determines the current rate of loan interest.87 Finally, he derives the existence of "surplus value" from the productivity of capital in a passage, where he bases the explanation of interest on the fact that we are indebted to the productive employment of capital for a "certain surplus value."88
In Joseph Garnier89 we find the elements of no less than three different theories eclectically combined. The basis of his views is Say's Productivity theory, from which he even revived and adopted the feature long ago rejected by criticism; that of reckoning interest among the costs of production.90 Then, in imitation of Bastiat, he calls the "privation" which the lender of the capital suffers through the alienation of it, the justification of interest. Finally, he declares that interest invites and compensates the "labour of saving."91
All the eclectics hitherto mentioned combine a number of theories which, if they do not agree in the character of their arguments, at least agree in the practical results at which these arguments arrive. That is to say, they combine theories which are favourable to interest. But, strangely enough, there are some writers who, with one or more theories favourable to interest, combine elements of the theory hostile to it, the Exploitation theory.
Thus J. G. Hoffmann lays down a peculiar theory that, on one side, is favourable to interest, and explains it as the remuneration of certain labours in the public service performed by the capitalists.92 But, on the other side, he distinctly rejects the Productivity theory, which was then fashionable, speaking of it as a delusion to think "that in the dead mass of capital or land there dwell forces of acquisition" (p. 588); and in blunt terms declares that in taking interest the capitalist takes to himself the fruit of other people's labour. "Capital," he says, "can be employed for the promotion of one's own labour, or for the promotion of other people's. In the latter case a hire is due the owner for it, and this hire can only be paid from the fruit of labour. This hire, this interest, has so far the nature of land-rent that, like it, it comes to the receiver from the fruit of other people's labour" (p. 576).
Still more striking is the combination of opposed opinions in J. S. Mill. It has often been remarked that Mill takes a middle position between two very strongly diverging tendencies of political economy—the so-called Manchester school on the one side, and Socialism on the other. It is easy to understand that such a compromise cannot, as a rule, be favourable to the construction of a complete and organic system—least of all in that sphere where the chief struggle of socialism and capitalism is being fought out, the theory of interest. The fact is that Mill's theory of interest has got into such a tangle that it would be a serious wrong to this distinguished thinker were we to determine his scientific position in political economy by this very unsuccessful part of his work.
As Mill constructed his system in the main on the economical views of Ricardo, he adopted, among others, the principle that labour is the chief source of all value. But this principle is traversed by the actual existence of interest. Mill consequently modified it in the way of making the value of goods determined by their costs of production, instead of by labour in general. Among these costs of production, besides labour which constitutes "so much the principal element as to be very nearly the whole," he finds room for profit, and gives it an independent position. Profit with him is the second constant element in costs.93
That Mill should have fallen into the old mistake of Malthus, and described a surplus as a sacrifice, is all the more wonderful that in English political economy it had already been criticised, severely and forcibly, both by Torrens and Senior.
But whence comes profit? Instead of one, Mill gives three inconsistent answers to this question.
In these the Productivity theory has the smallest share, and it is only in isolated passages, and with all manner of reservations, that Mill tends in this direction. First, he explains with a certain hesitation that capital is the third independent factor in production. Of course capital itself is the product of labour; its efficiency in production is therefore that of labour in an indirect shape. Nevertheless he finds that it "requires to be specified separately."94 In no less involved terms does he express himself on the kindred question whether capital possesses independent productivity. "We often speak of the 'productive powers of capital.' This expression is not literally correct. The only productive powers are those of labour and natural agents; or if any portion of capital can by a stretch of language be said to have a productive power of its own, it is only tools and machinery which, like wind and water, may be said to co-operate with labour. The food of labourers and the materials of production have no productive power."95 Thus tools are really productive, while raw materials are not—a distinction as startling as it is untenable.
