Capital and Interest

ANALYTICAL TABLE OF CONTENTS

Introduction

The Problem of Interest

The phenomenon of an income flowing constantly from all kinds of capital, without personal exertion of the owner

The conditions of solution

The theoretical must be distinguished from the social and political problem. Characteristics of each

Danger of confounding the two; its common effects

Our task is the critical history of the theoretical problem

Preliminary definitions. Capital a “ complex of produced means of acquisition”

The difference between National and Individual capital

between Gross interest and Net interest

between Natural and Contract (or Loan) interest

Interest as distinguished from Undertaker’s Profit

Limitation of the subject to Interest proper

Book I

The Development of the Problem

Chapter I

The Opposition to Interest in Classical and Mediäval Times

Loan interest, or Usury, as evidently income without labour, was discussed long before Natural interest, where labour is always present, and is supposed to account for the income

The first period—a rather barren one, extending to the eighteenth century—is taken up with the struggle for and against usury

Dislike of interest shown in all undeveloped stages of industry

Hostility of the philosophic writers

Aristotle’s argument, that money does not breed

Thus far the question is only theoretical, interest being recognised as an established institution

Reaction under Christianity; victory of the Church over temporal legislation; prohibition of interest

The subject treated theologically till twelfth century, when begin appeals to the jus divinum, jus humanuni, and jus naturale

The explanation of this;—the vexatious pressure of the prohibition on industry, and the necessity for rational defence of it

Stock arguments of this period—

(1) The barrenness of money

(2) The consumability of money (Thomas Aquinas)

(3) The Use transferred with the capital

(4) The selling of Time, a good common to all

But the prohibition did not apply to profit made by personal employment of capital

Chapter II

The Defence of Interest from the Sixteenth Till the Eighteenth Century

Zenith of the prohibition in the thirteenth century

The struggle of practical life. Direct exceptions to the prohibition; evasions of it. The “ interesse”

The effect on theory. Compromise of the reformers with the “ parasitic profit”

Rise of direct opposition to the prohibition

Calvin rejects authority, and dismisses the rational arguments, but does not unreservedly allow interest

Molinaeus; his scholastic review and criticism of the canon arguments; his conclusions and concessions

Calvin and Molinaeus, however, stand almost alone in the sixteenth century

Besold an able follower of Molinaeus

Bacon sees in interest an economical necessity, but only tolerates it

In the seventeenth century there is great development of theory, especially in the mercantile Netherlands. Grotius theoretically condemns interest

but practically allows it. A few years later the tide fairly turns with Salmasius

Salmasius’s argument;—if the Commodatum is allowable, so also is the Loan. To the objection founded on the perishable nature of goods, he answers : (1) that such an argument would prevent the lending of perishable things even without interest, and (2) that the perishableness is another argument for interest

Character of his writings

His works mark high water for a hundred years

In Germany after the seventeenth century there is not much question about the legitimacy of interest

Justi says nothing about it. Sonnenfels, who has nothing good to say of it, ridicules the canon doctrine and the prohibition

In England the prohibition was removed before the theoretic question emerged. Hence the only debated question was as to legal fixed rates of interest

Thus Culpepper, Child, North

Locke goes deeper into the subject. Money, he admits, is barren, but interest is justified; for, owing to bad distribution, one has land which he cannot use, and another has capital, and interest for the one is as fair as rent for the other

Locke’s real importance, however, lies in the idea kept in the background, that all wealth is made by labour. Thus also Steuart

Hume on the connection between profit and interest

By the time of Bentham (1787) the canon doctrine is only a subject for ridicule

In Italy the legal prohibition was quite inoperative

But before the eighteenth century there appeared no theoretical defence of interest

Galiani’s pregnant idea (1750). From the analogy of bills of exchange, he argues that present sums of money are worth more than future sums of similar amount, and that interest represents the difference

But he ascribes this to the different degree of their security, and so makes interest a mere insurance premium

Beccaria. In France legislation and theory held by the canon doctrine long after it was abandoned elsewhere. Pothier

Fanatical opposition of the elder Mirabeau

Finally, Turgot gave the canon doctrine its coup-de-grace

Summary of the Mémoire

Critical retrospect. The canon had said that interest was a defrauding of the borrower; for (1) money is barren, and (2) there is no separate use of it. The new doctrine said (1) money is not barren when the owner, employing it himself, can make a profit by it, and (2) there is a use of capital separable from capital itself

In short, it explained Loan interest from Natural interest, but did not go on to ask the meaning of Natural interest

All the same it was no small gain that the question was now formally put, Why can a man, employing his own capital, make a profit?

