Capital and Interest: A Critical History of Economical Theory
1. "Les intérêts des avances de l'établissement des cultivateurs doivent donc être compris dans leur reprises annuelles. Ils servent à faire face à ces grands accidents et à l'entretien journalier des richesses d'exploitation, qui demandent à être réparés sans cesse" (Analyse du Tableau Economique, Edition Daire, p. 62). See also the more detailed statement that precedes the passage quoted.
3. On his attitude towards loan interest see above, p. 53. As regards natural interest, he approves of interest as regards capital invested in agriculture (Philosophie Rurale, p. 83, and then p. 295) without going any deeper in explanation; but he speaks of what is gained in commerce and industry in hesitating terms, looking on it rather as a fruit of activity, de la profession, than of capital (p. 278).
5. The outward want of form in Turgot's explanation of interest has led a usually exact investigator of his works to maintain that Turgot does not explain interest (Sivers, Turgots Stellung, etc., Hildebrand's Jahrbücher, vol. xxii. pp. 175, 183, etc.) This is a mistake. It is, however true, as we shall see, that his explanation does not go particularly deep.
7. Usually the rent of land is somewhat less than interest on the price paid. But this circumstance, fully explained by Turgot (Réflexions, § 84), has no influence at all on the principle, and may here be simply neglected.
8. "If four bushels of wheat, the net product of an arpent of land, be worth six sheep, the arpent which produced them might have been given for a certain value—a greater value of course, but always easy to determine in the same manner as the price of all other commodities, i.e. first by discussion between the two contracting parties, and afterwards by the price current established by the competition of those who wish to exchange lands against cattle, and of those who wish to give cattle to get lands (§ 57). It is evident, again, that this price, or this number of years' purchase, ought to vary according as there are more or less people who wish to sell or buy land, just as the price of all other commodities varies by reason of the different proportion between supply and demand" (§ 58).
Book I, Chapter IV
9. "In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in the adventure.... He could have no interest to employ them unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one unless his profits were to bear some proportion to the extent of his stock" (M'Culloch's edition of 1863, p. 22). The second passage runs: "And who would have no interest to employ him unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit" (p. 30).
12. When Platter in the essay above mentioned (p. 71) comes to the conclusion that, "if Smith's system be taken strictly, profit on capital appears unjustifiable," it could only be by laying all the weight on the one half of Smith's expressions, and leaving the other out of account as contradictory to his other principles.
Book I, Chapter V
15. Handbuch der Staatswirthschaft, Berlin, 1796, particularly §§ 8 and 23. Even his later Abhandlungen die Elemente des Nationalreichthums und die Staatswirthschaft betreffend (Göttingen, 1806) does not take an independent view of our subject.
22. Handbuch der Staatswirthschaft, Berlin, 1808, §§ 110 and 120. See also § 129, where even contract "rents" are no better explained, but simply spoken of as facts. Schmalz's other writings are not more instructive.
25. In Lotz's former work, the Revision der Grundbegriffe, 1811-14, there are some rather interesting remarks on our subject, although they are full of inconsistency; among others, an acute refutation of the productivity theories (vol. iii. p. 100, etc.), an explanation of interest as "an arbitrary addition to the necessary costs of production," and as a "tax which the selfishness of the capitalist forces from the consumer" (p. 338). This tax is found, not necessary indeed, but "very fair." At p. 339 and at p. 323 Lotz considers it a direct cheating of the capitalist by the labourer if the former does not receive in interest as much as "he may be justified in claiming as the effect of those tools used up by the worker on his activity and on its gross return." It is very striking that in the second last of the passages quoted Lotz puts interest to the account of the consumer, and in the last of them to the account of the labourer; he thus exactly repeats Adam Smith's indecision on the same point.
32. The most complete of these runs thus: "For no one accumulates but with a view to make his accumulation productive, and it is only when so employed that it operates on profits. Without a motive there could be no accumulation, and consequently such a state of prices" (as show no profit to the capitalist) "could never take place. The farmer and manufacturer can no more live without profit than the labourer without wages. Their motive for accumulation will diminish with every diminution of profit, and will cease altogether when their profits are so low as not to afford them an adequate compensation for their trouble, and the risk which they must necessarily encounter in employing their capital productively" (chap. vi. p. 68; similarly p. 67; chap. xxi. p. 175, and other places).
