The Positive Theory of Capital

Eugen v. Böhm-Bawerk, from the Warren J. Samuels Portrait Collection
Böhm-Bawerk, Eugen v.
(1851-1914)
CEE
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Editor/Trans.
William A. Smart, trans.
First Pub. Date
1888
Publisher/Edition
London: Macmillan and Co.
Pub. Date
1891
Comments

1. See my Capital and Interest, p. 29.

2. See Capital and Interest, pp. 214-259.

3. See Capital and Interest, p. 239. It goes without saying that I could mean nothing else than an involuntary dialectical confusion in the writer's mind, and nothing was further from my intention than to charge a scholar, so much esteemed by myself and by all the world, with wilfully misleading his readers. I should have thought that the very sincere expressions, in that and other writings, of the respect in which I have always held the person of that past master of our science, and particularly the express recognition of his "thorough and conscientious efforts" with which I introduced this very criticism (p. 239), might have sufficiently protected me against any such misconception. I was therefore more than astonished to learn that Professor Knies had taken my words as conveying an offensive imputation of wilful misleading of his readers. Although I scarcely think that any one of my readers will have understood me in this sense, I do not hesitate to explain here, emphatically and publicly, not only that I had not the slightest intention of any offensive imputation, but that I am exceedingly sorry if my inconsiderate choice of words should unwittingly have made such an interpretation possible.

4. P. 229, and pp. 235-239.

5. Capital and Interest, pp. 228, 247.

6. Ibid. p. 264.

7. The criticism which Knies directs against me in the note to page 106 of his second edition is limited unfortunately to a few passing remarks on points which are, for the most part, of secondary importance. Moreover, several errors of fact have slipped into these, and two of them I cannot let pass unchallenged. First, I cannot admit that I have done what Knies ascribes to me, and explained that the replaceableness of goods—that is to say, the fact that one sample of a class can be adequately replaced and represented by another—is simply a legal fiction. I only said that the actual identity of replaceable goods was a legal fiction (Capital and Interest, p. 253); and these are two very different statements. And, further, in my book I do not regard it as certain that, if a person speaks of uses in respect to perishable goods, he ought to point out, and wishes to point out, exactly the same kind of process of use as is to be observed in non-perishable goods. On the contrary, my entire criticism of Say and Schäffle (p. 232), of Hermann and even of Knies himself (p. 233), rests on the idea that it was a matter for the opposed theory to point out the existence of a something otherwise constituted than the usual material services, and that it had not succeeded in this attempt.

8. Der Kredit, part i., Berlin, 1876, p. 10: shortly repeated without new arguments in the second edition of the book Das Geld, p. 106, note 1.

9. I may note that it would be easy to multiply examples in which the same state of things occurs. Grain merchants, e.g., may find it to their advantage to exchange stocks held in different stores; bankers, to exchange sums of money disposable at different places, etc.

10. "A loan without interest is a gift of the use of so much capital," Roscher, Grundlagen, § 189.

11. See above, p. 251.

12. Similar cases may perhaps occur after very abundant harvests, where the producers have not enough storage accommodation to secure the surplus.

Book VI, Chapter II

13. Of course it may happen in individual cases, that, outside of the reasons for apparently cheap buying discussed in the text, there may be other reasons for really abnormal cheap buying; as, e.g., skilful utilising of favourable conjunctures, usurious oppression of the seller, and, in particular, of the labourer. The emergence of such factors in this case results in a still further limitation of the purchase price, and in the obtaining of an extra profit. This extra profit is to be distinguished from normal profit on capital in every respect: in its nature—for it is not a true profit on capital but strictly a profit of the undertaker; in its theoretical explanation—for it owes its origin to other and quite special causes: and, finally, in the social and political judgment we must form of it. I need scarcely say in so many words that what is said in the text has only to do with profit on capital pure and simple.

Book VI, Chapter III

14. Not quite exactly: for easier understanding the figures in the text are calculated roughly, and without consideration of compound interest.

15. The analysis which follows is devoted to the circumnavigation of one of those hidden rocks which, I suspect, might rise suddenly in the way of those readers who venture on their own account to go further into the circle of ideas here opened up. The digression which it necessitates forms one of the numerous sacrifices of time which I imagine myself compelled to make with a view to the safety of my theory, at the cost of brevity and ease of comprehension.

16. In order to remain true to actual cases, so far as possible within the narrow limits of the illustration, I purposely assume that the value of product decreases as production in the same branch increases—the more units the less the value of each unit. The fact that even the most remunerative branch of production ceases to be remunerative when it is over-stocked, is the very thing that makes it possible for means of production to seek different employments simultaneously.

17. To be accurate it is 21.65%, or as 100 : 78.35.

18. If 200 pieces of the good are produced naturally all the pieces obtain one equal value, and not only the second hundred but the first hundred gets its value according to the lower rate of 8, at which the second hundred can be made remunerative.

19. By varying the figures the reader may very easily convince himself that exactly the same result emerges if the marginal utility, which determines the value, lies within the sphere, not of the immediately remunerative, but of the productive employments. The only difference is that, in this case, the chances of a temporary "conjuncture profit" between the individual branches of employment, are somewhat altered. That production which itself yields just the marginal utility bears no conjuncture profit, while such a profit is now possible temporarily in the present employments, and in the other branches of production.

