Capital and Interest: A Critical History of Economical Theory

Senior, who deduces the value of goods from their cost of production, simply says that this sacrifice is a constituent element of the costs, and is done with it. Bastiat, who bases the value of goods on “exchanged services,” elevates the postponement also to the rank of a service. “Postponement in itself is a special service, since on him who postpones it imposes a sacrifice, and on him who desires it confers an advantage.”
*13 This service, according to the great law of society, which runs “service for service,” must be specially paid. The payment takes place where the capitalist has borrowed his capital from another person by means of loan interest (
intérêt).

But even outside of loan interest this service must be compensated; for, speaking generally, every one who receives a satisfaction must also bear the collective burdens which its production requires, including the postponement. This postponement is looked upon as an “onerous circumstance,” and forms therefore, quite universally, an element in the valuation of the service, and at the same time in the formation of the value of goods. This is, in a few words, the substance of what Bastiat says with rhetorical diffuseness and copious repetitions.

I called this doctrine a deteriorated copy of Senior’s. If we put on one side all those defects that belong to Bastiat’s interest theory not as such, but only in virtue of its being embodied in his value theory—which to my mind is exceedingly faulty—the deterioration shows itself chiefly in two respects.

The first is that Bastiat confines his attention and his arguments almost entirely to a secondary point, the explanation of contract interest, and for that neglects the principal thing, the explanation of natural interest. Both in his
Harmonies Economiques and in the monograph which he specially devoted to the interest problem,
Capital et Rente, he is never tired of discoursing by the page on the interpretation and justification of loan interest.

But he applies his theory to the explanation of natural interest only once, and then only in passing, in the passages already quoted (
Harmonies, third edition, p. 213); and these leave a great deal to be desired in point of clearness and thoroughness.

The results of this negligence make themselves felt principally in this, that the chief thing in the exposition of interest, the sacrifice of postponement, is not nearly so clearly put by Bastiat as by Senior; for when Bastiat opposes the owner of capital to the borrower of capital, the sacrifice which he speaks of as made by the owner is generally that of doing without the productive use that meantime might have been made of the capital lent.
*14 This has quite a good signification if it means nothing more than what Salmasius had once tried to prove against the canonists, that, if by employing capital a man can make a natural profit, there is both reason and justification for claiming an interest on the capital when loaned. But to point to that sacrifice is evidently quite inappropriate as an explanation of natural interest, and the phenomenon of interest in general is not satisfactorily explained thereby, the existence of natural interest being already assumed in it as a given fact.

For the deeper explanation of interest it is evident that that other sacrifice on which Senior dwells is the only one that has any importance,—the sacrifice that consists in postponing the satisfaction of needs. Now Bastiat of course speaks of this sacrifice also, but by confusing it with the former sacrifice he gets his doctrine into a tangle; indeed it seems to me that he not only confuses his readers, but himself. At least there are to be found in his writings, especially in his
Capital et Rente, not a few passages in which he starts with his Abstinence theory, but comes suspiciously near the standpoint of the Naïve Productivity theorists. The course of explanation suggested, in the often quoted passage in the
Harmonies, was to show how under capitalist production the surplus value of the product arises from the necessity of buyers of the product paying for the “onerous circumstance” of the postponement of gratification, as well as for the labour embodied in the product. Instead of following out this line of explanation, he not unfrequently looks upon it as self-evident that capital, in virtue of the productive power that resides in it, must give its owner an “advantage,” a “gain,” an enhanced price, and a bettering of his lot; in a word, a profit.
*15 But that, as we know already, is not to explain. interest, but to assume it.

As a fact, Bastiat has often been accused of having entirely missed the chief point, the explanation of natural interest; the accusation is not, I think, quite justified, but, as we can see, it is very easily explained.
*16

This is the first point in which Bastiat’s theory does not improve on Senior’s. The second consists in a wonderful addition he makes. Besides the explanation of interest just stated, he gives another—of so different a nature, and at the same time so evidently mistaken, that I cannot even make a guess as to how Bastiat saw any relation between it and his principal explanation.