33. Ricardo puts the same causal relation very strongly in chap. i. § 4, when he gives the height of the "value of labour" as a secondary cause of the value of goods, in addition to the quantity of labour expended in the production,—having in his eye the influence exerted on the value of goods by the capitalist's claims to profit. The height of profit is to him only a dependent, secondary cause, in place of which he prefers to put the final cause of the whole relation, and this final cause he finds in the varying height of wages.
36. The careful reader will easily convince himself that the result remains the same, if we vary the form of the question, and look at the value instead of the amount of the product and wages. In that case, indeed, the value of the return remains fixed (see p. 90 [Book I, Chapter V. pars. I.V.29-31.—Econlib Ed.]), while wages are an elastic quantity, and the proposition expressed in the text, changed only in expression, not in reality, will run thus: cultivation must call a halt at that point where the wages of labour, increased by the increasing costs of cultivation, leaves over to the capitalist from the value of the product no more than enough to satisfy his claims on profit.
43. "The cost of producing commodities is, as will be afterwards shown, identical with the quantity of labour required to produce them and bring them to market" (first edition, p. 250). Almost in the same words in fifth edition, p. 250: "The cost or real value of commodities is, as already seen, determined by the quantity of labour," etc.
44. "But it is quite obvious that if any commodity were brought to market and exchanged for a greater amount, either of other commodities or of money, than was required to defray the cost of its production, including in that cost the common and average rate of net profit at the time," etc. (first edition, p. 249; fifth edition, p. 250).
48. It would to some extent modify this judgment of M'Culloch if we could assume that, in the above argument, he has used the word Labour in that vague and confused sense in which he uses it later (note 1 to his edition of Adam Smith, Edinburgh, 1863, p. 435) as meaning "every kind of activity,"—not only that exerted by men, but that of animals, machines, and natural powers. Of course by such a watering down of its fundamental conception his theory of value would be stripped of every peculiar characteristic, and reduced to an idle play upon words; but at least he might be spared the reproach of logical nonsense. However, he cannot be allowed the benefit even of this small modification. For M'Culloch expresses himself too often, and too decidedly, to the effect that interest is to be traced to the human labour employed in the production of capital. Thus, e.g. in note 1 on p. 22 of his edition of Adam Smith, where he explains interest to be the wage of that labour which has been originally expended in the formation of capital, and where obviously the "labour" of the machine itself cannot possibly be understood; and, particularly, in the passage (Principles, fifth edition, pp. 292-294) where, in regard to the illustration of the wine, he expressly declares that its surplus value is not produced by the powers of nature as these work gratuitously.
62. "The earth has only been cultivated because its product was able, not only to compensate the annual labour of cultivation, but also to recompense the advances of labour which its first and original cultivation cost. This superfluity it is which forms the rent of land" (p. 5).
Book II, Chapter I
2. It would be very easy to extend the above list. Thus physical productivity might be shown to contain two varieties. The first,—the only one considered in the text,—is where the capitalist process of production on the whole (that is, the preparatory production of the capital itself, and the production by the aid of the capital when made) has led to the production of more goods. But it may also happen that the first phase of the total process, the formation of capital, shows so large a deficit that the total capitalist production ends by showing no surplus; while, all the same, the second phase taken by itself, the production by aid of the capital, produces a surplus in goods. Suppose, e.g. that the boat and net which last 100 days had required 2000 days for their production, then the fisher would receive for the use of boat and net which have cost in all 2100 days of labour, only 100 × 30 = 3000 fish, while with the hand alone he could have caught in the same time 2100 × 30 = 6300 fish. On the other hand, if we look at the second phase by itself, then the capital, now in existence, of course shows itself "productive"; with its help in 300 days the fisher catches 3000 fish; without its help, only 300. If, on that account, we speak, even in this case, of a productive surplus result, and of a productive power of capital—as, in fact, we usually do—it is not without justification; only the expression has quite a different and a much weaker meaning. Further, with the recognition of the productive power of capital is often bound up the additional meaning, that capital is an independent productive power; not only the proximate cause of a productive effect, traceable in the last resort to the labour which produced the capital, but an element entirely independent of labour.... I have intentionally not gone into these varieties in the text, as I do not wish to burden the reader with distinctions of which, in the meantime at least, I do not intend to make any use.