Much more decisive is his profession of Senior's Abstinence theory. It forms, as it were, Mill's official theory on interest. It appears explicitly and completely in the chapter devoted to profit, and is often appealed to afterwards in the course of the work. "As the wages of the labourer are the remuneration of labour," says Mill in the fifteenth chapter of the second book of his Principles, "so the profits of the capitalist are properly, according to Mr. Senior's well-chosen expression, the remuneration of abstinence. They are what he gains by forbearing to consume his capital for his own uses, and allowing it to be consumed by productive labourers for their uses. For this forbearance he requires a recompense." And as distinctly in another place: "In our analysis of the requisites of production we found that there is another necessary element in it besides labour. There is also capital; and this being the result of abstinence, the produce or its value must be sufficient to remunerate not only all the labour required, but the abstinence of all the persons by whom the remuneration of the different classes of labourers was advanced. The return for abstinence is profit."96
But besides this, in the same chapter, under the heading of profit, Mill brings forward yet a third theory: "The cause of profit," he says in the fifth paragraph, "is that labour produces more than is required for its support. The reason why agricultural capital yields a profit is because human beings can grow more food than is necessary to feed them while it is being grown, including the time occupied in constructing the tools, and making all other needful preparations; from which it is a consequence that if a capitalist undertakes to feed the labourers on condition of receiving the produce, he has some of it remaining for himself after replacing his advances. To vary the form of the theorem: the reason why capital yields a profit is because food, clothing, materials, and tools last longer than the time which was required to produce them; so that if a capitalist supplies a party of labourers with these things, on condition of receiving all they produce, they will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining to work for the capitalist." Here the cause of profit is found, not in a productive power of capital, nor in the necessity of compensating the capitalist's abstinence as a special sacrifice, but simply in this, that "labour produces more than is required for its support"; that "the workers have a portion of their time remaining to work for the capitalist": in a word, profit is explained according to the Exploitation theory, as an appropriation by the capitalist of the surplus value created by labour.
A similar middle course, on the boundary line between Capitalism and Socialism, is taken by the German Katheder Socialists. The result in this case also is not seldom an eclecticism, but it is an eclecticism which ends more in agreement with the Exploitation theory than was the case with Mill. I shall only mention here the Katheder Socialist whom we have already met repeatedly in the course of this work, Schäffle.
In those writings of Schäffle where he treats of our subject three clear and distinct currents of thought may be traced. In the first Schäffle follows Hermann's Use theory, which he weakens as a theory by the subjective colouring he gives to the conception of Use—so bringing it nearer to the second of his theories. The first current predominates in the Gesellschaftliche System der menschlichen Wirthschaft, and has left evident traces even in the Bau und Leben.97 The second current takes the direction of making interest a kind of professional income, an income which is drawn by the capitalist for certain services he renders. This conception, which had already appeared in the Gesellschaftliche System, is explicitly confirmed in the Bau und Leben.98 But, finally, by the side of this in the Bau und Leben there appear numerous approximations to the socialist Exploitation theory. The chief of these is the resolution of all the costs of production into labour. While in the Gesellschaftliche System99 Schäffle had still recognised the uses of wealth as an independent and elementary factor in cost besides labour, he now says: "Costs have two constituents: expenditure of personal goods through the putting forth of labour, and expenditure of capital. But the latter costs also can be traced back to labour costs, for the productive expenditure of real goods may be reduced to a sum of labours expended at earlier periods; all costs, therefore, may be considered as costs of labour."100
If thus the labour which the production of goods costs is the only economic sacrifice that requires to be considered, it is but a step farther to claim the whole result of production for those who have made this sacrifice. Thus Schäffle repeatedly gives us to understand (e.g. iii. p. 313, etc.) that he considers the ideal economic distribution of goods to be the division to the members of the community according to work done. In the present day of course the realisation of this ideal is still prevented by all kinds of hindrances; among others, by the fact that wealth as capital serves as an instrument of appropriation—partly an illegal and immoral appropriation, partly a legal and moral appropriation of the product of labour.101 This appropriation of surplus value by the capitalists Schäffle does not condemn unconditionally; he would let it continue as a temporary and artificial arrangement so long as we are not able to replace the "economic service of private capital by a more perfect public organisation, established by law, and less 'greedy of surplus value.' "102
But notwithstanding this opportunist toleration, Schäffle often brings forward in blunt terms the dogma of the Exploitation theory, that interest is a robbery of the product of other people's labour. Thus, in immediate continuation of these words, he says: "All the same the speculative, individualistic organisation of business is not the non plus ultra of the history of economics. It serves a social purpose only indirectly. It is immediately directed, not to the highest net utility of the whole, but to the greatest acquisition of the means of production by private owners, and towards procuring for the families of the capitalists the highest life of enjoyment. The possession of the means of production, movable and immovable, is made use of to appropriate from the produce of the national labour as much as possible. Proudhon has already put it in full critical evidence that capital forestalls labour in a hundred different forms. The only share of which the wage labourer is assured is the share that an upright beast of burden, endowed with reason, and therefore incapable of being reduced to simple animal wants, finds necessary to sustain him in the condition of life in which he has been placed by circumstances that are historical—this condition itself being necessary to allow of the capitalist's competition."
