Capital and Interest

CHAPTER II

THE LATER FRUCTIFICATION THEORY

I HAVE pointed to the wide spread of eclecticism as a symptom of the unsatisfactory position of the economical doctrine of interest. Our economists select elements out of many theories, when and because no one of the existing theories is found sufficient.

A second symptom that points in the same direction is the fact that, in spite of the great number of existing theories, there is no check to the literature of the subject. Ever since scientific Socialism brought scepticism to bear on the old school of opinions there has been no lustrum, and in the latter lustrum no year, in which some new interest theory has not seen the light of day. So far as these have retained at least some principles of the older explanations, and have varied them only in the way of carrying out the original principles more strictly, I have tried to classify them according to the prevailing tendencies they show, and have included them in the statement of preceding chapters.

But some recent attempts strike out a way of their own,1 and one of them seems remarkable enough to call for fuller notice,—that of the American writer, Henry George. From its likeness in fundamental ideas to Turgot’s Fructification theory, it may be appropriately called the Later Fructification theory.

George’s2 interest theory occurs in the course of a polemic against Bastiat and his well-known illustration of the lending of the plane. A carpenter James has made a plane for his own use, but lends it for a year to another carpenter William. At the end of the year he is not content with getting back an equally good plane, because this would not compensate him for the loss of the advantage he might have had from the use of the plane during the year, and on that account he asks in addition a new plank as interest. Bastiat had explained and justified the payment of the plank by showing that William obtains “the power which exists in the tool to increase the productiveness of labour.”3 This explanation of interest from the productivity of capital George does not consider valid, for various reasons which do not concern us here, and then proceeds as follows: “ And I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters—that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes—that interest would be but the robbery of industry, and could not long exist. . . . But all wealth is not of the nature of planes or planks, or money, nor is all production merely the turning into other things of the inert matter of the universe. It is true that if I put away money it will not increase. But suppose instead I put away wine. At the end of a year I will have an increased value, for the wine will have improved in quality. Or suppose that in a country adapted to them I set out bees; at the end of a year I will have more swarms of bees, and the honey which they have made. Or supposing, where there is a range, I turn out sheep, or hogs, or cattle; at the end of the year I will, upon the average, also have an increase. Now what gives the increase in these cases is something which, though it generally requires labour to utilise it, is yet distinct and separable from labour—the active power of nature; the principle of growth, of reproduction, which everywhere characterises all the forms of that mysterious thing or condition which we call life. And it seems to me that it is this that is the cause of interest, or the increase of capital over and above that due to labour.”

The fact that, for the utilisation of the productive forces of nature, labour also is necessary, and that, consequently, the produce of agriculture, for instance, is in a certain sense a produce of labour, is not sufficient to obliterate the essential difference that exists, according to George, between the different modes of production. In such modes of production as consist “merely of changing the form or place of matter, as planing boards or mining coal, labour alone is the efficient cause. . . . When labour stops production stops. When the carpenter drops his plane as the sun sets, the increase of value which he with his plane is producing ceases until he begins his labour again the following morning. When the factory bell rings for closing, when the mine is shut down, production ends until work is resumed. The intervening time, so far as regards production, might as well be blotted out. The lapse of days, the change of seasons, is no element in the production that depends solely on the amount of labour expended.” But in the other modes of production “ which avail themselves of the reproductive forces of nature time is an element. The seed in the ground germinates and grows while the farmer sleeps or ploughs the fields.”4

So far George has shown how certain naturally fruitful kinds of capital bear interest. But, as every one knows, all kinds of capital, even those that are naturally unfruitful, produce interest. George explains this simply from the efficiency of the law of equalisation of profits. “No one would keep capital in one form when it could be changed into a more advantageous form…. And so in any circle of exchange the power of increase which the reproductive or vital force of nature gives to some species of capital must average with all; and he who lends or uses in exchange money or planes or bricks or clothing, is not deprived of the power to obtain an increase any more than if he had lent, or put to a reproductive use, so much capital in a form capable of increase.”

To return to Bastiat’s illustration: the reason why William at the end of the year should return to James more than an equally good plane, does not rest in the increased power “ which the tool gives to labour,” for “that is not an element … but it Springs from the element of time—the difference of a year between the lending and return of the plane. Now if the view is confined to the illustration, there is nothing to suggest how this element should operate, for a plane at the end of the year has no greater value than at the beginning. But if we substitute for the plane a calf, it is clearly to be seen that to put James in as good a position as if he had not lent, William at the end of the year must return not a calf, but a cow. Or if we suppose that the ten days’ labour had been devoted to planting corn, it is evident that James would not have been fully recompensed if at the end of the year he had received simply so much planted corn, for during the year the planted com would have germinated and grown and multiplied; so, if the plane had been devoted to exchange, it might during the year have been turned over several times, each increase yielding an increase to James…. In the last analysis the advantage which is given by the lapse of time springs from the generative force of nature and the varying powers of nature and of man.”

The resemblance of all this to Turgot’s Fructification theory is obvious. Both start with the idea that in certain kinds of goods there resides, as a natural endowment, the ability to bring forth an increment of value; and both demonstrate that, under the influence of exchange transactions and the efforts of economic men to get possession of this most remunerative fructification, the endowment must artificially become the general property of all kinds of goods. They differ only in that Turgot places the source of the increment of value quite outside of capital, in rent-bearing land, while George seeks it inside the sphere of capital, in certain naturally fruitful kinds of goods.