20. See above, p. 230.

Book VI, Chapter IV

21. Whether it take the form of completing the two years' production process from beginning to end by their own labour, or that of introducing their own labour at a later stage,—e.g. in the fourth half-year of the total production process,—and buying the fruits of the preparatory labour,—raw materials, tools, etc.,—from the others who have performed that previous labour.

22. The pleasure of an independent position may indeed very often create a preference for labour on one's own account, even although the labourer might obtain a somewhat greater income by taking a wage. Influences of this kind, however, can alter only the figures, not the principle.

23. Of course the possibility open to the labourer in question of realising his labour in other branches of activity, can do little or nothing to alter the position of circumstances assumed in the text. For if the other branches are such as likewise demand a somewhat long production period the matter stands just the same with the labourer of this branch; and the few branches which a man with no capital, or almost no capital, can take up with any result,—such as in particular the performance of personal services, domestic service, and the like,—can, from their nature, afford a remunerative refuge only to a limited number of workers, while any strong pressure would immediately result in overstocking and a corresponding entailment of the advantage.

24. See above, p. 250.

25. 16s. 8d. : 20s. = £104 : £124:16s.

Book VI, Chapter V

26. It will perhaps be objected that the purchase amounts which the undertakers of the previous stages receive contain, not only a simple replacement of the advances of subsistence paid by them to workers, but frequently also replacement of the uses of land consumed, and, in any case, some profit on capital. The fact is correct, but it makes no difference in the conclusions which I think are to be drawn from what I have said above. The necessity of paying in advance for uses of land, the return of which will not be obtained till after long methods of production have been completed, has the same effect on the price relation between finished present goods and original productive powers, as the necessity of paying for labour in advance has. The market for uses of land is only a third part-market in addition to the market for credit and the market for labour, where, in similar ways, present goods are sold against future goods (see above, p. 313), and, consequently, as regards its effects on price, the demand of this market for present goods mutually assists, and is assisted by, the demand of the other part-markets. This, however, will be made clearer as we go on. Finally, I must here leave out of consideration the profit of the undertaker, if I would not beg the question. Its existence is the result of a certain market condition in the subsistence market, and therefore cannot be assumed. It is not because the profits of the undertaker absorb a part of the available means of subsistence that the supply of means of subsistence is so weak as to give them an agio as against productive goods. It is because the supply of means of subsistence, even without consideration of profit, is insufficient, that these means of subsistence receive an agio, and the undertakers who advance them receive a profit. Moreover it is easily seen that, by eliminating profit from the argument with which I started in the text, I do not make it any easier to reach the final result, that of giving a reason for the agio on means of subsistence, but make it more difficult. That is to say, if, as I assume, the whole stock of means of subsistence is disposable for the granting of advances to labourers, it will be more difficult in any case for this more ample supply to be exceeded by the demand, than if a portion of the supply appears to be already hypothecated to profit.

27. The much more important matter of the consumption of the income from capital does not belong to the present question: as was shown in last note it is only a result of the supply of wealth being insufficient as against the demand.

28. The figures are, of course, only chosen for illustration.

29. 0.81 + 0.56 + 0.24 + 0.12 + 0.06 + 0.04 + ...

30. It would be erroneous to assume that, after the demand of the current year is covered, the current labour must be directed to the demand of the next annual period till such time as this is fully covered; that, e.g., if 5/10 of the demand of 1889 is covered by existing wealth, the labour of 1888 must, or even might, immediately prepare the remaining 5/10. But in 1888 the maturing of finished products is carried forward only one stage, and is itself fully terminated only in the year 1889 by an addition of the labour of 1889.

31. It is all the same as regards the effect whether the same persons perform the labour of all stages of production successively, or whether—as is the case under the division of labour—certain persons remain constantly occupied in one and the same stage.

32. Not to cumber the text I have done this in Appendix. [This appendix is titled in the original the "Appendix to page 327."—Econlib Editor.]

33. Of course many productions are, for technical reasons, very little divided up into stages; agriculture, e.g., yielding its harvests only from year to year. All the same the above formula will be found to give an approximately correct presentation of the case, and we may be the better pleased with it that I do not intend to draw a single deduction in which anything depends on definite figures. What I have to do with is rather the mere negative recognition, that the period of time, for which the accumulated subsistence fund must contain provision, need not be so great as the average economical production period.

Book VI, Chapter VI

34. I repeat again that it is quite true that, during the period of the national production process, the idle capitalists and rentiers also must be maintained by advances of wealth, and, indeed, as a rule maintained at a pretty fair rate. Their claims on subsistence, however, are not causes but effects of the condition of the market creating an agio on present goods. If there is no agio, and so no interest, then no one could live in idleness as a rentier; he would either have to work or positively consume his parent wealth. See above, p. 320 in note.

35. It is scarcely necessary to note that we have now changed the names of the parties who enter the market. So long as we were considering the special relations of the labour market, we thought of labour as the commodity offered, and of the means of subsistence as the equivalent price. Now, conversely, the means of subsistence appear as the commodity looking for a market, or as Supply.

36. Never, of course, quite 20s.; otherwise they would have no advantage from the exchange, and consequently no motive to conclude it; but, perhaps, 19s. 6d. or 19s. 9d.—a difference so insignificant that it may be entirely neglected in our inquiry.