Book VII, Chapter II
The Later Fructification Theory
I have pointed to the wide spread of eclecticism as a symptom of the unsatisfactory position of the economical doctrine of interest. Our economists select elements out of many theories, when and because no one of the existing theories is found sufficient.
A second symptom that points in the same direction is the fact that, in spite of the great number of existing theories, there is no check to the literature of the subject. Ever since scientific Socialism brought scepticism to bear on the old school of opinions there has been no lustrum, and in the latter lustrum no year, in which some new interest theory has not seen the light of day. So far as these have retained at least some principles of the older explanations, and have varied them only in the way of carrying out the original principles more strictly, I have tried to classify them according to the prevailing tendencies they show, and have included them in the statement of preceding chapters.
But some recent attempts strike out a way of their own,103 and one of them seems remarkable enough to call for fuller notice,—that of the American writer, Henry George. From its likeness in fundamental ideas to Turgot's Fructification theory, it may be appropriately called the Later Fructification theory.
George's104 interest theory occurs in the course of a polemic against Bastiat and his well-known illustration of the lending of the plane. A carpenter James has made a plane for his own use, but lends it for a year to another carpenter William. At the end of the year he is not content with getting back an equally good plane, because this would not compensate him for the loss of the advantage he might have had from the use of the plane during the year, and on that account he asks in addition a new plank as interest. Bastiat had explained and justified the payment of the plank by showing that William obtains "the power which exists in the tool to increase the productiveness of labour."105 This explanation of interest from the productivity of capital George does not consider valid, for various reasons which do not concern us here, and then proceeds as follows: "And I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters—that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes—that interest would be but the robbery of industry, and could not long exist.... But all wealth is not of the nature of planes or planks, or money, nor is all production merely the turning into other things of the inert matter of the universe. It is true that if I put away money it will not increase. But suppose instead I put away wine. At the end of a year I will have an increased value, for the wine will have improved in quality. Or suppose that in a country adapted to them I set out bees; at the end of a year I will have more swarms of bees, and the honey which they have made. Or supposing, where there is a range, I turn out sheep, or hogs, or cattle; at the end of the year I will, upon the average, also have an increase. Now what gives the increase in these cases is something which, though it generally requires labour to utilise it, is yet distinct and separable from labour—the active power of nature; the principle of growth, of reproduction, which everywhere characterises all the forms of that mysterious thing or condition which we call life. And it seems to me that it is this that is the cause of interest, or the increase of capital over and above that due to labour."
The fact that, for the utilisation of the productive forces of nature, labour also is necessary, and that, consequently, the produce of agriculture, for instance, is in a certain sense a produce of labour, is not sufficient to obliterate the essential difference that exists, according to George, between the different modes of production. In such modes of production as consist "merely of changing the form or place of matter, as planing boards or mining coal, labour alone is the efficient cause.... When labour stops production stops. When the carpenter drops his plane as the sun sets, the increase of value which he with his plane is producing ceases until he begins his labour again the following morning. When the factory bell rings for closing, when the mine is shut down, production ends until work is resumed. The intervening time, so far as regards production, might as well be blotted out. The lapse of days, the change of seasons, is no element in the production that depends solely on the amount of labour expended." But in the other modes of production "which avail themselves of the reproductive forces of nature time is an element. The seed in the ground germinates and grows while the farmer sleeps or ploughs the fields."106
So far George has shown how certain naturally fruitful kinds of capital bear interest. But, as every one knows, all kinds of capital, even those that are naturally unfruitful, produce interest. George explains this simply from the efficiency of the law of equalisation of profits. "No one would keep capital in one form when it could be changed into a more advantageous form.... And so in any circle of exchange the power of increase which the reproductive or vital force of nature gives to some species of capital must average with all; and he who lends or uses in exchange money or planes or bricks or clothing, is not deprived of the power to obtain an increase any more than if he had lent, or put to a reproductive use, so much capital in a form capable of increase."
