Capital and Interest: A Critical History of Economical Theory

Following the plan of statement indicated, I pass over Say’s Use theory in the meantime, to consider the development taken by the Naïve Productivity theory after him.

Of development in the strict sense of the word we need scarcely speak. The most conspicuous feature of the Naïve Productivity theories is the silence in which they pass over the causal relation between the productive power of capital and its asserted effect, the “surplus value” of products. Thus there is no substance to develop, and the historical course of these theories, therefore, is nothing but a somewhat monotonous series of variations on the simple idea that capital produces surplus value. No true development is to be looked for till the succeeding stage—that of the Indirect Productivity theories.

The Naïve Productivity theory has found most of its adherents in Germany, and a few in France and Italy. The English economists whose bent does not seem favourable, generally speaking, to the theory of productivity, and who, moreover, possessed an Indirect Productivity theory ever since the time of Lord Lauderdale, have entirely passed over the naïve phase.

In Germany Say’s catchword, the productivity of capital, quickly won acceptance. Although, in the first instance, no systematic interest theory was founded on it, it soon became customary to recognise capital as a third and independent factor in production, alongside of nature and labour, and to put the three branches of income—rent of land, wages of labour, and interest on capital—in explanatory connection with the three factors of production. A few writers who do so in an undecided kind of way, and add ideas taken from theories which trace interest to a different origin, have been already mentioned in the chapter on the Colourless theories.

But it was not long before Say’s conception was applied with more definiteness to the explanation of interest. The first to do so was Schön.
*18 The explanation he gives is very short. He first claims for capital, in fairly modest words, the character of being a “third and distinct source of wealth, although an indirect source” (p. 47). But at the same time he considers it proved and evident that capital must produce a “rent.” For “the produce belongs originally to those who co-operated towards its making” (p. 82), and
“it is clear that the national produce must set aside as many distinct rents as there are categories of productive powers and instruments” (p. 87). Any further proof is, very characteristically, not considered necessary. Even the opportunity he gets when attacking Adam Smith does not draw from him any more detailed reasoning for his own view. He contents himself with blaming Adam Smith, in general terms, for only considering the immediate workers as taking part in production, and overlooking the productive character of capital and land—an oversight which led him into the mistake of thinking that the rent of capital has its cause in a curtailment of the wages of labour (p. 85).

Riedel gives the new doctrine with more detail and with greater distinctness.
*19 He devotes to its statement a special paragraph to which he gives the title “Productivity of Capital,” and in the course of this he expresses himself as follows: “The productivity which capital when employed universally possesses is manifest on observation of the fact that material values which have been employed, with a view to production, in aiding nature and labour, are, as a rule, not only replaced, but assist towards a surplus of material values, which surplus could not be brought into existence without them…. The product of capital is to be regarded as that which in any case results from an employment of capital towards the origination of material values, after deduction of the value of that assistance which nature and labour afford to the employment of capital…. It is always incorrect to ascribe the product of capital to the working forces of nature or labour which the capital needs in order that it may be employed. Capital is an independent force, as nature and labour are, and in most cases does not need them more than they need it” (i. § 366).

It is very significant that in this passage Riedel finds the productive power of capital “manifest on observation” of excess of value. In his view it is so self-evident that surplus value and productive power belong inseparably to each other, that from the fact of surplus value he argues back to the productive power of capital as its only conceivable cause. We need not, therefore, be surprised that Riedel considers that the existence of natural interest is amply accounted for when he simply mentions the catchword, “productivity of capital,” and does not give any accurate explanation of it.

But the writer who has done more than any other to popularise the Productivity theory in Germany is Wilhelm Roscher.

