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The criticisms directed against the various theories of Interest in the former work may be briefly summarised as follows. The Productivity theories—those which, more or less explicitly, attribute the existence of interest to the productive power of capital—are dismissed as confusing quantity of product with value of product, either in the way of tacitly assuming the identity of the two, or of failing to show any necessary connection between them.

The problem of capital is a problem of surplus value, and value does not come from the side of production but from the side of consumption. Capital is productive, but interest is not its product. The Use theories, which are more or less scientific expansion of the familiar formula, "Interest is the price paid for the use of capital," are shown to base interest, which is notoriously an income obtained from all kinds of capital, on an analogy drawn from one special kind of capital, viz.

The idea that the use of capital is something distinct from the using-up of capital, and interest something different from the price of the principal, becomes untenable when the true economic nature of the "good" is understood as the sum of its material uses or services. If consumption is only a single exhaustive use, and use only a prolonged consumption, the payment for "use" of Capital must be included in the price of capital.

Lastly, the Socialist or Exploitation theory, which makes interest simply a gain from exploited labour, is shown to be a theory which could only arise on the negative basis of the unsatisfactory accounts hitherto given, and on the positive basis of a mistaken value theory.

When an income obtained without work and without risk was claimed as the reward of abstinence, and when all value was ascribed to the action of material labourers, it was inevitable that there should rise a reactionary theory proving that interest was robbery. Thus the board was swept clean for the Positive Theory. A translator who does his duty must pass the work he renders through his own mind.

The necessity this imposes on him of understanding his author, and getting at his point of view, should make him peculiarly sensitive to certain difficulties which are not removed by simple translation. Modes of thought, arrangement, manner of working, may remain foreign. A translator's preface, then, is not without justification if it anticipates some of the questions that are sure to arise in the minds of readers more accustomed, perhaps, to English economics.

Economic science being based on an analysis of the industrial life, the first question in a theory of capital is one of terminology: What does the practical world mean, and what has it hitherto meant, by the word Capital? Here we find in common acceptance not one but two conceptions, both based more or less on Adam Smith's old distinction between National Capital and Individual Capital.

It is quite necessary for scientific progress that the exact distinction between these two conceptions should be fully recognised, but it would be useless to refuse the name to either of them: the practical world would not follow us. On looking closer at the two, however, we can see that one of the conceptions really includes the other, and that the difficulty may be avoided by adding an appropriate predicate to each.

Taking as basis the old root idea of "an interest-bearing sum of money," we may define capital in its widest sense or Acquisitive Capital , as the complex of products destined to the Acquisition of goods. Under this, as narrower category, we put the conception that came later in time. Thus we happily preserve in both conceptions the popular idea of "income bearing": society as a whole can only obtain an income by "producing" new wealth, while the individual may "acquire" it as well by the transfer of old wealth.

By these definitions Land and Labour are excluded from capital. They have certain analogies, even close analogies, with it, but scientific accuracy is not gained by making definitions so wide as to conceal really discrepant elements. The definition of Social Capital also excludes the Maintenance of Labourers; for, obviously, to include the direct and most obvious means of living would be to take away all possibility of distinguishing between capital and consumption wealth.

The subject, then, naturally divides itself into two parts:—Capital in the narrower, but more widely important, meaning of the Instrument of Production, and Capital as the Source of Income.

First, of the Instrument of Production. In the economical world man finds himself a being of infinite want, confronted with a universe full of potential wealth but with no tools except hands and brains to give him possession of it. Incapable of creating anything, he yet finds himself endowed with a power of moving things, which, as he masters the secrets of nature's working, gradually enables him to imprison, impress, or suspend the action of her powers, and so make her his servant.

In various concrete ways he adapts or rearranges nature—never, of course, changing her laws or acting contrary to them, but varying the causal connection of natural processes in such a way that, to a large extent, he remakes the natural world to suit his purposes. Thus, between man and his natural environment there gradually grows up a third term, a machinery for the fuller satisfaction of man's life, and to this, in general terms, we give the name Capital.