To return to Bastiat's illustration: the reason why William at the end of the year should return to James more than an equally good plane, does not rest in the increased power "which the tool gives to labour," for "that is not an element... but it springs from the element of time—the difference of a year between the lending and return of the plane. Now if the view is confined to the illustration, there is nothing to suggest how this element should operate, for a plane at the end of the year has no greater value than at the beginning. But if we substitute for the plane a calf, it is clearly to be seen that to put James in as good a position as if he had not lent, William at the end of the year must return not a calf, but a cow. Or if we suppose that the ten days' labour had been devoted to planting corn, it is evident that James would not have been fully recompensed if at the end of the year he had received simply so much planted corn, for during the year the planted corn would have germinated and grown and multiplied; so, if the plane had been devoted to exchange, it might during the year have been turned over several times, each increase yielding an increase to James.... In the last analysis the advantage which is given by the lapse of time springs from the generative force of nature and the varying powers of nature and of man."
The resemblance of all this to Turgot's Fructification theory is obvious. Both start with the idea that in certain kinds of goods there resides, as a natural endowment, the ability to bring forth an increment of value; and both demonstrate that, under the influence of exchange transactions and the efforts of economic men to get possession of this most remunerative fructification, the endowment must artificially become the general property of all kinds of goods. They differ only in that Turgot places the source of the increment of value quite outside of capital, in rent-bearing land, while George seeks it inside the sphere of capital, in certain naturally fruitful kinds of goods.
This difference avoids the weightiest objection that we had to urge against Turgot. Turgot had left unexplained how it is possible to purchase, for a relatively small sum of capital, land which yields successively an infinite sum of rent, and to secure the advantage of an enduring fructification for unfruitful capital. With George, on the other hand, it seems to need no proof that unfruitful wealth is exchanged in equal ratio with fruitful. For since the latter can be produced in any quantity at will, the possibility of increasing the supply of such goods will not permit of their enjoying a higher level of price than the unfruitful goods that cost as much to produce.
On the other hand, George's theory is open to two other criticisms, which are, I think, decisive.
First, the separation of production into two groups, in one of which the vital forces of nature form a distinct element in addition to labour, while in the other they do not, is entirely untenable. George here repeats in a somewhat altered form the odd mistake of the physiocrats, who would not allow that nature co-operates in the work of production except in one single branch of it, agriculture. The natural sciences have long ago told us that the co-operation of nature is universal. All our production rests on the fact that, by the application of natural forces, we put imperishable matter into useful forms. Whether the natural power of which we avail ourselves in this be vegetative or inorganic, mechanical or chemical, makes no difference whatever in the relation in which natural power stands to our labour. It is quite unscientific to say that, in production by means of a plane, "labour alone is the efficient cause." The muscular movement of the man who planes would be of very little use if the natural powers and properties of the steel edge of the plane did not come to his assistance. Is it even true that, on account of the character of plank planing as a "simple change of form or place of the material," nature in this case can do nothing without labour? Can we not fasten the plane into an automatic machine, and get it driven by the force of a stream; and will not the plane, untiring, continue the production even when the carpenter sleeps? What more does nature do in the growing of grain?
Second, George has not explained that prior phenomenon of interest by which he seeks to explain all the other phenomena. He says all kinds of goods must bear interest because they can be exchanged for seed-corn, cattle, or wine, and these bear an interest. But why do these bear an interest?
Many a reader will perhaps think, at the first glance, as George himself evidently thinks, that it is self-evident. It is evident that the ten grains of wheat, into which the one grain has multiplied itself, are worth more than the one grain of wheat that was sown; that the grown-up cow is worth more than the calf out of which it grew. Only it would be well to consider that it is not a matter of ten grains simply growing out of one grain. The action of cultivated land, and a certain expenditure of labour, have had a share in it. And that ten grains are worth more than one grain + the action of the ground and + the labour expended, is obviously not self-evident. Just as little is it simply self-evident that the cow is worth more than the calf + the fodder which it has consumed during its growth + the labour which its rearing demanded. And yet it is only under these conditions that interest can fall to the share of the grain of wheat, or to the calf.