This distinguished economist, whose most signal merits do not, I admit, lie in the sphere of acute theoretical research, has unfortunately given but little care to the systematic working out of the doctrine of interest. This shows itself, even on the surface, in many remarkable misconceptions and incongruities. Thus in § 179 of his great work
*20 he defines interest as the price of the uses of capital, although evidently this definition only applies to contract and not to “natural” interest, which latter, however, Roscher in the same paragraph calls a kind of interest on capital. Thus also in § 148 he explains that the original amount of all branches of income “evidently” determines the contract amount of the same; therefore also the amount of the natural interest on capital determines the amount of the contract interest. Notwithstanding this, in § 183, when discussing the height of the interest rate, he makes its standard not natural interest but loan interest. He makes the price of the uses of capital depend on supply and demand “specially for circulating capitals”; the demand again depends on the number and solvability of the borrowers, specially the non-capitalists, such as landowners and labourers. So that from Roscher’s statement it seems as if the height of interest were first determined by the relations of contract interest on the loan market, and then transferred to natural interest, in virtue of the law of equalisation of interest over all kinds of employment; while admittedly the very opposite relation holds good. Finally, in the theoretic part of his researches Roscher does not take up the most important question in point of theory, the origin of interest, but touches on it only slightly in his practical supplement on the polities of interest, where he discusses its legitimacy.

To judge by the contents of the following observations, which are a medley of the Naïve Productivity theory and of Senior’s Abstinence theory, Roscher is an eclectic. In § 189 he ascribes to capital “real productivity,” and in the note to it he praises the Greek expression
, the born, as “very appropriate.” In a later note he argues warmly against Marx, and his “latest relapse into the old heresy of the non-productivity of capital”; adducing, as convincing proof of its productivity, such things as the increase in value of cigars, wine, cheese, etc.,” which, through simple postponement of consumption, may obtain a considerably higher value—both use value and exchange value—without the slightest additional labour.” In the same paragraph he illustrates this by the well-known example of the fisher who first catches three fish a day by hand, then saves up a stock of 100 fish, makes a boat and net while living on his stock, and thereafter catches thirty fish a day by the assistance of this capital.

In all these instances Roscher’s view evidently amounts to this, that capital directly produces surplus value by its own peculiar productive power; and he does not trouble himself to look for any intricate explanation of its origin. I cannot, therefore, avoid classing him among the Naïve Productivity theorists.

As already pointed out, however, he has not kept exclusively to this view, but has formally and substantially co-ordinated the Abstinence theory with it. He names as a second and “undoubted” foundation of interest the “real sacrifice which resides in abstinence from the personal enjoyment of capital”; he calls special attention to the fact that, in the fixing of the price for the use of the boat, the 150 days’ privation of the fisherman who saved would be a weighty consideration; and he says that interest might be called a payment for abstinence in the same way as the wage of labour is called a payment for industry. In other respects too there are many ill concealed contradictions. Among other things, it agrees very badly with the productive power of capital which Roscher assumes to be self-evident, when in § 183 he declares the “use value of capital to be in most cases synonymous with the skill of the labourer and the richness of the natural powers which are connected with it.”

Evidently the authority which the respected name of Roscher enjoys among German economists has stood him in good stead with his interest theory. If what I have said be correct, his theory has a very modest claim indeed to the cardinal theoretic virtues of unity, logic, and throughness; yet it has met with acceptance and imitation in many quarters.
*21

In France Say’s Productivity theory obtained as much popularity as in Germany. It became unmistakably the fashionable theory, and even the violent attacks made on it after 1840 by the socialists, especially by Proudhon, did but little to prevent its spread. It is singular, however, that it was seldom accepted
simpliciter by the French writers. Almost all who adopted it added on elements taken from one or even more theories inconsistent with it. This was the case—to name only a few of the most influential writers—with Rossi and Molinari, with Josef Gamier, and quite lately with Cauwès and Leroy-Beaulieu.

Since the Productivity theory experienced no essential change at the hands of these economists, I need not go into any detailed statement of their views, the less so that we shall meet the most prominent of them in a later chapter among the eclectics. I shall mention only one peculiarly strong statement of the last-named writer, for the purpose of showing how great a hold the Productivity theory has in French economics at the present day, in face of all the socialist criticism. In his
Essai sur la Répartition des Richesses, the most important French monograph on the distribution of wealth—a book which has passed through two editions within two years—Leroy-Beaulieu writes, “Capital begets capital; that is beyond question.” And a little later he guards himself against being supposed to mean that capital begets interest only in some legal sense, or through the arbitrariness of laws: “It is so naturally and materially; in this case laws have only copied nature” (pp. 234, 239).