It was not long before a part of employer’s profit was seen to be an income sui generis

Chapter III

Turgot’s Fructification Theory

The reason why Contract interest was first studied

Scientific research now replaced the outside motive. The Economists: Quesnay, De la Rivière

Turgot’s argument—the possession of land guarantees rent. But land may be priced in capital, and so every capital becomes the equivalent in value of a piece of land. Capital must therefore bear as much profit as land bears rent; otherwise all forms of industry would be abandoned for agriculture

This, however, is arguing in a circle. Land is priced by discounting its future uses; calculating so many years’ purchase at the customary rate of interest. Rent and interest then are forms of the one phenomenon which we are investigating

Chapter IV

Adam Smith and the Development of the Problem

Adam Smith has no distinctive theory of interest

His principal suggestion—its necessity as an inducement to the productive employment of capital

His contradictory accounts of its origin (1) in an increased value of products over the labour value, (2) in a curtailment of wage

While Adam Smith is thus neutral, these suggestions formed the germs of later theories

The growth of capital and the antagonism of capital and labour soon made neutrality impossible, and compelled discussion of interest as income obtained without work

Hence the appearance of a number of interest theories

Division of the subject. The various interest theories as answers to the central question: Why is Surplus Value a constant phenomenon of capitalist production?

CHAPTER V

THE COLOURLESS THEORIES

Sartorius, Lueder, Kraus, Hufeland, Seuter, Politz, Murhard, Schmalz, Cancrin.

Count Soden on interest as diverted from the product of labour.

Lötz makes the capitalist’s sole claim replacement of his expenses;

but this would not be sufficient inducement to the productive employment of capital; hence the necessity of interest

Insufficiency of this illustrated from rent

Jakob, Fulda, Eiselen, Rau

Ricardo’s account—

(1) Of the origin of interest—the inducement to productive employment of capital

(2) Of the rate of interest. As result of his rent theory, profit and wage together are determined by the return to the worst land in cultivation

But wages being determined by the “Iron Law,” profit is the remainder. And as more unfavourable cultivation is resorted to, the decreasing product leaves less to profit

But profit cannot disappear, otherwise accumulation would cease, and wealth and population would be checked

In this Ricardo has neglected the constant causes which prevent the absorption of profit by wage;

for the weakening of the motives of accumulation may prevent resort to land which yields too small a profit

(3) Of the connection between profit and value. Profit as paid out of increased price. Inconsistency of this with the “Labour principle”

Torrens, arguing against Malthus, declares profit a surplus, not a cost; but says nothing as to its origin

M‘Culloch finds that value is determined by labour alone, capital being only the product of previous labour; includes profit among costs; and at the same time defines profit as a surplus

His absurd illustrations of the cask of wine; of the two capitals—in leather and wine; of the timber. General untrustworthiness

M’Leod sees no problem; considers profit self-explanatory and necessary

His faith in the formula of supply and demand

Garnier. Canard; “necessary” and “superfluous” labour

Possible agreement of Canard with Turgot’s theory

Droz makes saving an element of productive power, but devotes his attention chiefly to Contract interest

Book II

The Productivity Theories

Chapter I

The Productive Power of Capital

Apparent simplicity of the new explanation that Capital produces its own interest

Real ambiguity of the word “productive,” as (a) producing more goods, (b) producing more value

(a) Physical Productivity; Rvoscher’s illustration

(b) Value Productivity; its two possible meanings

Its usual meaning—Capital produces more value than it has in itself

Conspectus of the four interpretations of “ Capital is productive”

Danger of confusing these. The task assigned to productive power by the Productivity theories

Restatement of the problem as essentially a problem of Surplus Value

Surplus Value may conceivably be explained from productive power by ascribing to capital (1) direct creation of value; (2) direct creation of goods possessing surplus value, this value being assumed as self- explanatory; (3) direct creation of goods and indirect creation of surplus value

Corresponding to these explanations are three groups of theories : (1) The Naive Productivity theory; (2) the Indirect Productivity theories; (3) the Use theories

Chapter II

The NaÏve Productivity Theories

J. B. Say their founder

Nature, Labour, and Capital are the factors of wealth, and, like rent and wage, interest is the price of a Productive Service

Adapting the problem to Say’s terms we get two answers: (1) Capital directly creates surplus value, and takes that as its payment (thus making it a production problem); (2) the Service must be paid and prices must rise to cover the payment (thus a distribution problem)

The development after Say

Schön and Riedel consider it self-evident that Capital must produce a “rent” or surplus