But, however the growth of wealth and industry disguise the fact, in all production of wealth there are only two original forces at work, nature's powers and man's powers. Human powers, as always limited, and as always put forth "at the cost of" brain or tissue, are all "economic"; but in the great treasury of natural forces there are some powers so universal in their scope and working that they do not enter into calculations of cost. As we say, using two phrases whose full significance we do not always realise, we do not "economise" the free gifts of nature—they "cost" us nothing; although they enter into the operations of all production, they do not enter into "economic" consideration.

The original factors of production, then, are man and nature: the strictly economic factors of production are labour and those natural forces called by metonymy Land which are limited and capable of being monopolised. But Capital, however much credit it gets and deserves for its work in present-day production, is no independent factor alongside of these.

In one aspect it may be called "stored-up labour," in another—and more truly—"natural force stored up by labour"; but in capital itself, alike in its origin and in its working, there is nothing that is not accounted for by the other two factors. We say, in its origin and its working, and it is advisable to emphasise that these are distinct things. The origin of capital is due to two factors, Industry and Saving, both being indispensable. It should be noted, however, that what is saved is not capital but productive power.

The primitive labourer works overtime, produces a surplus subsistence, and spends it in making tools: his saving is saving of strength to make tools. The modern worker produces a surplus over his subsistence: gives that over to banks and other agencies to be spent in building factories, erecting machinery, etc. But when we know the origin of capital, we have still to ask: What is the nature and character of the production carried on by means of capital?

The answer may be put in the following way. The aim of production is essentially the making or procuring of a living.

The animal finds a certain provision spontaneously offered it in nature; goes straight toward that provision; and never gets beyond it. Man, on the other hand, even in the simplest state, takes an indirect course.

He allies natural with his own still natural forces; and he gets behind these natural forces, setting them against each other, or co-operating with each other in carrying out his instructions.

He steals fire from heaven, and turns it against the gods. The end is always the consumption good—the good which exhausts itself in ministering to man's life in its higher and lower forms; the factors are always labour and nature; but the way in which the end is reached is here indirect, lengthy, and roundabout.

From the rude spade, which the savage first uses as a medium between his bare hands and the fruits or roots he lives on, down to the many years' production process stretching between the sinking of the shaft for coal or iron and the flying shuttles turning out the cloth which finds its goal in covering bare backs, is simply an evolution of the roundabout method. The course of economic progress puts increasing intervals between preparatory and finishing labour, decreasing the stock by increasing the tools; and at every new stage labour embodies itself in further intermediate products or capital.

The characteristic result is twofold. As we should expect from the accumulation and concentration of natural forces, this capitalist method is immensely productive as compared with direct or unassisted labour.

On the other side, however, is to be put the sacrifice of Time necessarily involved in the indirect process. The relation of these two aides must be carefully noted.

As time plays a greater part in production—as the average period is extended—the absolute productiveness of the capitalist process increases, but the relative productiveness decreases. That is to say: when the process has reached a certain point, it becomes subject to a law of diminishing returns.

The function, then, of capital in production may be said to be that of allowing labour and natural powers to work out their economic effects in processes that take time, or the utilisation of natural forces in roundabout methods. Or, if we adopt the peculiarly modern view that man is the economic Ziepulnkt, we may say that capital gives time to labour to avail itself of those powers of nature which become available only at a considerable sacrifice of time. So much for the function of capital, and one is apt to jump to the conclusion that, having shown how capitalist industry produces a great quantity of products as compared with unassisted labour, the sole and sufficient origin of interest has been indicated.

A little consideration will show that we are yet on the threshold of that inquiry. These are the transformed shapes of raw and auxiliary materials, machinery generally, and labour; and the price realised for them repays the outlay on materials, keeps up the machinery, and pays the wages—including all the wages of intellect. But beyond the repaying of all these costs it is a familiar fact that, in normal production, the prices realised leave a surplus.

This surplus is not accounted for by profits, although often confused with them. Profit is either employer's wage and is thus already included , or it is the chance of a happy conjuncture that allows a higher price to be obtained than is normal—which chance is continually being levelled down by competition.

But this surplus is recognised as something due to the owner of capital without claim of personal work from him, and it is a surplus of value which competition cannot wipe out. It is not a payment for the labour embodied in concrete capital, for that labour is presumably fully paid for—say, by the machine maker to his men and to himself—and does not warrant a further continuous payment. It is not a payment for the working of natural forces embodied in the machine, for the value of the machine consists in nothing else than in the working of these forces, and in the price is already paid all the forces that the machine will put forth and mediate.

