Online Library of Liberty: Capital, Interest, and Rent

form of contract and payment. The new industrial, capitalistic, and money economy was developing rapidly, but had not become dominant as it is to-day. Even such city men as Ricardo were so under the influence of the old ways of thought that the real difference between these two kinds of economic conceptions could not be clearly seen by them. Rent as a return to natural resources seemed a different kind of return, with a different source, from interest as a return to city wealth, so evidently the work of man's hands, whose value was so easily transferable, and whose return always took the money expression. They never doubted that they were taking the same point of view as they looked at the two factors, two shares, two economic laws, that seemed so essentially different. In fact they were taking two different points of view, one of the 16th and one of the 19th century, and were thus finding contrasts and distinctions which corresponded, not with reality, but with their own shifting modes of thought. The enormous development recently of capitalistic enterprise, the marketing of every form of natural resource by means of shares and bonds, the expression in money form of the value of nearly every kind of wealth and the decline of the agricultural and extractive industries in relative social and economic importance, have made this unconscious confusion of mediaeval and modern viewpoints in economic theory an increasing hindrance to clear and practical thinking. In order to be suited to the discussions of an age that is increasingly industrial, the capital concept must be unified and cleared of its feudal elements.

THE SCARCITY FACTOR THEN AND NOW.

The old rent concept also is found to be inadequate in this age of rapid growth of industrial corporations which enjoy some public franchise or peculiar economic situation, of large industry exercising a power on prices over areas and periods more or less extended, and of multiplying trusts and monopolies. The theorists of a century ago, looking on value from the cost-of-production standpoint, thought of monopoly as a rare thing, due generally to political favor, and almost negligible in ordinary economic discussion. The contribution and value of land, the only exception to the law of labor value that was quite obvious to them, was accounted for by “the law of rent.” Now when our economic growth is bringing to our attention every day new instances of the influence of scarcity on value, often by social changes outside the control of the one who gains by them, often by the capitalists’ own manipulations, it can no longer be ignored that the coat of economic theory is a bad misfit. It is in Hibernian phrase, too long at one end and too short at the other. The rent theory explains so much that it is not true in one direction, and in the other it does not explain at all. This difficulty worried even Ricardo, it caused Mill a deal of anxiety, and industrial developments have made it greater every year. There is no solution short of a new terminology. The Ricardian law of rent is being relegated by industrial development to the curiosity shop of outgrown economic theories.

SOME PROPOSITIONS.

These are some of the difficulties. In order that the suggestions as to the kind of work to be done in the next decade may be specific, and may serve as a basis for thought

Online Library of Liberty: Capital, Interest, and Rent

and discussion, some propositions expressed or implied in the foregoing paragraphs may be recapitulated.

1. The concept of capital must be given an importance in economic theory corresponding to the dominant place of capitalistic enterprise in present industrial affairs.

5.The concept must be re-defined so as to correspond more closely with commercial usage and the needs of practical discussion.

6.The conventional division of the factors of production is illogical, and must be abandoned. This involves a re-study of many problems and a re-writing of large portions of economic literature.

4.The old idea of rent as a payment for a gift of nature must be rejected; it is questionable whether the later tendency to extend the term rent to every differential gain will prove to be a fortunate development.

5.The labor theory of value and the notion of labor units as in some way usable for a standard of value, are persistent errors which vitiate a large part of current economic discussion, and must be completely thrown aside.

6.The doctrines of rent and interest as currently taught are hopelessly entangled in these old and illogical distinctions. The two forms of return for material goods must be considered as differing in modes of calculation, not as to kinds of agents and as kinds of return.

RESTATEMENT OF THE OBJECTS OF THIS PAPER.

The object of this paper may now be restated as follows:

1.To account rationally for the conviction that has been growing among economists that economic terminology is in an unsatisfactory state.

2.To show the necessity of rewriting the theory of distribution along radically new lines.