From the Italian literature of our subject I shall, finally, instead of a number of writers, only mention one; but his method of treatment, with its simplicity in form and its obscurity in substance, may be taken as typical of the Naïve Productivity theory—the much read Scialoja.
*22

This writer states that the factors of production, among which he reckons capital (p. 39), share with, or transfer to their products their own “virtual” or “potential” value, which rests on their capacity towards production; and that, further, the share which each factor takes in the production of value is itself the standard for the division of the product among the co-operating factors. Thus in the distribution each factor receives as much value as it has created; if, indeed, this share may not be fixed
a priori in figures (p. 100). In conformity with this idea he then declares natural interest to be that “portion” of the total profit of undertaking “which represents the productive activity of capital during the period of the production” (p. 125).

In turning now from statement to criticism, I must redistinguish between these two branches of the Naïve Productivity theory which I put together for convenience of historical statement. It has been shown that all the views already examined agree in making surplus value result from the productive power of capital, without showing any reason why it should be so. But, as I have shown in last chapter, beneath this agreement in expression there may lie two essentially different ideas. The productive power of capital referred to may be understood, in the literal sense, as Value Productivity, as a capacity of capital to produce value directly; or it may be understood as Physical Productivity, a capacity of capital to produce a great quantity of goods or a special quality of goods, without further explanation of the existence of surplus value, it being regarded as perfectly self-evident that the great quantity of goods, or the special quality of goods, must contain a surplus of value.

In stating their doctrine most of the Naïve Productivity theorists are so sparing of words that it is more easy to say what they may have thought than what they actually did think; and often we can only conjecture whether a writer holds the one view or the other. Thus Say’s “productive power” equally admits of both interpretations. It is the same with Riedel’s “productivity.” Scialoja and Kleinwächter seem to incline more to the former. Roscher, in his illustration of the abundant take of fish, rather to the latter. In any case it is not of much importance to determine which of these views each writer holds: if we submit both views to criticism, each will get his due.

The Naïve Productivity theory, in both its forms, I consider very far from satisfying the demands, which we may reasonably make on a theory purporting to be a scientific explanation of interest.

After the sharp critical attacks that have been directed against it from the side of the socialistic and the “socio-political” school, its inadequacy has been so generally felt, at least in German science, that in undertaking to prove this judgment I am almost afraid I may be thrashing a dead horse. Still it is a duty which I cannot shirk. The theories of which we are speaking have been treated with such a lack of thoroughness and such hastiness of judgment that, as critic, I must at least avoid a similar blunder. But my chief reason is that I mean to attack the Naïve Productivity theory with arguments which are essentially different from the arguments of socialistic criticism, and seem to me to go more nearly to the heart of the matter.

To begin with the first form.

If we are expected to believe that interest owes its existence to a peculiar power in capital directed to the creating of value, the question must at once force itself upon us, What are the proofs that capital actually possesses such a power? An unproved assurance that it does so certainly cannot offer sufficient foundation for a serious scientific theory.

If we run through the writings of the Naïve Productivity theorists, we shall find in them a great many proofs of a physical productivity, but almost nothing that could be interpreted as an attempt to prove that there is a direct value-creating power in capital. They assert it, but they take no trouble to prove it; unless the fact that the productive employment of capital is regularly followed by a surplus of value be advanced as a kind of empirical proof of the power of capital to produce value. Even this, however, is only mentioned very cursorily. It is perhaps put most plainly by Say, when, in the passage above quoted, he asks how capital could to all eternity produce an independent income, if it did not possess an independent productive power; and by Riedel when he “recognises” the productive power of capital in the existence of surpluses of value.

Now what is the worth of this empirical proof? Does the fact that capital when employed is regularly followed by the appearance of a surplus in value, actually contain a sufficient proof that capital possesses a power to create value?

It is quite certain that it does no such thing; no more than the fact that, in the mountains during the summer months, a rise of the barometer regularly follows the appearance of snow is a sufficient proof that a magic power resides in the Summer snow to force up the quicksilver—a naïve theory which one may sometimes hear from the lips of the mountaineers.