And it is not wear and tear, nor is it insurance against risk, for in all normal undertakings these are provided for by separate replacement and insurance funds.

For proof of these statements I must refer the reader to that book, or the brief summary of it in the preface. What must be emphasised here is that the explanation of capital as the Instrument of Production is exhausted when it is shown that it allows nature and labour to work out their effects in lengthy processes The source of interest will not be found simply within the sphere of production, for the reason that interest is a problem of surplus value, and value takes us into the sphere of distribution.

Thus we come to the next division of the present work, Capital as it appears in the sphere of Distribution, or Capital as the source of the income called Interest. The most obvious fact here is that the payment of interest has some very definite connection with the time when payment is made.

This suggests the general question: What is the place and influence of time on the value of goods. And the answer is: It is an empirical fact of undoubted universality that present goods are valued more highly than future goods of like kind and amount.

For this three causes may be given. First, is the difference between the circumstances of want and the provision for want in present and in future. In any case, if want is pressing and provision is scarce, value is high.

But the pressure of want in the present is always with us, while as regards provision in the future it is generally true omne ignotum pro mirifico. Thus present goods obtain a permanent importance from felt present wants, and future goods a permanent unimportance from anticipated future provision.

Most men, accordingly,—people in immediate distress and beginners of all sorts being types—are willing to pledge their future for a really inadequate present sum. Second, is the general underestimate of the future, common to humanity, and traceable to want of imagination, defect of will, or feeling of life's uncertainty.

Children and savages are typical of the improvidence which is more or less striking in all classes. It may be that this cause is not on the same level with the first, and tends to less importance with social progress. But, in the world as it is, it is certain that the things of the future are of less value to us simply because they are future.

And, third, is the technical superiority of present goods. As we have already seen, in the hands of labour wealth increases enormously with the extension in time of the production process. Goods available now have accordingly the promise and potency of being greatly multiplied in the future, while goods coming into our disposal only in the future must undergo another period of production before the same abundance is reaped. Of these three causes the first two are cumulative, the second alternative.

The first group alone would account for a difference in value between present and future goods: the appearance of the latter makes the difference not only apparent but measurable. If, then, from so many aides and classes—from the young who expect to be better off, from the rich and improvident who wish to enjoy the present, from the industrious who wish to add to their wealth; that is to say, from probably the majority of mankind—there comes an underestimate of the future compared with the present, it is easily explained why, as a rule, present goods have a greater value than future goods of like kind and amount.

In this empirical and psychological fact, for the full treatment of which the reader is referred to Book V. The simplest case of interest is that in which it appears in the loan for consumption.

Here we have a real and true exchange of a smaller amount of present money, or present goods, for a larger amount of future money or goods. The sum returned, "principal" plus interest, is the market valuation and equivalent of the "principal" lent. This Agio on present goods is interest.

In other words, interest is a complementary part of the price; a part equivalent of the "principal" lent. In this simple case interest is more evidently the result of the first two causes just mentioned. Apart altogether from an organised system of production this agio would emerge, and has emerged, as something claimed by the saving from the unthrifty.


The Positive Theory of Capital

The text of this edition is in the public domain. Picture of Eugen v. Samuels Portrait Collection at Duke University. The criticisms directed against the various theories of Interest in the former work may be briefly summarised as follows. The Productivity theories—those which, more or less explicitly, attribute the existence of interest to the productive power of capital—are dismissed as confusing quantity of product with value of product, either in the way of tacitly assuming the identity of the two, or of failing to show any necessary connection between them. The problem of capital is a problem of surplus value, and value does not come from the side of production but from the side of consumption. Capital is productive, but interest is not its product.


Eugen von Böhm-Bawerk

He served intermittently as the Austrian Minister of Finance between and He also wrote a series of extensive critiques of Marxism. After completing his studies in , he entered the Austrian Ministry of Finance, holding various posts until , when he became qualified as a Privatdozent of political economy at Vienna. The following year, however, he transferred his services to the University of Innsbruck , where he remained until , becoming a professor in The Austrian system at the time taxed production heavily, especially during wartime, which resulted in huge disincentives to investment. After a second brief period in the position, after his third appointment to the post he remained in it from to

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