3.To reduce the mental friction and waste of social energy that must accompany the acceptance of doctrines, a readjustment of which is shown to be inevitable.

4.To indicate specifically the direction which the new doctrines must take, the points at which energy of thought may most effectively be applied.

Online Library of Liberty: Capital, Interest, and Rent

[Back to Table of Contents]

Review Of Böhm-Bawerk, Capital Und Capitalzins

It is over sixteen years since the first edition of this work was published, and nearly eleven since the English translation appeared. The great activity in economic and social studies which has marked the intervening period has been due in large measure to the rapid industrial changes that have been in progress; but if one book is to be named more than any other as influencing and stimulating to the abstracter studies, as furthering the philosophic analysis of economic questions during this period, it is this book to which the honor must be given. Its importance lay not so much in the conclusions it reached, for it was almost entirely historical and critical, as in its method of acute analysis, its example of tireless research and scholarship, and its awakening of thought. Even the remarkable second and companion volume, The Positive Theory of Capital, does not surpass it in these regards. The later volume, though much more widely read and discussed, and arousing a keener interest in the student, owes to the earlier critical volume much of the air of authority and scholarship which are its strength and its charm.

In the case of a work that is so well known it is unnecessary to dwell on the parts that remain unchanged. Interest will center

around the alterations and additions. The author says of these in the new preface: “The changes are not important. They are limited to a few improvements in the composition and the correction of a few errors that had been overlooked. On the other hand I have had occasion to make copious additions, increasing by more than a third the size of the book.” On every essential question the author's views remain unchanged. The additions count up 192 pages, of which 23 are in the new preface, 54 are in the added section on John Rae, 25 are in the discussion of Marx's third volume and the controversy connected with it, and 90 are in the new concluding chapter entitled “Contemporary Literature on Interest.” Some clew to the activity of economic discussion in the various countries may be found in the Autoren-Register. There are 88 names that did not appear in the first edition, distributed by nationalities as follows: Germans, 25; Americans, 16; Italians, 14; English, 12; Austrians, 4; Norwegians, 4; Swedes, 3; Dutch, 3; Danes, 2; Swiss, 2; French, 2; Russian, 1. Grouping these by languages it is seen that 35 per cent. write in German, 32 per cent. in English, 6 per cent. in Italian, 10 per cent. in Scandinavian, 3.5 per cent. in Dutch, 2 per cent. in French, and 1 per cent. in Russian. But this alone is not a fair test of the relative attention given to them by Böhm-Bawerk. Many of the authors are merely mentioned, or are cited in a footnote, as is the case with all but those writing in English or German. As to the text additions it is not easy to determine what justly should be credited to each group. Rae is spoken of by the author as a Canadian, but John Stuart Mill refers to him as “a Scotchman settled in the United States.” His book was published in Boston in 1834, and its recent prominence is due to Mr. Mixter's essay in the Quarterly Journal of Economics on “A forerunner of Böhm-Bawerk.” It would seem that America might claim him. Macvane receives a page, Walker two, and Carver nine, a total of 66 pages to America. The English writer singled out for attention is Marshall, to whom in preface and text 29 pages are given. The German writers receive 67 pages, nearly half turning immediately about the belated volume of

Online Library of Liberty: Capital, Interest, and Rent

Marx, and much of the rest connected with the old discussion of surplus value. Omitting thirty other pages, not assignable to special writers or countries, it appears that 42 per cent. of the additions are devoted to German writers and 58 per cent. to writers of English, of which America has 41 per cent. and England 17 per cent. This is a showing that may well justify a little harmless pride if it represents at all fairly the relative activity of economic studies in the different lands. The exceptional length of the section given to Rae, a forgotten author of earlier date, it may well be said, invalidates any such claim for America; but, on the other hand, it may be said that the German additions are in large measure given to Marx's posthumous book, that there is a strong tendency for an author to exaggerate the importance of the writers in his own language, and finally that the most important of American contributions, probably the most important of all recent contributions, to the interest problem, those of Fisher and Clark, not to mention several others, are barely referred to. It is hard to reconcile oneself that so much energy has been wasted in refuting trite eclecticism, when original and farreaching contributions by these Americans are all but passed in silence.