The scientific blunder here made is obvious. A mere hypothesis is taken for a proved fact. In both cases there is, first of all, a certain observed connection of two facts, the cause of the facts being still unknown and being object of inquiry. There are in both cases a great many conceivable causes for the effect in question. In both cases accordingly a great many hypotheses might be put forward as to the actual cause; and it is only one among many possible hypotheses when the rising barometer is accounted for by a specific power of the summer snow, or when the surplus value of products of capital is accounted for by a specific power in capital to create value. And it is all the more a mere hypothesis since nothing is known in other respects as to the existence of the “powers” referred to. They have only been postulated for the purpose of explaining the phenomenon in question.

But the cases we have compared resemble each other not only in being examples of mere hypotheses, but in being examples of bad hypotheses. The credibility of a hypothesis depends on whether it finds support outside the state of matters which has suggested it; and, particularly, whether it is inherently probable. That this is not the case as regards the naïve hypothesis of the mountaineer is well known, and therefore no educated man believes in the story that the rise of the column of quicksilver is caused by a mysterious power of the summer snow. But it is no better with the hypothesis of a value-creating power in capital. On the one hand it is supported by no single fact of importance from any other quarter—it is an entirely unaccredited hypothesis; and, on the other hand, it contradicts the nature of things—it is an impossible hypothesis.

Literally to ascribe to capital a power of producing value is thoroughly to misunderstand the essential nature of value, and thoroughly to misunderstand the essential nature of production. Value is not produced, and cannot be produced. What is produced is never anything but forms, shapes of material, combinations of material; therefore things, goods. These goods can of course be goods of value, but they do not bring value with them ready made, as something inherent that accompanies production. They always receive it first from outside—from the wants and satisfactions of the economic world. Value grows, not out of the past of goods, but out of their future. It comes, not out of the workshop where goods come into existence, but out of the wants which those goods will satisfy. Value cannot be forged like a hammer, nor woven like a sheet. If it could, our industries would be spared those frightful convulsions we call crises, which have no other cause than that quantities of products, in the manufacture of which no rule of art was omitted, cannot find the value expected. What production can do is never anything more than to create goods, in the hope that, according to the anticipated relations of demand and supply, they will obtain value. It might be compared to the action of the bleacher. As the bleacher lays his linen in the sunshine, so production puts forth its activity on things and in places where it may expect to obtain value as its result. But it no more creates value than the bleacher creates the sunshine.

I do not think it necessary to collect more positive proofs in support of my proposition. It appears to me too self-evident to require them. But it is perhaps well to defend it against some considerations that at first sight—but only at first sight—seem to run counter to it.

Thus the familiar fact that the value of goods stands in a certain connection, though not a very close or exact connection, with the cost of their production, may give the impression that the value of goods comes from circumstances of their production. But it must not be forgotten that this connection only holds under certain assumptions. One of these assumptions is usually expressly stated in formulating the law that value depends on cost of production; while the other is usually tacitly assumed—neither of them having anything at all to do with production. The first assumption is that the goods produced are
useful; and the second is that, as compared with the demand for them, they are
scarce, and continue scarce.

Now that these two circumstances, which stand so modestly in the background of the law of costs, and not the costs themselves, are the real and ruling determinants of value, may be very simply shown by the following. So long as costs are laid out in the production of things which are adequately useful and scarce—so long, therefore, as the costs themselves are in harmony with the usefulness and scarcity of the goods—so long do they remain in harmony with their value also, and appear to regulate it. On the other hand, so far as costs are laid out on things which are not useful enough or scarce enough—as, say, in the making of watches which will not go, or the raising of timber in districts where there is naturally a superfluity of wood, or the making more good watches than people want—the value no longer covers the costs, and there is not even the appearance of things deriving their value from the circumstances of their production.

Another plausible objection is this. We produce, it may be, in the first instance, goods only. But since without the production of goods there would be no value, it is evident that in the production of goods we bring value into the world also. When a man produces goods of the value of £1000, it is quite evident that he has occasioned the existence of £1000 of value which would never have existed without the production; and this appears to be a palpable proof of the correctness of the proposition that value also comes into existence through production.