37. I might name, as a fourth group of demand, those landowners who live, not on the return of their labour but on their rents, and who, like the labourers, get the price of a future commodity sold by them—in this case the productive good, use of land—advanced them in the form of subsistence. I intentionally, however, make no mention here of this group of demand since there need not be in every economy landowners living on their rents, and since, in any case, the emergence of interest which we have to prove in the text is quite independent of the simultaneous existence of rent from land.

38. The deficiency is grater, because it is well confirmed by experience that the surplus return constantly tends to decrease as the production period is extended. (See above, p. 84. ) The difference between the return which can be obtained in a five years', and that which can be obtained in a ten years' production period, is greater than the difference between the returns of a ten and a fifteen years' period. If now, in a community where the stock of wealth is such as to allow of an average ten years' period, one branch is forced to limit its own period to five years because another branch has extended its period to fifteen years, the greater difference is lost to the community, and the lesser one is won. The total result of such a procedure is, therefore, uneconomic.

39. The fact that the agio stands at a certain height may now and then lead to the appearance of there being a deficiency in remunerative opportunities of employment, and a "glut of capital." The truth is that there is always a surplus of remunerative opportunities of employment, and a deficiency of capital; only that the high agio, which is the result of the deficiency of capital, excludes a mass of remunerative opportunities as not remunerative enough economically. It is exactly the same as when, in a year of bad crops, sufficient buyers cannot at the moment be found in some one market for the strongly appreciated grain, on account of the price being so high. It cannot be truly said that there is a surplus of grain and a deficiency of demand; on the contrary, there is so great a deficiency of grain that, after the weeding out which has resulted from the war of competition, only a very small part of the demand finds, economically, admittance to the scanty stocks.

40. See above, pp. 316, 317.

41. I assume that the figures of the return in a six years' period are a little, but not very much higher than those in a three years; in harmony with the experience, so often alluded to, that gradual extension of the production period tends to always decreasing surplus returns.

Book VI, Chapter VII

42. Capital and Interest, p. 219. Also Rechte und Verhältnisse, p. 57.

43. Are Material Services themselves "Goods"?—Many writers will have it so, as Hermann (Staatswirthschaftliche Untersuchungen, second edition, p. 109), or Menger (Grundsätze, p. 132). Other recent writers, like Sax (Grundlegung, p. 209) and R. Meyer (Das Wesen des Einkommens, p. 155, 168), emphatically exclude the services themselves from the conception of Goods. (Sax speaks primarily of personal services, but what is true of them must logically be true of material services.) To my mind the matter appears to stand as follows. First of all, the whole question is not one of scientific knowledge, but simply one of terminology. And provided that the nature and the place of material services in economies were really and properly recognised, in the end it would not much matter whether the name Good was attached to them or not. Those authors who refuse to recognise material services as goods appear to me, however, to have some notions that are not really and properly correct. Thus Meyer (pp. 158, 157, note 4) denies to material services the character of economic means, and explains them rather as "satisfactions of want." Now the material service, as I understand it, is a real mean towards the satisfaction of want, not that satisfaction of want itself. It stands as independent intermediary between the good from which it comes, and the satisfaction of want which it is intended to cause but does not by any means always cause. If, e.g., I hire an oven for the baking of bread—that is to say, buy its use or its material service—what kind of thing is it I really have bought? Have I directly bought the satisfaction of want, the allaying of hunger?—Certainly not. Or the oven itself?—No. Or, perhaps, the bread that is to be made by the oven?—Again, no. But what I have bought is just one material service, or group of services, of the good called Oven; these services are means to the production of bread, and thus, beyond that, to the satisfaction of one of the needs of subsistence. The material services are, therefore, true and—according to the sense indicated in the text—independent economical instruments and objects.—If now, with the view of settling the terminological question, we inquire as to the position of the material services among the other economical instruments, we seem to arrive at the following. There can be no doubt as to the inventory of the causes of wellbeing,—the causes which we summon to the satisfaction of our wants. Our wellbeing is furthered, on the one side, by persons who are useful to us (such as teachers, guardians, clergymen, artists, workers, domestics, etc.), and, on the other side, by useful things. And the use of both comes to us through the exertion of their useful powers,—that is, through useful services. In the sphere of material instruments of wellbeing we treat both the things and their services as economical objects: in the sphere of personal instruments of wellbeing, since the abolition of slavery, we do not treat the useful persons themselves, but only their services, as economical objects. Thus the scheme of our economical means of satisfaction would receive something like the following shape:

Economical Means of Satisfaction
(Useful Persons)
  Material Goods
Personal Services   Material Services

And now it is a question of appropriate terminology to which of these categories the name "Good" should be attached. Personally I believe that the science has great need of one short expression which would embrace all kinds of means of satisfaction. Now, since, the word "good" is quite suitable for this purpose, and has already long been used for this purpose, I see no reason why it should now be deposed. Of course there is quite as strong a need to keep the material services in their turn separate from the material goods which bear these services. But this can be done, both simply and sufficiently, by instituting the distinction, inside the universal conception of the "Good," between "Material Goods" and "Material Services."—Things like Rights, Relations, Properties, would, for good reasons, find no room even in the widened conception.

