Front Page Titles (by Subject) Review of Böhm-Bawerk, Einige strittige Fragen der Capitalstheorie (1902) - Capital, Interest, and Rent
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Review of Böhm-Bawerk, Einige strittige Fragen der Capitalstheorie (1902) - Frank A. Fetter, Capital, Interest, and Rent 
Capital, Interest, and Rent: Essays in the Theory of Distribution, ed. with an Introduction by Murray N. Rothbard (Kansas City: Sheed Andrews and McMeel, 1977).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
Review of Böhm-Bawerk, Einige strittige Fragen der Capitalstheorie
This little group of essays, dedicated to the “true friends of theory,” is a reprint of three articles which appeared during 1899 in the Zeitschrift fur Volkswirtschaft, Socialpolitik und Verwaltung. The author's object, as he explains, is not to present any new theory of capital or interest or to make any changes in the one which he had before presented, but rather to examine more carefully some questions of detail in the doctrine of capital that are essential for the solution of the main question. Of the five distinguishable subjects discussed, the four less important ones comprise the last third of the pamphlet and may be first mentioned.
The author maintains that the confusing of interest, the return of capital, with the earnings of the entrepreneur, as is done by Philippovich, is a step backward away from clear thinking and a clear economic terminology. He refutes Dietzel's idea that there must be, not one, but several theories of interest—that in turn, or according to the particular problem, the abstinence, the productivity, the exploitation, the time-value theory or others, must be employed. The author makes a telling criticism of this eclectic method of avoiding the real problem involved. He then replies to the objection made to his own theory by Philippovich, to the effect that it explains only a part of the cases of interest. And, finally, he criticizes the loose acceptance by Lexis of the
Let us turn now to the major theme of the essay—the nature of the roundabout process. Böhm-Bawerk's conception of the “average production period” as that period which elapses between the application of productive agents and their reward in the form of satisfaction, and his proposition that by roundabout methods a greater product can, as a rule, be attained, have been variously criticized and attacked. Especially the assaults of Lexis, called for a reply. In defense of his ideas, the author retraces much of the argument of his earlier works, developing and illustrating the thought in many details. He first clears away some misunderstandings, by defining the production period not as the absolute time that elapses from the first application of labor and capital until the securing of the enjoyment, but as the average length of the interval. As the main objection turns on the effect of inventions which shorten the various industrial processes, while giving a larger product, he considers at length the effect of inventions and improved processes. He concludes that they are dynamic factors that check, but do not reverse, the movement of the rate of interest, and maintains the truth of the general rule set forth in his theory. He returns to the same argument in the next division, maintaining that the greater productivity of the longer period can be shown both by observation and experience (pp. 43–52).
He then turns to a different but related question, as to whether (pp. 51–63) the rate of interest is fixed in the whole range of industry or, as Lexis has maintained, in a particular branch of it. The same question appears under a slightly different aspect in this form: whether the different branches of trade have an essential effect on each other in the matter of the rate of interest. Böhm-Bawerk analyzes the methods by which the rate of interest and the successive uses of capital are equalized in the various lines of industry. From the standpoint of the author and that of Lexis, who apparently approaches the subject from the same side, this is a subtle and convincing piece of analysis. Its defects, viewed from a different standpoint, will be suggested below.
Finally, in this division Böhm-Bawerk vigorously resents the view that his notion of the production period and the length of the roundabout process is unsound, in that it deals with magnitudes practically not determinable. Admitting that it is impossible to measure the productive period, he says that this is equally true of many causes which must be recognized and reasoned about in the various sciences. He says it would be very pleasant and interesting to know all these facts, but that a lack of knowledge does not invalidate his theory. The details of the arguments presented cannot be discussed here, but it must be confessed that, despite the great ingenuity displayed, they leave the vague impression that somehow the real question has been evaded. Not a single concrete example has been given where an individual producer practically measures this period, whereas in the cases of cost of production and of the marginal buyer in market value, which Böhm-Bawerk adduces as strict analogies, there are clearly evident some points at which the magnitudes of satisfaction or cost, usually unmeasured, appear for a moment in concrete and measurable forms.
Considering as a whole the author's argument on the central theme, it can be called successful only in a negative way, as a refutation of various objections that have been made against it. The author has not advanced the solution of the problem, positively, a single step. Critics of the Positive Theory have frequently declared in effect that, while its author had ejected the productivity of capital from the front yard of his theory, he had opened to it the side door and had given it the freedom of the house. For what place are we to assign in the broad theory of interest to the “productiveness of the roundabout process”? Is it the main and fundamental, or is it only a supplementary and partial, explanation of the cause of interest? The essay under review certainly puts it in the central and leading place: it is the greater productiveness of labor when applied in a long and roundabout way which is the great and efficient cause of interest on capital. If that is not the impression left on the reader of this essay, and the one the author intends to leave, then we have missed its purpose. And yet this is out of harmony, first, with the author's own strong negative criticisms of productivity theories as affording only incomplete answers to the interest problem and, secondly, with his formal statement of the theory of interest as due to the difference between the value of present and that of future goods.
Let us venture to suggest very briefly an explanation of this appearance of wavering in the author's conclusion. Starting with a narrow concept of capital as composed of things produced by labor, he has not succeeded in escaping various of the old errors of the labor-value theory which he himself has elsewhere so successfully discredited. That concept suggests the thought that labor is put into the material form of capital to appear later as enjoyment. Some cases may be found in seeming support of this view, but others that clearly forbid it. When or in what way will the labor expended in digging the Isthmian canal become enjoyment? There will be an annual yield of enjoyment, but the “principle,” or result of the labor, is, as John B. Clark has strongly emphasized, an abiding thing, never to be used up. Again, Böhm-Bawerk recognized before he concluded his Positive Theory that the capitalization of land is only another aspect of the interest problem, yet his productive period or roundabout process has no validity there. Indeed, his capital concept is a cost-of-production concept and does not make possible a consistent explanation of the theory of interest or the capitalization of scarce agents—“natural” means of production. The period of production seems plausible when illustrated by examples of capital thought of as “previous labor” (see Strittige Fragen, pp. 11, 12, 17, et passim). An “average waiting time,” however abstract and unrelated to any practical calculation which business men make in determining investments, appears to be a possible thing, if capital can be reduced to applications of labor at various times, destined all to appear at a later moment in the form of consumable goods. But when the problem of comparing present and future goods is thought of in the form of a balancing of present and future rentals, as is done in the case of capitalizing scarce natural agents, the fallacy is evident. Then there is no “round-aboutness” in the application of labor. There is neither a series of technical processes nor an application of labor which will mature as enjoyment at a later period. The rate of interest falls gradually, as future rents increase in value relative to present rents, and accordingly are discounted at a lower rate of interest. Great as have been the services of our author in stimulating to clearer and deeper thinking in economic theory, his presentation of a Capitalstheorie evidently is not destined to be a finality. Some development it is sure to undergo, and is undergoing. And that development clearly lies along the lines of a value concept, as opposed to a cost-of-production concept of capital.