Roscher, wavering between Natural and Loan interest, co-ordinates the Productivity and the Abstinence theory

In France, Leroy-Beaulieu, in Italy, Scialoja, represent this theory

Criticism. Division of the theory into its two forms

The first form—that capital directly produces value—rests on the mere empirical observation that the employment of capital is followed by surplus value

But to find the origin of value in production involves an erroneous theory of value

For value corresponds with costs only as goods are useful and scarce;

and though production turns out valuable goods, it is not production that gives them value—it is a cause, not the cause

An application: if value does not arise in production, the other factor of production, labour, cannot confer it

The second form—that the increased product must contain a surplus of value over the capital consumed—is by no means self-evident

Why should not the value of the capital rise to the value of its product, and surplus value vanish?

Summary: failure of this theory in either form to explain Value, and therefore Surplus Value

It connects the undeniable fact that capital is productive, and that products of capitalist industry, as a rule, have value, with the phenomenon of surplus value which also appears in capitalist production, and capital is made the cause of surplus value

Chapter III

The Indirect Productivity Theories

These theories do not assume as self-evident that surplus value is bound up with increased quantity of products, but give reasons why it should be so. The conflicting accounts of these reasons, however, necessitate individual statement and criticism

Lauderdale finds the source of profit in the power of capital to supplant labourers and appropriate their wage

The familiar fact of such profit being usually less than such wages he explains by reference to competition

But the share thus proved to go to capital is not interest at all, but gross return to capital; and no proof is offered that net interest must remain after deduction of tear and wear

True, if there is no saving of labour there is no profit; but it is as true that if there is no labour there is no profit

Malthus correctly states the nature of profit as the difference between the value of the advances and the value of products, but omits to ask the cause of this constant difference

His most important contribution to the subject is the formal inclusion of profit among the Costs of Production—

a crude recognition of the fact, afterwards recognised, that there is another sacrifice in production besides labour

He does not, however, measure the rate of interest by the amount of sacrifice, but by the level of wage on the one side, and the level of prices on the other;

Not asking why there is a constant difference between these two, and having, at the same time, no better explanation of the level of price than Supply and Demand

Carey, a confused and blundering writer

His illustration of the axes

In which he confuses (1) gross use with net use; (2) the capitalist’s proportion of the total return to capitalist production with the rate of interest; i.e. confounds the return to capital with capital itself

Peshine Smith repeats all Carey’s blunders with more than Carey’s deliberation

Thünen, a most careful investigator

His genetical account of the growth of capital, origin of interest, and rate of interest

In which we find (1) labour, assisted by capital, obtaining a greater amount of products; (2) this surplus composed of net interest and replacement of capital consumed; (3) this excess production falling to the capitalist; and (4) this plus of products regularly possessing a value greater than that of the real capital consumed

But no proof is offered for this last proposition, which assumes that capital has the power to reproduce its own value and leave something over

Now (1) why should not the value of capital rise till it becomes equal to the value of its products; or (2) why should not competition of capitals increase till the claim of capital is reduced to its simple replacement?

Strasburger, writing in reply to Marx, defines profit as payment for natural powers, which, while in themselves gratuitous, are made available to production by capital only

But in actual life how does the capitalist get paid for natural powers? By selling the services of his capital at a higher price than the price of the labour embodied in the capital

This in three ways: (1) as Undertaker, getting a gross return greater than the value of the capital consumed; (2) as Hirer-out, getting a payment greater than the labour value; (3) as Seller of the capital itself, including all its services

But in this latter case also the natural powers here made available will raise the value of the capital above the payment of the labour which produced it. But if capital value rises proportionally with the value of its services (products), there is no interest, although natural powers have been paid for. If, on the other hand, competition presses down the capital value to the value of the labour embodied, it is evident there can be no claim for natural powers

All then that Strasburger proves is that command over natural powers may increase the gross return to capital above what was paid to produce the capital. But whatever raises the value of products will raise the value of capital, and no explanation is thereby given of the constant difference between capital and products, which is interest

Summary: interest is the difference between the minuend (product) and the subtrahend (capital consumed), and, as the value of capital is bound up with the value of its products, productive power can only affect the one as it affects the other, leaving the difference between them unchanged, and the question of interest untouched

Book III

The Use Theories

Chapter I

The Use of Capital

The growing recognition of the identity between value of product and value of means of production was bound to suggest that something had been overlooked among the sacrifices of production