44. The perception of the above is made very difficult by the usual method of valuation according to "Costs" which, naturally, is always directed to the unit of goods as a whole (see my Rechte und Verhältnisse, p. 64, note 1). The reader, however, who has followed our conception of what the nature of the law of costs is, and has, consequently, recognised that, even where goods seem to get their value from their costs, the utility of the goods always stands in the background as the true source of value, and that, in any case, the "costs" must always be in harmony with the—independently established—marginal utility of the goods, will not be misled by any appearance to the contrary. Even in the consideration, for instance, of whether a durable good in general is worth its cost, and whether, consequently, we should produce or buy it, we must form an opinion to ourselves as to its utility, and I should be puzzled to know how this opinion is to be formed if not on the basis of the value which the material services of the good—singly and taken together—have for us.—On the whole question treated in the text see also my Rechte und Verhältnisse, pp. 61-68.

45. These figures are based on the assumption that the whole year's utility is obtained all at once, and, indeed, obtained in anticipation at the beginning of the year; e.g. by hiring the good at a year's interest of 100 payable on each 1st January. If, on the other hand, the year's rise can only be had at the end of the year, a valuation undertaken at the beginning of the year will show figures not inconsiderably lower. That is to say, on 1st January 1888, the present year's use which will be obtained only by 31st December,—that is, practically, a whole year later,—will not be valued at the full 100, but at 95.23 only; and again the "next year's use," that obtainable 31st December 1889,that is, practically, two years later,—will be valued at 90.70, and so on. Now this shows, for the whole good, a sum of value of 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55. If, finally, the utility were always obtainable in the middle of the year, or, what comes to the same thing, were to be spread equally over the whole year, the figures would be—for a valuation taken on the 1st January—97.56 + 92.85 + 88.38 + 84.12 + 80.07 + 76.21 = 519.19.—That the figures should alter according as the date of the valuation stands nearer or farther from the date of obtaining the utility, is an entirely natural thing, and one quite familiar in financial life. The value of paper—which is just a "durable good" with annual uses—always stands a little higher shortly before the interest or dividend terms than some time before. I may note that the above figures are taken as before from Spitzer's Tables, and are based on an interest rate of 5%.

46. On the part return of 100, which was separated off from the good on the first day of the year, the good naturally will no longer yield any interest. If, on the other hand, the year's utility is only obtainable at the end of the year, it must naturally pay interest on the full initial value of the bearer of the utility, us will be brought out somewhat more fully later on.

47. Of 354.58, because again the 100 taken off at the beginning of the year—which may independently obtain interest—need no longer obtain interest through the good.

48. If the year's service can be obtained only at the year's end, the figures of the valuation, and with them the figures of the interest, will be altered, but the principle of the process, and, in particular, the reduction of value by the amount of the then last service, remains unchanged. I shall put together in the following tables the course of the value movement for one such case. The initial value of a good which will last six years, and has an annual utility, obtainable at the end of the year, of 100, is, as stated above (p. 343 in note), equal to 95.23 + 90.70 + 86.38 + 82.27 + 78.35 + 74.62 = 507.55.

Year. Value on 1st Jan. Value on 31st Dec. Gross Int. Wear and Tear. Net Int.
1888 507.55 432.93 100 74.62 25.38
1889 432.93 354.58 100 78.35 21.65
1890 354.58 272.31 100 82.27 17.73
1891 272.31 185.93 100 86.38 13.62
1892 185.93 95.23 100 90.70 9.30
1893 95.23 100 95.23 4.77

49. See Capital and Interest, p. 194, and particularly p. 233.

50. A very noteworthy fact, which theory up till now has left entirely without notice and entirely without explanation. I have already called attention to it in my book Rechte und Verhältnisse, p. 68, note 6. As to the actual fact that the successive diminution of value, which a good suffers in the course of its wear and tear, does not go parallel with the degree of its physical wear and tear, but is slower at the beginning and quicker as time goes on, there can be no doubt. It may be seen in its purest form, because there it is not confused through subjective inexactnesses or caprice, in the rating of valuable paper which brings in a fixed annual amount for a limited number of years. A bond, e.g., which assures its owner the right of drawing ten years' coupons of £1000, and possesses (on a calculation of 5% compound interest) an initial course value of £7722 (Spitzer's Tables, p. 274), does not lose £772.2 for each of the ten years which make up its lifetime, although in each of these years it loses exactly one-tenth of its content. In the first year it loses £614, in the second £645, in the third £677, and so on successively £710, £747, £783, £823, £864, £907, and, finally, in the tenth year, £952, the sum it was still worth at the beginning of this latter year. But in all other kinds of durable goods the same course of wear and tear may be observed with sufficient accuracy, although, for obvious reasons, we seldom make so exact and mathematical a calculation. Later on I shall have another occasion to mention cases of this kind. Now in all the literature known to me I have found no attempt to give an explanation of this fact,—which is certainly notable enough to deserve explanation. Indeed, such an explanation is simply not to be got from the machinery of previous theories, particularly the "Use theory," while it offers itself unsolicited on the lines of my theory.

51. See above, p. 343.

52. In Menger's most valuable contribution Zur Theorie des Kapitales (Conrad's Jahrbücher, vol. xvii. p. 47), which appeared while this was passing through the press, the author likewise has urged against the Use theory that, in its conception of capitalisation, it has not solved its problems, but only gone round about them.

Book VI, Chapter VIII

53. After deducting the share of the co-operating complementary factors.

54. Here I must assume that the utility is not obtained in advance, but at the expiry of the particular period, because, in the case of durable productive goods employed in a personal undertaking—with which the comparison is to be made—there is, in the nature of things, no anticipative use. The utility, e.g., which an agricultural implement affords in farming, cannot possibly be obtained on 1st January, for the whole year in advance: obviously it can be realised only at the end of the year, in the harvest.