Indeed, even in the case of wine which improves in lying, it is not by any means self-evident that the wine which has grown better is of more value than the inferior and unripe wine. For in our method of valuing the goods which we possess we follow unhesitatingly the principle of anticipating future use.107 We do not estimate the value of our goods according to the use—at least we do not value them only according to the use—which they bring us at the moment, but also according to that use which they will bring us in the future. We ascribe to the field, which for the moment lies useless in fallow, a value with regard to the crop which it will bring us by and by. We give a value even now to the scattered bricks, beams, nails, clamps, etc., which bring us no use when in that condition, in consideration of the use they will afford us when put together at some future time in the shape of a house. We value the fermenting must, which, as such, we cannot make any use of, because we know that by and by it will be serviceable wine. And so might we also value the unripe wine, which we know will become excellent wine after lying, by the amount of use which it will give us as matured wine. But if we ascribe to it here and now a value corresponding to that future use, there remains no room for an increase of value, and for interest. And why should we not?
And if we do not ascribe such a value, or not quite such a value, the cause is certainly not to be found, as George imagines, in the productive powers of nature which the wine possesses. For that there are vital forces of nature in the fermenting must, which in itself is even hurtful, or in the unripe wine, which of itself is of little use; and that these vital forces tend to the furnishing of a costly product, can, in the nature of things, only afford a ground for valuing the goods which contain these precious forces at a high figure, not at a low one. If, nevertheless, we value them at a relatively low figure, we do it not because of their containing useful natural forces, but in spite of it. The surplus value of the products of nature, which George appeals to, is therefore not self-evident.
George makes one attempt to explain this surplus value, though it must be called a very lame one. He says that time, as well as labour, constitutes an independent element in its production. But is this really an explanation, or is it an evasion of the explanation? How comes the person who throws a seed of corn into the earth to get compensation, out of the value of the product, not only for his labour but also for the time that the seed has lain in the ground and grown? Is time then the object of a monopoly? Such an argument almost tempts one to recall the naïve words of the old canonist, that time is a good common to all, to the debtor as to the creditor, to the producer as to the consumer.
Of course George did not mean time, but the vegetative powers of nature actually working during time. But how should the producer manage to get himself paid for these vegetative forces of nature by a special surplus value in the product? Are, then, these natural powers objects of a monopoly? Are they not rather accessible to every man who owns a seed of corn? And cannot every one put himself in possession of a seed of corn? Since the production of seed-corn can be indefinitely augmented by labour, would the amount of corn not be steadily increased so long as a monopoly of the natural forces immanent in the grain made its possession appear peculiarly advantageous? And would not, on that account, the supply inevitably increase till the extra profit due to that monopoly was absorbed, and the production of corn became no more remunerative than any other kind of production?
The careful reader will note that in this discussion we have come back into the same groove of ideas into which we were brought by our criticism of Strasburger's Productivity theory.108 In this part of his work George has under-estimated the interest problem in the same way as Strasburger did, only to a greater extent and with still greater naïvety. Both hastily conclude that the powers of nature are the cause of interest. But Strasburger at least made an attempt to investigate exactly the alleged causal connection between the two, and to follow it out in detail. George, on the contrary, gives us nothing but assertions which take for granted that, in certain productions, time is an "element." It is certainly not in this superficial way that the great problem is to be solved.
[67.]Fourth edition, Paris, 1865.
[68.]"The costs of production are made up of (1) the recompense to the workers; (2) the profits of the capitalists," etc. (p. 93).s
[69.]See also the sharp but most pertinent criticism of Pierstorff, Lehre vom Unternehmergewinn, p. 93, etc.
[70.]Cours d'Economie Politique, second edition, Paris, 1863. His Productivity theory is similar to that of Say (e.g. "interest is a compensation for the productive service of capital," i. p. 302). His Abstinence theory (1, 289, 293, 300) is particularly unsatisfactory on account of the peculiar meaning he gives to the conception of "privation." He means by it what the capitalist may suffer on account of the capital sunk in production not being available for the satisfaction of pressing wants which may possibly arise in the meantime. Surely a very unsuitable foundation for a universal theory of interest!
[71.]Essai sur la Répartition des Richesses, second edition, Paris, 1885. See particularly pp. 236 (Abstinence theory), 233, 238 (Productivity theory); see also above, p. 131. [Book II, Chapter II, par. II.II.38.—Econlib Ed.]