The new theory found this in the Use as distinct from the Substance of capital

Relation of this to the Productivity theories

Chapter II

Historical Statement

Say’s ambiguous account of the Services of capital

Storch’s perverted explanation

Nebenius’s eclectic suggestions

Marlo’s brief epitome of Say

Hermann elaborates the fundamental conception of the independent “use” of goods. Distinguishing first between durable and transitory goods, he points out that the former, so long as they last, have a use which may be conceived as a good in itself, and may obtain an exchange value, called interest

But goods of transitory material, when combined and transformed by manufacture into durable goods, may also acquire this use. On this capability of affording an independent use he bases his conception of capital

In production, besides the sacrifices of existent wealth (material and tools), and besides labour (manual and intellectual), there is thus another sacrifice, the Uses of fixed and floating capital over the period of production. Immediately that any form of capital is engaged in production, the disposal of it in any other way is made impossible; it enters, with its exchange value, into the product, and is suspended till the sale of the product. Thus what is paid for in the product is not simply the renunciation of the immediate consumption of wealth, but a new use, consisting in the holding together of the technical elements of the product

Superiority of this to Say’s outline. Some inconsistencies Hermann’s views on the rate of profit. A product ultimately is a sum of labours and uses of capital. Thus all exchange is an exchange of labours and uses against other labours and uses, either direct or embodied in products. The rate of profit, then, depends on the amount of labours and uses obtainable for uses alone. If capital increases in amount more uses are offered, and the exchange value of use against use is unchanged; but, if labour is stationary, the exchange value of uses sinks in comparison with labour, and the rate of profit falls. If capital, again, increases in productiveness, the result is the same, except that, for their reduced profits, the capitalists receive more means of enjoyment than they formerly obtained for their high profit

Thus increasing productiveness lowers interest

This application of the Use theory to explain the rate of interest is certainly incorrect. What his argument proves is the relation between total profit and total wage; not between profit and parent capital

Hermann’s views on productivity

Bernhardi, Mangoldt, Mithoff

Schäffte has two conceptions of Use : in his Gesellschaftliche System, for the most part, we find the subjective conception, which connects it with the undertaker;

in his Bau und Leben, the objective uses are “functions of goods ” Knies, although at one time adopting Galiani’s conception of interest as part equivalent of parent loan,

of late years, in Geld und Kredit, conceives of the Use as quite distinct from the good itself, the “bearer of the Use,” and describes it as obtaining value—as all goods obtain value—by satisfying human needs

Menger, who represents the highest point of the Use theory, bases it on a complete theory of value. His great law: the value of goods of higher rank (means of production) is determined by the value of goods of lower rank (products)

How then is the value of the product always higher than the value of the means of production?

His answer : the production process requires the “disposal” over capital for periods of time. This disposal is, economically, the Use of capital; it enters, as an economic good, into the value of the product, and is the source of value. Interest is thus a distribution, not a production problem

Chapter III

Plan of Criticism

The theses to be proved are : (1) that there is no independent use of capital as assumed; (2) that, if there were such a use, it would not explain interest

Chapter IV

The Use of Capital According to the Say-Hermann School

Uncertainty in the various accounts given of the use. Definitions of Say, Hermann, Knies, Schäffle

These definitions, in correspondence with popular usage, are divisible into two conceptions—a subjective and an objective. Obviously it is the latter alone which corresponds with the character of the Use theory

What then is the objective use of goods?

Chapter V

The True Conception of the Use of Goods

The character of material “goods,” as distinct from material “things,” is that, in them, the working of the natural powers inherent in all matter permits of being directed to human advantage

The function of goods, then, consists in the forth-putting of their available energy, and the use of goods consists in the receiving of useful results from this forth-putting of energy

This is strictly an economic as well as a physical conception; its application in regard to “ideal” goods

Material Services (Nutzleistungen) an appropriate name for this function of goods

Inferences from this conception. Every economic “good” must be capable of rendering material services, and ceases to be a good on the exhaustion of this capability

But the number of services which a good may render varies. Perishable goods exhaust themselves at a single use; durable goods only by successive acts or continuous service

In virtue of this the single use, or definable period of service, obtains economic independence apart from the body of the good, which remains capable of further uses

Finally, as material services constitute the economic substance of goods, it follows that the economic essence of the transfer of a good is the transfer of all its services, and that the value of a good contains the value of all its services

Chapter VI

Criticism of the Say-Hermann Conception

The Use of capital, according to this conception, is not identical with what we call Material Services. Its use is the basis of net interest; ours of gross interest (in the case of durable goods) or the basis of the entire capital value (in the case of perishable goods)

No use of goods other than their Material Services is conceivable

either in durable goods (illustration of the mill) or in perishable (illustration of the coals)