3. Whether the shares allotted, in practical economic life, to the individual factors in production exactly correspond to the quota which each of them has produced in the total production, is a much disputed question that I cannot prejudge meantime. I have, on that account, chosen to use in the text modes of expression that do not commit me to any view. Moreover it is to be noted that the phenomenon of surplus value takes place, not only between individual shares in the return as thus allotted, and the sources of return that correspond to them, but also, on the whole, between the goods brought forward and the goods that bring them forward. The totality of the means of production employed in making a product—labour, capital, and use of land—has, as a rule, a smaller exchange value than the product has when finished—a circumstance that makes it difficult to trace the phenomenon of "surplus value" to mere relations of allotment inside the return.
Book II, Chapter II
13. In this illustration, besides the expenditure for labour and use of land, I do not introduce any separate expenditure for substance of capital consumed, because, according to Say, that entirely resolves itself into expenditure for elementary productive services.
21. I venture to pass over a goodly number of German writers who since Roscher's time have simply repeated the doctrine of the productive power of capital, without adding anything to it. Of these Friedrich Kleinwächter may be mentioned as one who has worked at the doctrine, if not with much more success, at least with greater thoroughness and care. See "Beitrag zum Lehre vom Kapital" (Hildebrand's Jahrbücher, vol. ix. 1867, pp. 310-326, 369-421) and his contribution to Schönberg's Handbuch. In the same category may be put Schulze-Delitzsch. For his views, which, like Roscher's, are somewhat eclectic, and not free from contradictions, see his Kapitel zu einem Deutschen Arbeiterkatechismus, Leipzig, 1863, p. 24.
In the German edition of 1884 there are three pages of criticism on Kleinwächter, which, by desire of Professor Böhm-Bawerk, I here omit.—W.S.
24. I purposely disclaim at this point any inquiry whether the physical productivity of capital thus conceded is an originating power in capital, or whether the productive results attained by the help of capital should not rather be put to the account of those productive powers through which capital itself originates; particularly to the account of the labour which made the capital. I do this to avoid diverting the discussion from that sphere where alone, in my opinion, the interest problem can be adequately solved,—that of the theory of value.
Book II, Chapter III
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.
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.
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.
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.
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.
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.
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).
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.
The second attempt might be found in Thünen's note quoted above on p. 166, at that place where he speaks of the renewal of the capital by the borrower. There Thünen points out that "in this inquiry we must necessarily direct our attention to the whole." It is conceivable that this warning might be taken as an attempt to prove that the phenomenon supposed in the text, where the user of capital renews it by his own labour, and beyond that obtains a surplus product, maintains its validity in all economic circumstances, provided the people as a whole be substituted for the individual. That is to say, even if the single individual cannot by his own personal labour renew the capital consumed by him, it will hold, as regards the whole people, that by the use of capital men are able to obtain a surplus product, and besides, with a portion of the saved labour, to replace the capital consumed. In this line of thought, then, we might see a support of the objection I made in the text, where I pronounced Thünen's hypothesis to be applicable only to the simplest cases, and to be inadmissible in complicated ones. I do not think that this warning—to look at the whole—was meant by Thünen in the sense I have just indicated. But if it was, it does not take anything from the force of my objection. For in questions of distribution—and the question of interest is a question of distribution—it is not right in every circumstance to look at the whole. From the fact that society, as a whole, is able by the help of capital to renew this capital itself, and over and above that, to produce more products, it does not follow at all that there should be interest on capital. For this plus in products might just as well accrue to the labourers as surplus wage (they being certainly as indispensable to the obtaining of it as the capital) as to the capitalist in the shape of interest. The fact is that interest, as surplus value of individual return over individual expenditure of capital, depends on the individual always obtaining particular forms of capital at a price which is less than the value of the surplus product obtained by means of them. But the consideration of society as a whole will not by itself guarantee this to the individual; at any rate it is not self-evident that it will do so. If it were so surely there would not be so many theories over a self-evident thing!
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.
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.