55. P. 343, note 1. At a different interest rate, of course, the figures would be different.

56. This is most clearly shown when the intermediate product made by the assistance of the durable good—e.g. the cotton yarn spun by a machine—is immediately sold to another undertaker by whom the process is completed, and the yarn made into thread or cloth. All increment of value which the intermediate product, the yarn, thus obtains, is now naturally put to the account of this particular intermediate product (or the money capital for which it is sold) and not to that of the parent durable good.

57. See above, p. 305.

58. In the later years the "wear and tear" increases progressively, because the last service, which is not replaceable by any one coming after it, gets always nearer to the present, and becomes, therefore, always higher in value. See above, particularly the table on p. 348, note 1.

59. Spitzer's Tables, p. 121.

60. On the relation of Ricardo's rent theory to the modern value theory, see Dr. James Bonar's suggestive remark; in an article entitled "The Austrian economists and their view of value" in the Quarterly Journal of Economics, October 1888.

61. Manifestly the fact that Rent of Land and Rent of Capital have one common final cause is not a sufficient reason for abolishing every distinction between them. Between land and capital there are so many important differences, both theoretical and practical, that, notwithstanding the common feature just described, we are justified in adhering to the decision made in a former chapter to keep land out of the conception of capital.—Quite lately Carl Menger, in Conrad's Jahrbücher, vol. xvii. p. 48, has ably put forward the necessity of a comprehensive "universal theory of the return to wealth." I trust that, in the contents of the present chapter, he will see an earnest attempt to develop such a theory.

Book VI, Chapter IX

62. The incorrectness of a theory is shown in its not being able to give a satisfactory solution for all given cases. I have already had frequent occasion to point to cases which could not be satisfactorily explained by means of the—to my mind—incorrect "Use theory" (see above, pp. 287, 347). Here I have to add another instance;—the buying of a perpetual interest, e.g. Consols, where the original debt can neither be called up nor paid back. In these annual payments the Use theory would see the price for a "use of capital" perpetually transferred. But what has happened with the capital stock? It has of course been transferred. But it is not simply lent, for it will never be paid back. Nor, in the view of the Use theorists, can it be transferred against payment, for the annual interest is the price of the "use," and there is nothing paid beyond that. Nor, finally, is it transferred without payment,—presented as a gift: the rentiers, the representatives of those who made the loan, have no intention of making any such present, and the government which received the loan certainly does not feel that it has received a gift.—Now what the Use theory could not explain, or explained only in a most artificial way, is explained perfectly simply by our theory: it is just an exchange of present goods (the original capital) against a series of future sums of goods (the annual interest payments).

63. See below on the Rate of Interest.

64. I gladly embrace this opportunity to repair an omission in my Capital and Interest. At the time when I published that work I unfortunately had not made the acquaintance of Loria's La Rendita Fondiaria (Mailand, 1880). It contains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence theory, of which I can only say that, if the Abstinence theory were tenable—which, of course, I do not believe it to be—Loria's setting of it would be the first to gain recognition.

65. See above, p. 114.

Book VI, Chapter X

66. See above, p. 335.

67. It may, perhaps, be pointed out in reply that, owing to the increasing supply of wood, its value would be pressed down, and so, by and by, forestry would become only as remunerative as baking and such like. I would, however, suggest that this result would only be reached when the value of hundred-year-old timber had come down to a halfpenny; and to press down the value of wood so low, in the midst of a dense population, an enormous portion of the country would require to be turned into forest again!

68. See above, p. 310.

69. The levelling up of wages—that is, up to the value of the future product of the most remuneratively employed labour—is, of course, impossible, because the national product would not suffice for that.

70. I may remark in passing that the same position holds in the case of land rent. It is obvious that, even in the Socialist state, a labourer working on a peculiarly fruitful piece of land, e.g. in a Rüdesheim vineyard, will produce a greater or more valuable product than one who puts forth the same exertion and skill on a common piece of land or vineyard. But it is as evident that it would be insufferable "protection" to allow the former labourers their entire greater product as wage. To avoid injustice the wage here must be levelled down; that is to say, of the product of the more fruitful lands, the "land rent" must be first of all retained for the common purse, to be divided afterwards to all the citizens in their capacity as joint owners of the national land. Land rent, therefore, even in the Socialist state, would exist, would come into operation as against the labourers cultivating superior land, and would only be divided according to another plan than new, on account of the equal share of all in the nationalised land.

71. On these forms of organisation see Anton Menger, Das Recht auf den vollen Arbeitsertrag, Stuttgart, 1888, pp. 104, 112.

Book VII, Chapter I

1. An assumption which, for the reasons shown on p. 315, holds very widely;—that is to say, among all persons who own more wealth than they can or will spend in their own productive equipment.

2. As regards the sellers of present goods, for simplicity's sake, we shall adhere throughout the argument to the assumption that their personal circumstances are such that they value present and future commodities alike.

3. We may take the case, e.g., of a youth standing on the brink of manhood, kept very short of cash at the moment by his tutor, but with the prospect of a great fortune coming into his absolute disposal in a few months.