This will best be proved by showing that any other kind of use (1) is an unproved assumption, and (2) leads to untenable conclusions

Chapter VII

The Independent Use: An Unproved Assumption

“In all the reasoning by which the Use theorists thought they had proved the existence of this Use, an error or misunderstanding has crept in.” Say’s services productifs are nothing more than our Material Services, and cannot be the basis of net interest

So also Schäffie’s “ functions’’ of goods

Hermann introduces his independent use when speaking of durable goods—the use which does not exhaust the good that renders it, and is accordingly capable of independent valuation (note that this is a gross use, and its payment is not interest)

By analogy he finds a similar use in perishable goods, technically transformed into durable goods

But this analogy does not hold : durable goods are immediately “used” when successively giving forth a part of their content; perishable goods in each immediate use exhaust their entire content, and what Hermann calls a durable use in this latter case is a mediate use

Thus Hermann has drawn his parallel between the immediate use of a durable good and the mediate use of a perishable good

Knies goes carefully into the question of the existence of an independent use;

finds that there are economical transfers, where the intention is to transfer a use and retain the good that bears the use; and inquires if this does not hold also in the case of fungible goods

His illustration of the loan of corn

Where, by using Nutzung in a double sense, he actually assumes the very point at issue—that there can be a use (Nutzung) of grain separate from its consumption (Verbrauch)

Thus all the Use theorists first allude to the Material Services of capital, then note the successive services of durable goods as obtaining value independent of the good itself (the sum of the remaining services), and end by assuming a use and independent value in all goods, outside and independent of the use and value of the (undiminished) good from which they come

Chapter VIII

The Independent Use : Its Untenable Conclusions

The usual assumption of this theory is the existence of a gross Nutzung (basis of hire) and a net Nutzung (basis of interest). Yet Nutzung is always taken as synonymous with Gebrauch

But it is impossible to think of two simultaneous uses in every act by which a good renders its material services. If, then, the name of Use or Nutzung is rightly given to the gross use, what is this net use?

If it exists, it must be part of the gross use, and interest is paid for something contained in the gross use. Now the gross use of a meal is its consumption. But if we repay the meal on the moment of its consumption, we pay no interest; we only pay interest for the delay in replacing the meal. That is, we pay for something not contained in the gross use

Further absurdities involved

Summary of what has been proved

Chapter IX

The Independent Use : Its Origin in Legal Fiction

The need of fiction in jurisprudence

The first fiction here—of the identity between fungible goods lent and those returned

The second fiction—that the goods replaced had themselves been used and not consumed; hence usura, a durable use obtained from all goods

Under the attack of the canonists on interest generally

the fiction attained a new importance as apparently affording the sole defence of interest, and, thanks to Salmasius, the fiction was proclaimed a fact

Modern Political Economy turned this practical justification of interest into a theoretical one, and hence the Use theory

The mistake has lain in considering that £100 replaced now, is the full equivalent of £100 lent a year ago, and interest an extra payment

The true conception of the loan : it is a real exchange of present goods against future goods; the capital replaced plus interest is the full equivalent of the capital loaned

Chapter X

Menger’s Conception of Use

“ Disposal over goods for a period of time,” as an independent good

Its indirect proof: the existence of surplus value not otherwise accounted for

Insufficiency of this: (l) surplus value can be explained otherwise; (2) “disposal” for a period of time proved to have no existence beyond the capital value of goods

Chapter XI

Final Insufficiency of the Use Theory

Even if the independent use were admitted, it would not explain interest. For the explanation of surplus value as caused by a new element, the use of capital, necessarily assumes that the value of capital in itself does not contain the value of this use. This, however, is disproved by the familiar fact, that if, in selling a commodity, any of its future uses are retained, the capital value of the commodity is reduced

Thus the use of capital is contained in the loan of the capital, and cannot explain a surplus value greater than that capital

Book IV

The Abstinence Theory

Chapter I

Senior’s Statement of the Theory

The Labour Principle and its difficulties in accounting for interest. Is interest a wage for labour, or is it a cost of production alongside of labour?