[72.]On Roscher, see above, p. 129 [Book II, Chapter II, par. II.II.33.—Econlib Ed.], Schüz, Grundsätze der National-Oekonomie, Tübingen, 1843; particularly pp. 70, 285, 296, etc. Max Wirth, Grundzüge der National-Oekonomie, third edition, i. p. 324; fifth edition, i. 327. See further Huhn, Allgemeine Volkswirthschaftslehre, Leipzig, 1862, p. 204; H. Bischof, Grundzüge eines Systems der National-Oekononik, Graz, 1876, p. 459, and particularly note on p. 465; Schülze-Delitzsch, Kapitel zu einem deutschen Arbeiterkatechismus, pp. 23, 27, 28, etc.
[73.]La Nozione del Capitale, in the Saggi di Economia Politica, Mailand, 1878, p. 155.
[74.]Sixth edition, 1883.
[75.]P. 34, and more at length in the Saggi.
[76.]"The elements of interest are two: first, compensation for the non-use of capital, or, as some say, for its formation, and for its productive service" (p. 119).
[77.]Theory of Political Economy, second edition, London, 1879.
[79.]P. 266. Jevons puts the same formula in other ways that need not be specified here.
[80.]Thus, on one occasion, he says that, under the influence of this element of time, in the case of the distribution of a stock of goods in the present and in the future, "less commodity will be consigned to future days in some proportion to the intervening time" (p. 79).
[81.]An Inquiry into the Natural Grounds of Right to Vendible Property or Wealth, Edinburgh, 1829.
[82.]P. 131, and generally all through the argument against Godwin, and the anonymous tract "Labour Defended."
[83.]Note to p. 247.
[84.]Beitrag zur Lehre vom Kapital, Erlangen, 1857, pp. 16, 22, etc.
[85.]Précis d'Economie Politique, second edition, Paris, 1881.
[86.]See above, p. 304. [Book V, Chapter I, par. IV.I.26-27.—Econlib Ed.]
[87.]"The principle then is that the rate of interest is a direct consequence of the productivity of capital" (ii. p. 110).
[88.]"We saw that the real value of interest depended on the productive employment given to capital; since a certain surplus value is due to capital, interest is one part of that surplus value presumably fixée à forfait (without consideration of gain or loss) which the lender receives for the service rendered by him" (ii. p. 189).
[89.]Traité d'Economie Politique, eighth edition, Paris, 1880.
[92.]Kleine Schriften staatswirthschaftlichen Inhalts, Berlin, 1843, p. 566. See above, p. 312. [Book V, Chapter I, note c41.—Econlib Ed.]
[93.]Principles, book iii, chap. iv. §§ 1, 4, 6; chap. vi. § 1, No. 8, etc.
[94.]Book i. chap. vii. § 1.
[95.]Book v. § 1.
[96.]Book iii. chap. iv. § 4.
[97.]See above, p. 206. [Book III, Chapter II, par. III.II.57-58.—Econlib Ed.]
[98.]See above, p. 306. [Book V, Chapter I, par. IV.I.33.—Econlib Ed.]
[99.]i. pp. 258, 268, 271, etc.
[100.]Bau und Leben, iii. p. 273, etc.
[101.]iii. p. 266, etc.
[102.]iii. p. 423, See also iii. p. 330, 386, 428, etc.
[103.]By desire of the author I here omit, as of little interest to English readers, a statement and criticism of Schellwien's theory (Die Arbeti und ihr Recht, Berlin, 1882, p. 195. etc.) which occupies pp. 477-486 of the German edition.—W. S.
[104.]Progress and Poverty. Kegan Paul, 1885.
[105.]Capital et Rente. See above, p. 289. [Book IV, Chapter III.—Econlib Ed.]
[106.]Parallel with the "vital forces of nature," according to George, works also "the utilisation of the variation in the forces of nature and of man by exchange." This too leads to "an increase which somewhat resembles that produced by the vital forces of nature" (p. 129). But I need not here enter into a more exact exposition of this somewhat obscure element, since George himself ascribes to it only a secondary rôle in the origination of interest.
[107.]See my remarks on "Competition of Wealth" in Rechte und Verhältnisse, p. 80, etc.
[108.]See above, p. 178. Book II, Chapter III, par. II.III.147-49.—Econlib Ed.]