4. The total surplus return, due to the loan, figures out at £20, since, in each of the two years of the extended production period, the surplus return to labour is £10. But this surplus return is all the same divided over two years, so that only the amount of £10 is to be reckoned to one year. In more skilful disposition, however, the borrower need not take up, at the beginning of the production period, the whole amount of the loan from which he defrays his subsistence during that period: he may raise the loan by successive instalments, and this has for result that the loan is outstanding and requires to pay interest only for half the production period. If such a disposition is arranged the yearly surplus return may in the most extreme case be offered as a half-year's interest on the subsistence loan, and in this case the most extreme interest rate economically possible is double the figures given is the text. The raising of such subsistence loans by instalments thus exerts exactly the same influence on the relation between subsistence fund and surplus return, and, at the same time, on the height of the interest rate, as does a suitable "Staffelung" of production (see above, p. 325), with which phenomenon, as may be easily seen, it is closely and intimately connected.

5. Up to a certain point the surplus return may now and then increase even in a greater ratio than the duration of the production period. It may, e.g., happen that the transition from rod-fishing to net-fishing shows a greater advance than the transition from primitive modes of fishing to rod-fishing. But beyond a certain point this cannot be maintained, and the surplus returns show a decreasing ratio.

Book VII, Chapter II

6. See above, p. 319, and particularly p. 330.

7. The case of production carried on entirely without capital, which, according to the scheme, would return only £15, we may leave out of account as practically of no importance.

8. Only the wages of the first month are outstanding nearly a whole year; those of the second month are outstanding only eleven months, and so on; all wages of the first six months outstanding more than half a year. Against this the wages of the second six months are outstanding for as much less than the half-year.

9. The calculation is exactly similar to the foregoing.

10. Perhaps one or other of my readers will take exception to my looking upon the production period, in which the work of undertaking is carried on, as not a fixed immovable amount. It will be said that each undertaker has made the arrangements for his production on a quite definite footing, and works in any case in the production period corresponding to and determined by these given arrangements. This is not the case. Even where the visible outlines of the arrangements, such as workshops, number and kind of employés, and so on, may be pretty permanent, yet, within these fixed lines, a number of little noticed alterations are possible, by which the length of the production period might be changed not inconsiderably. In the simplest shoemaking shop, e.g., the buying of a new machine-made tool, the wholesale purchase of finished uppers, or, above all, the acquiring of labour-saving instruments such as sewing-machines and the like, involves no unimportant extension of the production period. True, in the shoemaking shop itself one does not notice that the production of shoes has now become a more lengthy process. But all the more noticeable will it be in those preparatory stages of production where, on account of the shoemaker's demand—not, of course, the demand of the one shoemaker, but of many,—people must now stretch away back in time, as it were, and invest original productive powers in machine-making, founding of factories, and so on. The shoemaker, therefore, according as he covers his demand for the instruments of his business in one way or the other, may as a fact cause a lengthening or shortening of the total production period, and naturally he makes the choice which, in the circumstances, is economically the more advantageous. If, e.g., the level of wages is very high, he will prefer to buy machine-made uppers, put up a sewing-machine in his own shop, etc.; that is to say, in entire correspondence with the statement given in the text, he will prolong the production period: while, if the level of wages is low, he will prefer directly to employ the cheap hand labour—that is to say, so far as in him lies, to keep the production period short.

11. On the assumption of a production arranged in the form of stages, whereby (as shown on p. 328, and in Appendix I.) the initial fund need only contain subsistence for half the production period.

12. If, e.g., the existing stock of subsistence is so great as to defray four million years pay—in which case, as we know, where production is by stages, an initial capital amounting to two millions of wages only would be required—and if there are one million labourers in the country, then it is shown that an average four years' production period must be taken. For if, say, a three years' period were taken, the three years' payment of one million of workers would take up only a capital of one and a half millions of wage, and the rest of the capital would have to go idle. In a five years' production, again, an initial fund of two millions of wages would only defray the subsistence of 800,000 labourers for five years, and the remaining 200,000 would go starving—a position which evidently is as untenable.

13. I here assume a well-organised production by stages, where no portion of the capital remains idle, and where, consequently, the initial fund need only contain something like half the amount of subsistence required during the course of the whole production period. I may note, however, that the correctness of the conclusions drawn in the text is quite independent of the pure question of fact whether the initial capital must be exactly half, or something more than half, or, perhaps, just so much as the amount of subsistence successively consumed by the workers during the production period. According as this is determined the figures puat down in the following tables will, of course, vary—they have no value, indeed, but as illustrative—but not the laws that underlie these figures. With other figures representing the productiveness and the capital, the calculation would lead to different concrete rates of interest, but to the same laws as regards height of the interest rate, as will be shown more clearly further on.

14. To be exact the figures of profit from the larger periods of production should be set down at somewhat less. They fall due, of course, all at once at the end of the total production period, and are thus less in value by the amount of the intermediate interest. In a ten years' production period, e.g., the capital of £1000 realises a total profit of £2666.6, which is less favourable than £266.66 for each single year, because in the latter case the interests falling due earlier might increase by compound interest. I consider it, however, less of a mistake to give up mathematical exactness than to include involved calculations of compound interest, and make the illustration so difficult and circumstantial that, in the end, it might be perhaps more difficult to understand than the rule which I mean it to illustrate. It is not committing any blunder in principle: the neglect of compound interest leads only to the same result as if I had made the progression of the annual returns—which in any case is arbitrary and only given for purposes of illustration—a little more rapid, and then had calculated exactly.