Amends may be made for this, however, in the revision of The Positive Theory of Capital, which is promised at an early date. This will be looked forward to with interest none the less keen because of the difficulties in which the author is sure to find himself. The movement of economic thought is rapidly leaving behind it the concept of capital with which Böhm-Bawerk works. It is not to be expected that the able author will change his point of view, but to the task of meeting objections and eluding the charges of inconsistency he will bring that remarkable acuteness and ability which he has shown himself in these volumes to possess.

Online Library of Liberty: Capital, Interest, and Rent

[Back to Table of Contents]

Review Of Böhm-Bawerk, Einige Strittige Fragen Der

Capitalstheorie

This little group of essays, dedicated to the “true friends of theory,” is a reprint of three articles which appeared during 1899 in the Zeitschrift fur Volkswirtschaft, Socialpolitik und Verwaltung. The author's object, as he explains, is not to present any new theory of capital or interest or to make any changes in the one which he had before presented, but rather to examine more carefully some questions of detail in the doctrine of capital that are essential for the solution of the main question. Of the five distinguishable subjects discussed, the four less important ones comprise the last third of the pamphlet and may be first mentioned.

The author maintains that the confusing of interest, the return of capital, with the earnings of the entrepreneur, as is done by Philippovich, is a step backward away from clear thinking and a clear economic terminology. He refutes Dietzel's idea that there must be, not one, but several theories of interest—that in turn, or according to the particular problem, the abstinence, the productivity, the exploitation, the timevalue theory or others, must be employed. The author makes a telling criticism of this eclectic method of avoiding the real problem involved. He then replies to the objection made to his own theory by Philippovich, to the effect that it explains only a part of the cases of interest. And, finally, he criticizes the loose acceptance by Lexis of the

socialistic exploitation theory of interest, sharply and powerfully arraigning that sentimentality which has led many thinkers, especially in Germany, to concede validity to the socialistic theory of interest, while rejecting the reasoning on which alone rational validity can be demonstrated.

Let us turn now to the major theme of the essay—the nature of the roundabout process. Böhm-Bawerk's conception of the “average production period” as that period which elapses between the application of productive agents and their reward in the form of satisfaction, and his proposition that by roundabout methods a greater product can, as a rule, be attained, have been variously criticized and attacked. Especially the assaults of Lexis, called for a reply. In defense of his ideas, the author retraces much of the argument of his earlier works, developing and illustrating the thought in many details. He first clears away some misunderstandings, by defining the production period not as the absolute time that elapses from the first application of labor and capital until the securing of the enjoyment, but as the average length of the interval. As the main objection turns on the effect of inventions which shorten the various industrial processes, while giving a larger product, he considers at length the effect of inventions and improved processes. He concludes that they are dynamic factors that check, but do not reverse, the movement of the rate of interest, and maintains the truth of the general rule set forth in his theory. He returns to the same argument in the next division, maintaining that the greater productivity of the longer period can be shown both by observation and experience (pp. 43–52).

Online Library of Liberty: Capital, Interest, and Rent

He then turns to a different but related question, as to whether (pp. 51–63) the rate of interest is fixed in the whole range of industry or, as Lexis has maintained, in a particular branch of it. The same question appears under a slightly different aspect in this form: whether the different branches of trade have an essential effect on each other in the matter of the rate of interest. Böhm-Bawerk analyzes the methods by which the rate of interest and the successive uses of capital are equalized in the various lines of industry. From the standpoint of the author and that of Lexis, who apparently approaches the subject from the same side, this is a subtle and convincing piece of analysis. Its defects, viewed from a different standpoint, will be suggested below.