Foreshadowings of the theory in Nebenius and Scrope

Senior. Abstinence from unproductive use of wealth a third element in production. Like labour and natural agents, it enters into the costs or sacrifices of production, and demands compensation

Chapter II

Criticism of Senior

Pierstorff’s estimate much too severe

Lassalle notwithstanding, the very existence of capital requires postponement of immediate consumption, and this is considered in price of products which cannot be obtained without postponement

Yet interest and sacrifice by no means invariably correspond

Principal defect of Senior’s theory : that he represents interest as an independent sacrifice in addition to labour-sacrifice

A concrete example: a rustic, choosing to fish instead of shoot or gather fruit, may estimate his sacrifice in terms, either of the labour undergone, or the gratification intermitted

It is the same if, instead of fishing, he devotes his labour to obtain future results; he cannot calculate the sacrifice of labour in addition to the sacrifice of abstinence

But must choose one or the other mode of calculation

This double calculation, however, is made by Senior

According to his theory, the sacrifice involved in a day’s planting of potatoes is a day’s labour plus a year’s abstinence, while a day’s harvesting of the same involves the sacrifice of a day’s labour only. But if the potatoes I sowed yesterday are eaten by deer overnight, is my sacrifice a day’s labour plus an infinite abstinence?

Speciousness of the argument. The misleading element is the consideration of time. Time is not a second independent sacrifice, but it determines the amount of the one sacrifice actually made. E.g. sacrifice, in the majority of economical cases, is estimated, not by (positive) pain, but by (negative) renunciation of alternative enjoyments

Not so, however, as regards the sacrifice of labour, where some amount of positive pain is always present. Yet, as a rule, in civilised communities the methods of labour are so various that sacrifice is not estimated by its pain, but by its alternative results. Now, of these results some are immediate, some take time; the attraction of a present over a future result of labour, increases the estimate of the sacrifice made by those who devote themselves to the distant result. The sacrifice in terms of labour is the same; in terms of alternative results it is calculated by the greater of the alternatives intermitted

Reasons for the popularity of this theory. Cairnes, Cherbuliez, Wollemborg, Dietzel

Chatter III

Bastiat’s Statement

Delay or Privation as a service demanding payment

His statement inferior to Senior’s in two respects—

(1) As confined to Contract interest, in the course of which he seems to suggest that the sacrifice spoken of is the sacrifice of the productive use, not the postponement of needs

(2) In confounding interest with replacement of capital

Book V

The Labour Theories

These Theories Agree in Explaining Interest as Wage of the Capitalist’s Labour

The English Group

Traces interest to that labour which produces capital

James Mill starts with the proposition that labour alone regulates value

And defines profit as wage of indirect labour

But as the labour formative of capital has been already paid, this must be an extra wage, and raises the question why such mediate labour should be more highly paid than immediate

The French Group

Courcelle’s conception of the Labour of Saving : the conservation of capital requires effort of intellect and will, which is so far painful, and the return to this labour is interest

Not to speak of this being merely another way of putting Senior’s theory, what correspondence is there between the painful exertion of intellect and will and the so-called wage?

And if interest is explained by these painful exertions, why does the borrower not get interest instead of paying it?

Cauwes, an eclectic follower of Courcelle

The German Group

Its origin in a remark of Rodbertus

expanded by Schäffle into the statement that interest is a remuneration for the office, now filled by private capitalists, of binding together production processes by means of capital

Wagner characterises the capitalist’s saving and disposing activities as labours, and constitutive elements of value

It is difficult to know whether these Katheder Socialists mean to give a theoretical explanation or a socio-political justification of interest

Difference between the two illustrated by a parallel case; land rent could not be explained by the original exertion of labour on the land

but might be justified as a political measure of expediency

Similarly, the permission of interest may possibly be the most effective means to the accumulation and employment of national capital, and this may be a sound reason for its maintenance by society, but the capitalist’s “labour” gives no economic explanation of what is, obviously, an income from ownership It is impossible to doubt that interest is not a wage for labour

Book VI

The Exploitation Theory

Chapter I

Historical Survey

The essence of the theory—the exploitation from the labourer, by means of the wage contract, of the wealth which he exclusively produces

An inevitable consequence of the Labour-value theory

Preceding developments—the acceptance of the Ricardian theory and the spread of capitalist production

Sismondi, the writer of a transition period,

states its main propositions,

but, illogically, justifies interest as founded on the original labour which produces capital

Proudhon : all value being produced by labour, the labourer has a natural claim to his entire product, but this he ignorantly gives up for a wage

and cannot buy even his own product at what it cost him

Rodbertus, a profound scientific investigator

Lassalle, the most eloquent but least original

Marx, the most important theorist after Rodbertus

Many writers adopt the Exploitation theory, but stop short at its consequences, as Guth and Dühring

Others add its ideas eclectically to their other theories, as James Mill and Schäffle

The Katheder Socialists, again, accept the proposition, Labour is the sole source of value—a proposition which has had a singular history in economic theory

Plan of criticism

Chapter II

Rodbertus

His starting-point : that goods, economically considered, are the products of labour alone