15. Leaving out of account special disturbing causes, the influence of which I cannot pursue here: my business just now is to develop the fundamental law of the interest rate, just as I have already developed the fundamental law of the formation of price. See Conrad's Jahrbücher, vol. xiii. p. 480.

16. Always assuming a complete arrangement of production by stages. I may add the mathematical proof of this somewhat paradoxical thesis. To employ 30 labourers in a 5 years' period arranged by yearly stages, the 6 labourers of the first stage need an advance of wage over full 5 years, that is, in all, 30 annual wages: the 6 labourers of the second stage require an advance over 4 years, that is, 24 wages: similarly, the labourers of the third stage require 18, those of the fourth 12, those of the fifth 6: a total of 90 wages. To support the same 30 labourers in a 6 years' production, the first stage, now embracing only 5 labourers, requires the advance for 6 years, that is, 30 wages; the second stage, 25; the third, 20; the others, respectively, 15, 10, and 5 wages: in all, 105 wages. The extension of the production period for 30 labourers by a whole year requires therefore, as a fact, the augmenting of the wage fund by the amount of only 15 wages, which gives the case maintained in the text.

17. From this formulation it will be seen why the law now deduced does not depend, and has no need to depend, for its correctness on the concrete numerical ratio between the amount of the wage fund and the length of the production period. (See above, p. 387, note 1.) Suppose, e.g., that not a half but a whole year's wage were necessary to extend the production period by a year, all the same a capital sufficient to defray the wages of a whole year would require to bear something like the return of the last extension of the production period as interest. The figures may change as they will, but the typical relation holds, that the interest of that unit of capital required for a definite extension of the production period lies between the surplus return of the last permissible and the first non-permissible extension.

18. See above, p. 217.

19. See above, p. 221.

20. Der isolirte Staat, second edition, part ii. div. i. p. 100. It is very notable that Thünen, without knowing the law of marginal utility, without any general price theory based on that law, and, finally, even without any clear insight into the origin of interest, was able to solve the special problem of the rate of interest with almost entire correctness, and in the sense of those general theories of which he had perhaps a dim

Book VII, Chapter III

21. See above, p. 218.

22. As, e.g., in the familiar proposition that an increase of the national capital tends to reduce the interest rate. In the points here raised, I am in very thorough agreement with Walras, who, like Thünen, starts from a theory of interest which, in my opinion, is essentially wrong, and yet is able to arrive at many details correctly and with fine scientific feeling. The coming second edition of his Élements,d'Économie Politique Pure, the proof sheets of which, by the kindness of the author, I was permitted to see, contains many forcible and noteworthy passages on this subject. I can only regret that they are expressed in the troublesome and difficult language of mathematics. The conception of political economy as pre-eminently a mathematical science is one on which, notwithstanding what the distinguished economist has recently said (p. 191 in new edition), I fear we shall never be able to agree.

23. In this case it falls considerably nearer the under limit on account of the relative abundance of the capital, which would be almost sufficient for general adoption of a nine years' production period.

24. That is to say, with £1000 capital, as the table shows, 11.905 labourers could be employed in four years' production. To employ all the existing ten million labourers, therefore, a capital is required which follows this proportion

1000 : x = 11.905 : 10,000,000.

The solution of this proportion gives

x = 10,000,000,000 : 11.905 = 840,000,000.

25. With £1000 capital 9.524 labourers are employed in five years' production; with 1000 millions of capital, therefore, 9.524 millions of labourers.

26. I may call attention to the fact that now we arrive at the figure 19.048 by a quite different way, by quite different lines of thought, and by quite different calculations, than in the above table. There we sought and found empirically the figures of wage and interest at which, under the given assumptions, the equilibrium of Supply and Demand may be established. Now, applying the law of the marginal pair to the concrete case, we have deduced that the interest must lie between the surplus returns of the last extension of production still permissible, and the first excluded, and arrived thereby exactly at the same figure 19.048. In the former case we get our figures immediately by multiplication of the number employed by the gain made per labourer (11.905 × 16 and 9.524 × 20). Here we get the same figure by dividing the dependent last surplus product by half the wage (4 : 21). I may, therefore, take this agreement as a proof that our deductive reasoning correctly expressed the results empirically established.—Here also it may be the most suitable place to point out the error into which Jevons fell as regards this question. Jevons recognises perfectly correctly that the "last surplus return" decides the interest rate; but, owing to an oversight in principle, he makes the mistake of fixing on that other amount to which this surplus return must be put in relation, and deduces the rate of interest, not from the relation of the last surplus return to the sum of subsistence which allows the last extension of production, but from the quite different relation in which that surplus return stands to the value of the whole product which might have been obtained without the last extension of production. "The interest of capital is the rate of increase of the produce divided by the whole produce" (Pol. Econ. second edition, p. 267). The seriousness of this oversight will be best seen from a concrete example, which, for the sake of easier comprehension, I shall take from the case of isolated exchange spoken of above (p. 378). Remembering what was then said, let us suppose the case of an undertaker whose means would allow him to carry through an eight years' production period with a yearly return of £68:10s., and who, by a loan of £30, which would guarantee him subsistence for a ninth year, is put in a position to go on to a nine years' production period with a return of £69:10s., or a surplus return of 20s. According to Jevons this should allow an interest rate of £1 on £68:10s., or 1.46%. But evidently there is no ground whatever why the suitor for the loan should be ready to offer £1 per year and no more as interest for a sum of £68:10s. It is not the amount of £68:10s., but that of £30, whose acquisition makes the extension of production possible, calls forth the surplus return of £1, and, consequently, maybe paid, in the most extreme case, by £l, but, on the assumption noted on p. 378, note 1, by as much as £2 per year. As a fact, then, in the case of this illustration, it is not, as Jevons assumed, an interest of £1 on £68:10s., or 1.46%, that is economically possible, but an interest of £1 on £30, or 3 1/3%, indeed, on the above assumption, a rate of £1 on £15, or 6 2/3%. A certain very modest kernel of truth may be found, all the same, in Jevons's t error; but to point it out I should require to go still further afield into discussions in which I could not assume that the majority of many readers would find sufficient interest.