Finally, in this division Böhm-Bawerk vigorously resents the view that his notion of the production period and the length of the roundabout process is unsound, in that it deals with magnitudes practically not determinable. Admitting that it is impossible to measure the productive period, he says that this is equally true of many causes which must be recognized and reasoned about in the various sciences. He says it would be very pleasant and interesting to know all these facts, but that a lack of knowledge does not invalidate his theory. The details of the arguments presented cannot be discussed here, but it must be confessed that, despite the great ingenuity displayed, they leave the vague impression that somehow the real question has been evaded. Not a single concrete example has been given where an individual producer practically measures this period, whereas in the cases of cost of production and of the marginal buyer in market value, which Böhm-Bawerk adduces as strict analogies, there are clearly evident some points at which the magnitudes of satisfaction or cost, usually unmeasured, appear for a moment in concrete and measurable forms.

Considering as a whole the author's argument on the central theme, it can be called successful only in a negative way, as a refutation of various objections that have been made against it. The author has not advanced the solution of the problem, positively, a single step. Critics of the Positive Theory have frequently declared in effect that, while its author had ejected the productivity of capital from the front yard of his theory, he had opened to it the side door and had given it the freedom of the house. For what place are we to assign in the broad theory of interest to the “productiveness of the roundabout process”? Is it the main and fundamental, or is it only a supplementary and partial, explanation of the cause of interest? The essay under review certainly puts it in the central and leading place: it is the greater productiveness of labor when applied in a long and roundabout way which is the great and efficient cause of interest on capital. If that is not the impression left on the reader of this essay, and the one the author intends to leave, then we have missed its purpose. And yet this is out of harmony, first, with the author's own strong negative criticisms of productivity theories as affording only incomplete answers to the interest problem and, secondly, with his formal statement of the theory of interest as due to the difference between the value of present and that of future goods.

Let us venture to suggest very briefly an explanation of this appearance of wavering in the author's conclusion. Starting with a narrow concept of capital as composed of things produced by labor, he has not succeeded in escaping various of the old errors of the labor-value theory which he himself has elsewhere so successfully discredited.

Online Library of Liberty: Capital, Interest, and Rent

That concept suggests the thought that labor is put into the material form of capital to appear later as enjoyment. Some cases may be found in seeming support of this view, but others that clearly forbid it. When or in what way will the labor expended in digging the Isthmian canal become enjoyment? There will be an annual yield of enjoyment, but the “principle,” or result of the labor, is, as John B. Clark has strongly emphasized, an abiding thing, never to be used up. Again, Böhm-Bawerk recognized before he concluded his Positive Theory that the capitalization of land is only another aspect of the interest problem, yet his productive period or roundabout process has no validity there. Indeed, his capital concept is a cost-of-production concept and does not make possible a consistent explanation of the theory of interest or the capitalization of scarce agents—“natural” means of production. The period of production seems plausible when illustrated by examples of capital thought of as “previous labor” (see Strittige Fragen, pp. 11, 12, 17, et passim). An “average waiting time,” however abstract and unrelated to any practical calculation which business men make in determining investments, appears to be a possible thing, if capital can be reduced to applications of labor at various times, destined all to appear at a later moment in the form of consumable goods. But when the problem of comparing present and future goods is thought of in the form of a balancing of present and future rentals, as is done in the case of capitalizing scarce natural agents, the fallacy is evident. Then there is no “round-aboutness” in the application of labor. There is neither a series of technical processes nor an application of labor which will mature as enjoyment at a later period. The rate of interest falls gradually, as future rents increase in value relative to present rents, and accordingly are discounted at a lower rate of interest. Great as have been the services of our author in stimulating to clearer and deeper thinking in economic theory, his presentation of a Capitalstheorie evidently is not destined to be a finality. Some development it is sure to undergo, and is undergoing. And that development clearly lies along the lines of a value concept, as opposed to a cost-of-production concept of capital.