The labourers accordingly have a just claim to the whole product, or its value

But in the present system they receive only a part, the remainder going as rent (including land-rent, and profit)

Rent owes its existence to two facts : (1) that, thanks to the division of labour, each worker can produce a surplus; (2) that the indispensable conditions to labour—land and capital—are private property, this necessitating a wage contract, which virtually restores the original condition of labour, slavery

Thus all rent is exploitation, and under the iron law of wages its amount increases with the productivity of labour

His confused statement of the division of amount exploited between land-rent and profit

Nevertheless Rodbertus would not abolish rent and would regard it as the salary for a social function

Criticism : the first proposition, that all goods, economically considered, are products of labour alone (suggesting the question, What is meant by “economically considered?”)

is false, as proved by the fact that purely natural goods, if scarce, have economic value

The argument he advances, that labour is economically the only original power, and only original cost, implies that economy has nothing to do with other powers, or their results; this rests on a quite arbitrary and narrow conception of economic conduct

Lastly, the limitation of labour to material manual labour does not need serious confutation

But to confute this first proposition is not, as Knies considered, to refute Rodbertus’s entire interest theory

The second proposition, that the whole product or its value, should belong to the labourer who produces it, is, rightly understood, quite correct

But as Rodbertus explains it, he would have the labourer now receive the entire future value of the product

Illustration of the steam-engine. Supposing that its value when completed is £550

And that one labourer, working continuously for five years, produces the engine; the value of his first year’s wage is not a fifth part of the value the engine will have when finished, but a much less sum—say £100, which, with interest, will be the same as receiving £120 for his fifth year

But Rodbertus would have the value of the completed product spread proportionally over the five years of production, which would involve that the £550 was paid in two and a half years

Thus giving the individual labourer a value in wage which no undertaker could obtain for himself

The same illustration : assuming the work divided among labourers working successively

Dividing what they produce as wage, as before the first receives £100, the last £120

Assuming that the production is carried on under an outside undertaker, the labourers will receive exactly the same

The only undertaker that could make a higher wage payment is the State

But this would not be a fulfilling, but a violation of Rodbertus’s own proposition

The third proposition, that labour alone regulates value, overlooks Ricardo’s exception of those goods which require time for their production. But this exception really contains the chief feature in natural interest

To neglect that is to assume the validity of one fixed law of value, by simply ignoring that there are others

A fourth criticism : Rodbertus’s theory of land-rent is based on the statement that the amount of rent does not depend upon the amount of capital, but the amount of labour employed;

which would involve that capital bears a rate of profit varying from business to business

But Rodbertus himself lays down the law of the equalisation of profits under competition

This equalisation can only take place by alteration in the exchange value of products

(unless we suppose it effected by alteration in wage, which is contradictory both of experience and Rodbertus’s own iron law)

and in this case what becomes of his law—that goods exchange according to the labour incorporated in them?

Criticising the theory as a whole, even if it were granted that it explains the interest on that capital invested in wages, it will be found incapable of explaining interest on capital invested in materials; this is easily proved where capital is large and workers few, as in pearl-stringing

But most clearly by the good old illustration of the maturing wine

Chapter III

Marx

His fundamental proposition—that goods exchange solely according to the amount of labour spent in producing them. In exchange use-values are disregarded, and nothing remains to account for the equation of exchange but amount of labour

Value is measured by “ socially necessary labour time”

His statement of the problem : Money transformed into commodities retransformed into money, M—C—M’

This surplus value cannot originate in the circulation, nor yet outside of it

But among the commodities which the capitalist buys is one whose Use value is the source of Exchange value—Labour Power. The value of labour power is regulated, like other commodities, by the labour time necessary for its reproduction

The capitalist, buying it at this price, is able to appropriate all the value produced beyond this; i.e. in every minute over the “necessary labour time.” Illustration of the spinner. All surplus value then is unpaid labour

Compared with Rodbertus’s statement the most important point in Marx’s work is the attempt to prove that all value rests on labour

Adam Smith and Ricardo are generally claimed as authorities for this proposition, but on examination we shall find that they virtually did no more than assume it

Adam Smith, indeed, spoke of the equivalence of Value and Trouble, but with him it is merely a general remark, without any claim to scientific exactitude

Marx’s argument restated : (l) the common element in exchange; (2) this element is not the use value; (3) it can only be labour

As regards (2), the use value is never disregarded in exchange, but only the particular form the use assumes

As regards (3), is there no other possible common element, such as scarcity?

And in goods that exchange is there always labour?