Certainly this proposition is so far correct, but in a quite different sense from that which is here given it. It is correct in the sense that production is
a cause of value. It is not correct in the sense that production is
the cause of value—that is to say, it is not correct in the sense that the complex of causes entirely sufficient to account for the existence of value is to be found in the circumstances of production.

Between these two senses lies a very great distinction, which may be better illustrated by an example. If a corn-field is turned up by a steam plough, it is indisputable that the steam plough is one cause of the grain produced, and at the same time is one cause of the value of the grain produced. But it is quite as indisputable that the emergence of value on the part of the grain is very far from being fully explained by saying that the steam plough has produced it. One cause of the existence of the grain, and at the same time of the value of the grain, was certainly the sunshine. But if the question were put why the quarter of corn possessed a value of thirty shillings, would anybody think it an adequate answer to say that the sunshine produced the value? Or when the old problem is put, whether ideas are innate or acquired, who would decide that they were innate from the argument that, if man were not born there would be no ideas, and that, consequently, there is no doubt that birth is the cause of the ideas?

And now to apply this to our present problem. Our productivity friends are wrong because they over-estimate their claim to be right. If they had been content to speak of a value-creating power of capital in the sense that capital supplies
one cause of the emergence of value, there would have been nothing to object to. Next to nothing indeed would have been done towards explaining surplus value. It would only be stating explicitly what scarcely required to be stated at all; and in the nature of things our theorists would have been compelled to go on to explain the other and less obvious part—causes of surplus value. Instead of that, they imagine that they have given
the cause of the existence of value. They assume that, in the words, “Capital, in virtue of its productive power, creates value or surplus value,” they have given such a conclusive and complete explanation of its existence that no further explanation of any kind is needed, and in this they are grievously mistaken.

But from what has been said another important application may be drawn, and I give it here, although it is not directed against the Productivity theory. What is right for the one must be fair for the other; and if capital can possess no value-creating power because value is not “created,” on the same ground no other element of production, be it land or be it human labour, possesses such a power. This has escaped the notice of that numerous school which directs the sharpest weapons of its criticism against the assumption that land or capital have any value-creating power, only with greater emphasis to claim that very power for labour.
*23

In my opinion those critics have only overturned one idol to set up another in its place. They have fought against one prejudice only to take up a narrower one. The privilege of creating value belongs as little to human labour as to any other factor. Labour, like capital, creates goods, and goods only; and these goods wait for and obtain their value only from the economical relations which they are meant to serve. The fact that there is a certain amount of legitimate agreement between quantity of labour and value of product has its ground and reason in quite other things than a “value-creating” power in labour; in things which I have already suggested—of course in the most cursory way—in speaking of the incidental connection of value and costs. Labour does not and cannot give value.

All these prejudices have been a deplorable hindrance to the development of theory. People were misled by them into settling with the most difficult problems of the science much too easily. If the formation of value was to be explained they followed up the chain of causes a little way—often a very little way—only to come to a stop at the false and prejudiced decision that capital or labour had created the value. Beyond this point they gave up looking for the true causes, and made no attempt to follow the problem into those depths where we first meet with its peculiar difficulties.

To turn now to the second interpretation that may be given to the Naïve Productivity theory. Here the productive power ascribed to capital is, in the first instance, to be understood as Physical Productivity only; that is a capacity of capital to assist in the production of more goods or better goods than could be obtained without its help. But it is assumed as self-evident that the increased product, besides replacing the costs of capital expended, must include a surplus of value. What is the force of this interpretation?

I grant at once that capital actually possesses the physical productivity ascribed to it—that is to say, by its assistance more goods can actually be produced than without it.
*24 I will also grant—although here the connection is not quite so binding—that the greater amount of goods produced by the help of capital has more value than the smaller amount of goods produced without its help. But there is not one single feature in the whole circumstances to indicate that this greater amount of goods must be worth more than the capital consumed in its production,—and it is this phenomenon of surplus value we have to explain.