Book VII, Chapter IV

27. See above, p. 392.

28. See what was said above on p. 334: the two passages mutually supplement each other.

29. See above, p. 394.

30. See above,p. 376.

31. Which can be quite easily calculated from our tabular examples. See, too, close connection of what was said on p. 382.

32. See above, p. 319.

33. Members of the community not here mentioned, as women, children, persons who occupy themselves with the performance of personal services, as artists, officials, domestics; must also, of course, get part of the subsistence fund. But they are not to be counted separately, for the reason that they are not a direct charge on the social subsistence fund, but on the portions secured by the economical classes already mentioned in the text. Violin-players, e.g., receive a portion of the subsistence obtained by concert-goers; the establishment of a rich landowner is supported and paid out of his rent, and so on

34. I must guard myself against a misunderstanding very apt to occur. What I maintain is that the position of land rent as a form of income—the absorption of a portion of the national product by landowners who live without working,—tends to raise the rate of interest. On the other hand, I do not say that the causes which call forth land rent, and raise it, raise also the rate of interest. On the contrary, the well-known law of Diminishing Returns, according to which (in the absence of technical discoveries or improvements) new additions of capital and labour in agriculture lead to a decreasing surplus return, while it exerts an upward influence on land rent, certainly exerts a depressing influence on interest (see point 3 in the text). The full bearing of my contention is best expressed in this;—that in event of the taking away of private right to land, or heavy and confiscatory taxation of land rent, interest in that community would stand lower than it would otherwise. The causes of land rent, in themselves, would depress interest, but land rent, as one of the shares in the division, through its effects on the division, makes up for a portion of these influences.

35. It may, perhaps, have been noticed that the often-mentioned factor of Insurance or Risk, which plays so great a part in practical life, especially in determining the rate of interest on loans, is missed out in my enumeration. This factor, however, has no place here. For the surplus return which this gives the capitalist, if to all appearance it raises the rate of interest, is in truth no real interest,—no net income accruing from the possession of capital,—but only a replacement for a loss of parent stock which shows itself as unavoidable over a great average of cases.—Finally, from the whole course of my research, it will be self-evident that it was not my intention to introduce exhaustively all the secondary determinants of the rate of interest. I have contented myself intentionally with enumerating the most important of those determinants which come into view as typical if the economical interests of the market are followed without let and hindrance. On the other hand, the influence of motives such as generosity, national prejudice, vanity, etc. (see Conrad's Jahrbücher, vol. xiii. p. 486) I have purposely left out of account here. See also below.

Book VII, Chapter V

36. The possibility of a complete harmony of satisfaction is only now and then prevented through an imperfect divisibility of wants on the one side, and of units of goods on the other. See my Grundzüge in Conrad's Jahrbücher, vol. xiii. p. 68, and in particular Wieser's Ursprung und Hauptgesetze, p. 148.

37. It must not be thought that this equilibrium of provision is reached if the available sum of goods is divided over the various periods of time in entirely equal amounts, so that each period obtains, allotted to its consumption, exactly the same quantity of goods. The position of wants also changes. A bachelor has to provide for fewer wants than the father of a family; a healthy man has to make much less expenditure on the preservation of his health than an invalid and frail old man, and so on. Now, obviously, any one would make a very unsymmetrical provision for his wants, who proposed to consume mechanically the same amount of goods during all periods of his life, whether as bachelor, father of a family, or old man. To secure anything like harmonious provision a man must anticipate a probable increase of wants, and meet it by an increase of provision.

38. I That is to say;—the utility of £105 in the future is equal to the utility of £100 now, only on the condition that the community's wealth is increasing.

39. See my Grundzüge in Conrad's Jahrbücher, vol. xiii. p. 74.

40. See the short and clear statement by Mithoff in Schönberg's Handbuch, second edition, vol. i. p. 643, particularly note 53.

41. I do not at all pretend, in the somewhat sketchy suggestions which this chapter contains on the subject of wage, to have given a perfect theory of that matter. In particular, my occasional remarks have only dealt—in a half-complete sort of way—with one of the sides that comes into consideration as regards wages; viz. the relation of wage and interest. On the other hand, I have given no express consideration to another side which is at least as important,—the question as to the influence exerted on the rate of wages by the difficulty that exists, in consonance with the law of diminishing returns, for an increased number of people to obtain the necessary subsistence from the earth. All the same, the attentive reader may find in this book, if in scattered form yet tolerably completely, the foundation-stones on which the principles of a theory of wage might be built; partly in the theory of complementary goods (p. 170), partly in my explanation of the law of costs (p. 223), partly in the present chapter.

End of Notes.
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