But apart from deduction, experience only confirms the equivalence of labour and value in the case of one class of goods, and that a relatively insignificant one

Exceptions to the Labour principle—

(1) Scarce goods (including land and patented goods)

(2) Goods produced by skilled labour

(3) Goods abnormally badly paid

(4) Even where value and labour correspond, the labour value is only the gravitation point

(5) Goods that require greater advances of “previous” labour

Conclusions from these exceptions. Labour is one circumstanc that affects value—an intermediate not an ultimate cause

Ricardo knew this, but, underestimating the exceptions, spoke of the labour principle as if it were practically universally valid; it was his followers who formally gave it that extension. The Socialists not only declare that this law is universal, but demand the abolition of interest as contrary to it

Later on Marx falls into all Rodbertus’s mistakes, such as claiming for the labourer in the present the future value of his product

connecting exploitation and surplus value with wage capital alone, and neglecting to show how labour creates that value which accrues only in virtue of time

Causes of this theory’s popularity : (1) it appeals to the heart as well as to the head; (2) the weakness of its critics

Book VII

Minor Systems

Chapter I

The Eclectics

Reasons for eclecticism on the interest problem

Rossi uses Productivity and Abstinence theory alternately

Molinari, Leroy-Beaulieu, Roscher, Cossa

Jevons, finding the function of capital in enabling the labourer to expend labour in advance, makes interest the difference between the product of labour assisted and that of labour unassisted by capital

This is to identify surplus in products with surplus in value (Productivity theory), to correct which he reckons the capitalist’s abstinence among the costs of production (Abstinence theory)

His pregnant remarks on the effect of time on the valuation of anticipated pleasures and pains only excite our astonishment that he did not develop them into a systematic theory

Read hesitates among Productivity, Abstinence, and Labour theories

Gerstner, Cauwes

Garnier, Hoffmann

J. S. Mill includes profits among costs of production

and explains it not only by the Productivity and Abstinence theory, but by the Exploitation theory

Schäffle, in his earlier writings, follows Hermann’s Use theory; in the Bau und Leben makes interest a functional income (Labour theory); and resolves all costs of production into labour (which practically amounts to an Exploitation theory)

Chapter II

The Later Fructification Theory

Henry George’s variation of Turgot’s theory

Criticising Bastiat’s illustration, he indicates that the cause of interest is the active powers of nature,

distinct from labour as being operative while the labourer sleeps. That all forms of capital produce interest George explains by the equalisation of profits

Thus interest “springs from the element of time,” because during a year certain forms of capital produce fruit

This differs from Turgot’s theory chiefly in bringing the source of surplus value within the sphere of capital—finding it, not in land, but in certain naturally fruitful goods

Two decisive objections : (1) it is quite unscientific to say that the forces of nature are operative in one class of goods and not in another; (2) he does not think it necessary to show how certain naturally fruitful goods produce surplus value

over the value of labour and material consumed in co-operating with “ vital powers”

His one attempt at explanation of surplus value—that time constitutes an independent element in production—seems to involve that the vegetative forces of nature can be monopolised, this bringing us back to Strasburger’s Productivity theory

Conclusion

Looking at all this tangle of theories, can we find the line of development? Restatement of the problem as obviously a problem of distribution. What is it guides a portion of the stream of wealth into the hands of the capitalists? There are three distinct answers

(1) That there are three sources of value, Nature, Labour, and Capital, and that from each source flows to its owner the value which comes from that source. This is the Naive Productivity theory, which makes interest a production problem

(2) That the stream of wealth comes from labour alone, and is only diverted at its mouth by landlords and capitalists. This is the Exploitation theory, which makes it purely a distribution problem

(3) That there are two or three springs, but one stream, and under the influences which create value the stream branches, till it empties into three separate kinds of income. This makes it peculiarly a problem of value

As to (1), there is no power in any factor of production to create value; it is not a simple problem of production

As to (2), it is not first in the final distribution that a foreign element intrudes beside labour. The value of one good diverges from that of another according to the time required in production. The explanation of surplus value, then, is to be found in investigating the formation of value. The distribution in which products that require time as well as labour possess surplus value, is not to be explained by a snatch at the spoil, but by previous formations of value

lu order of merit, then, the Naive Productivity and the Exploitation theories stand lowest

They do not even see the problem, and they botli assume a theory of value which bases it on production

Next come those theories which use the external machinery of a theory of costs; this has the disadvantage of explaining surplus value without direct reference to the wants and satisfactions in which value arises

Highest stand those which recognise that interest is a problem of value, as in the higher forms of the Abstinence and Use theories, and particularly in Menger’s statement

The future work of interest theorists