Every branch of production, he explains, is an aggregate of efforts. But between various efforts an important distinction is to be drawn. One category of efforts is connected with services which we are presently engaged in rendering. A second category of efforts, on the other hand, is connected with an indefinite series of services. To the first category, for instance, belong the daily efforts of the water-carrier, which are directed immediately to the fetching of water; or, in the sphere of agriculture, the labours of sowing, weeding, ploughing, harrowing, reaping, threshing, which are collectively directed to obtain a single harvest. To the second category belongs the labour which the water-carrier expends in making his barrow and water cask; which the farmer expends on his hedging, harrowing, draining, building, improvements generally: all those labours which, as the economists say, go to the formation of a fixed capital, and result in benefit to a whole series of consumers, or a whole series of harvests.
*17

Bastiat now raises the question, How, according to the great law of “service for service,” are these two categories of efforts to be estimated or rewarded? As regards the first category, he finds this very simple. These services must be compensated, on the whole, by those who profit by them. But that does not apply in the case of the second category, those services which lead to the formation of a fixed capital; for the number of those who profit by this capital is indefinite. If the producer were to get paid by the first consumers it would not be just; for, in the first place, it is unreasonable that the first consumers should pay for the last; and in the second place, there must come a point of time when the producer would have at once the stock of capital not yet consumed, and also his compensation, which again involves an injustice.
*18 Consequently, Bastiat concludes with a mighty logical
salto mortale, the distribution among the indefinite series of consumers is only managed thus: the capital itself is not distributed, but the consumers are burdened with the interest of the capital instead—a way of getting out of it which Bastiat explains to be the only conceivable one for the solution of the problem in question,
*19 and one which, offered spontaneously by the “ingenious natural mechanism of society,” saves us the trouble of substituting an artificial mechanism in its place.
*20 Thus Bastiat explains interest as the form in which an advance of capital is redistributed over a sum of products: “C’est là, c’est dans la répartition d’une avance sur la totalité des produits, qu’est le principe et la raison d’être de l’Intérêt” (vii. p. 205).

It must have occurred to every one while reading these lines that, in this analysis, Bastiat has fallen into some errors almost inconceivably gross. It is, first, an error to say that it is not possible to distribute the capital itself over the purchasers. Every business man knows that it is possible; and knows too that it is done, and how it is done. He simply calculates the probable duration of the capital laid out, and, on the basis of this calculation, charges every single period during which the capital is employed, and every single product, with a corresponding quota for wear and tear and replacement of the capital sum. When the purchasers pay the quota for replacement of the fixed capital in the price of the finished commodities, “the capital itself” is of course distributed over them. Perhaps not with absolute “justice,” because there may be an error in the calculated duration of the capital, and in the calculated quota for wear and tear which is based on that; but, on the average, the prices successively paid will, in any case, cover the capital sum that is to be replaced.

And it is a second gross error to assume that the producers receive interest instead of receiving back the capital itself, which, he says, cannot be distributed. The fact is, as every one knows (1), that, in the quota for replacement, they receive back the capital itself, and (2) so long as a part of this capital lasts they receive interest besides. Interest, therefore, rests on an entirely distinct foundation from the replacement of capital. It is really difficult to understand how Bastiat could make a mistake in such simple and well-known matters.

In conclusion, I may note in passing that Bastiat has borrowed his practical law of interest from Carey: the law that with the increase of capital the absolute share obtained by the capitalist in the total product increases, and the relative share diminishes.
*21 In his attempts to prove this law—which from the point of view of theory are quite worthless—like Carey he carelessly confuses the conception of “percentage of total product” with the conception of “percentage on capital” (rate of interest).

On the whole, Bastiat’s interest theory seems to me to be quite unworthy of the reputation which it has, at least in certain circles, so long enjoyed.