To put it in terms of Roscher’s familiar illustration, I at once admit and understand that, with the assistance of a boat and net, one may catch thirty fish a day, where without this capital one would only have caught three. I admit and understand, further, that the thirty fish are of more value than the three were. But that the thirty fish must be worth more than the proportion of boat and net worn out in catching them, is an assumption which, far from being self-evident, we are not in the least prepared for by the presuppositions of the case. If we did not know from experience that the value of the return to capital was regularly greater than the value of the substance of capital consumed, the Naïve Productivity theory would not give us one single reason for looking on this as necessary. It might very well be quite otherwise. Why should a concrete capital that yields a great return not be highly valued on that account—so highly that its capital value would be equal to the value of the abundant return that flows from it? Why,
e.g. should a boat and net which, during the time that they last, help to procure an extra return of 2700 fish, not be considered exactly equal in value to these 2700 fish? But in that case—in all physical productivity—there would be no surplus value.

It is remarkable that, in certain of the most prominent representatives of the Naïve Productivity theory, there are to be found statements which would lead us to expect such a result, viz. the absence of a surplus value. Some of our authors directly teach that the value of real capital has a tendency to adapt itself to the value of its product. Thus Say writes (
Traité, p. 338) that the value of the productive funds springs from the value of the product which may come from them. Riedel in § 91 of his
National-Oekonomie lays down in detail the proposition that “the value of means of production”—therefore the value of concrete portions of capital—”depends substantially on their productive ability, or on a capacity assured them, in the unchanging principles of production, to perform a greater or less service in the producing of material values.” And Roscher says in § 149 of the
Principles: “Moreover land has this in common with other means of production that its price is essentially conditioned by that of its product.”

What then, if, in accordance with these views, the value of real capital accommodates itself entirely to the value of the product, and becomes quite equal to it? And why should it not? But in that case where would be the surplus value?
*25

If then surplus value be actually bound up with the physical productivity of capital, the fact is certainly not self-evident; and a theory which, without a word of explanation, takes that as self-evident has not done what we expect of a theory.

To sum up. Whichever of the two meanings we give to the expression “productive power,” the Naïve Productivity theory breaks down. If it asserts a direct value-creating power in capital, it asserts what is impossible. There is no power in any element of production to infuse value immediately or necessarily into its products. A factor of production can never be an adequate source of value. Wherever value makes its appearance it has its ultimate cause in the relations of human needs and satisfactions. Any tenable explanation of interest must go back to this ultimate source. But the hypothesis of value-creating power is an attempt to evade this last and most difficult part of the explanation by a quite untenable assumption.

If, however, the writers we are discussing understand by productivity, merely physical productivity, then they are mistaken in treating surplus value as an accompanying phenomenon that requires no explanation. In assuming that it is self-explanatory, and contributing no proof to the assumption, their theory leaves out the most important and difficult part of the explanation.

It is, however, very easy to understand the strong adherence given to the Naïve Productivity theory in spite of these defects. It is impossible to deny that at the first glance there is something exceedingly plausible about it. It is undeniable that capital helps to produce, and helps to produce “more.” At the same time we know that, at the end of every production in which capital takes part, there remains over a “surplus” to the undertaker, and that the amount of this surplus bears a regular proportion to the amount of capital expended, and to the duration of its expenditure. In these circumstances nothing really is more natural than to connect the existence of this surplus with the productive power that resides in capital. It would have been wonderful indeed if the Productivity theory had not been put forward.

How long one remains under the influence of this theory depends on how soon one begins to reflect critically on the meaning of the word “productive.” So long as one does not reflect, the theory appears to be an exact representation of facts. It is a theory which, one might say with Leroy-Beaulieu, “N’a fait ici que copier la nature.” But when one does reflect, this same theory shows itself to be a web of dialectical sophistry, woven by the misuse of that ambiguous term, “Productive Surplus Result” of capital.

That is why the Naïve Productivity theory is, I might say, the predestinated interest theory of a primitive and half-matured condition of the science. But it is also predestinated to disappear so soon as the science ceases to be “naïve.” That up till the present day it is so widely accepted is not a matter on which modern political economy has any reason to congratulate itself.