This difference avoids the weightiest objection that we had to urge against Turgot. Turgot had left unexplained how it is possible to purchase, for a relatively small sum of capital, land which yields successively an infinite sum of rent, and to secure the advantage of an enduring fructification for unfruitful capital. With George, on the other hand, it seems to need no proof that unfruitful wealth is exchanged in equal ratio with fruitful. For since the latter can be produced in any quantity at will, the possibility of increasing the supply of such goods will not permit of their enjoying a higher level of price than the unfruitful goods that cost as much to produce.

On the other hand, George’s theory is open to two other criticisms, which are, I think, decisive.

First, the separation of production into two groups, in one of which the vital forces of nature form a distinct element in addition to labour, while in the other they do not, is entirely untenable. George here repeats in a somewhat altered form the old mistake of the physiocrats, who would not allow that nature co-operates in the work of production except in one single branch of it, agriculture. The natural sciences have long ago told us that the co-operation of nature is universal. All our production rests on the fact that, by the application of natural forces, we put imperishable matter into useful forms. Whether the natural power of which we avail ourselves in this be vegetative or inorganic, mechanical or chemical, makes no difference whatever in the relation in which natural power stands to our labour. It is quite unscientific to say that, in production by means of a plane, “ labour alone is the efficient cause.” The muscular movement of the man who planes would be of very little use if the natural powers and properties of the steel edge of the plane did not come to his assistance. Is it even true that, on account of the character of plank planing as a “ simple change of form or place of the material,” nature in this case can do nothing without labour? Can we not fasten the plane into an automatic machine, and get it driven by the force of a stream; and will not the plane, untiring, continue the production even when the carpenter sleeps? What more does nature do in the growing of grain?

Second, George has not explained that prior phenomenon of interest by which he seeks to explain all the other phenomena. He says all kinds of goods must bear interest because they can be exchanged for seed-corn, cattle, or wine, and these bear an interest. But why do these bear an interest?

Many a reader will perhaps think, at the first glance, as George himself evidently thinks, that it is self-evident. It is evident that the ten grains of wheat, into which the one grain has multiplied itself, are worth more than the one grain of wheat that was sown; that the grown-up cow is worth more than the calf out of which it grew. Only it would be well to consider that it is not a matter of ten grains simply growing out of one grain. The action of cultivated land, and a certain expenditure of labour, have had a share in it. And that ten grains are worth more than one grain + the action of the ground and + the labour expended, is obviously not self-evident. Just as little is it simply self-evident that the cow is worth more than the calf + the fodder which it has consumed during its growth + the labour which its rearing demanded. And yet it is only under these conditions that interest can fall to the share of the grain of wheat, or to the calf.

Indeed, even in the case of wine which improves in lying, it is not by any means self-evident that the wine which has grown better is of more value than the inferior and unripe wine. For in our method of valuing the goods which we possess we follow unhesitatingly the principle of anticipating future use.5 We do not estimate the value of our goods according to the use—at least we do not value them only according to the use—which they bring us at the moment, but also according to that use which they will bring us in the future. We ascribe to the field, which for the moment lies useless in fallow, a value with regard to the crop which it will bring ns by and by. We give a value even now to the scattered bricks, beams, nails, clamps, etc., which bring us no use when in that condition, in consideration of the use they will afford us when put together at some future time in the shape of a house. We value the fermenting must, which, as such, we cannot make any use of, because we know that by and by it will be serviceable wine. And so might we also value the unripe wine, which we know will become excellent wine after lying, by the amount of use which it will give us as matured wine. But if we ascribe to it here and now a value corresponding to that future use, there remains no room for an increase of value, and for interest. And why should we not?

And if we do not ascribe such a value, or not quite such a value, the cause is certainly not to be found, as George imagines, in the productive powers of nature which the wine possesses. For that there are vital forces of nature in the fermenting must, which in itself is even hurtful, or in the unripe wine, which of itself is of little use; and that these vital forces tend to the furnishing of a costly product, can, in the nature of things, only afford a ground for valuing the goods which contain these precious forces at a high figure, not at a low one. If, nevertheless, we value them at a relatively low figure, we do it not because of their containing useful natural forces, but in spite of it. The surplus value of the products of nature, which George appeals to, is therefore not self-evident.

George makes one attempt to explain this surplus value, though it must be called a very lame one. He says that time, as well as labour, constitutes an independent element in its production. But is this really an explanation, or is it an evasion of the explanation? How comes the person who throws a seed of corn into the earth to get compensation, out of the value of the product, not only for his labour but also for the time that the seed has lain in the ground and grown? Is time then the object of a monopoly? Such an argument almost tempts one to recall the naïve words of the old canonist, that time is a good common to all, to the debtor as to the creditor, to the producer as to the consumer.

Of course George did not mean time, but the vegetative powers of nature actually working during time. But how should the producer manage to get himself paid for these vegetative forces of nature by a special surplus value in the product? Are, then, these natural powers objects of a monopoly? Are they not rather accessible to every man who owns a seed of corn? And cannot every one put himself in possession of a seed of corn? Since the production of seed-corn can be indefinitely augmented by labour, would the amount of corn not be steadily increased so long as a monopoly of the natural forces immanent in the grain made its possession appear peculiarly advantageous? And would not, on that account, the supply inevitably increase till the extra profit due to that monopoly was absorbed, and the production of corn became no more remunerative than any other kind of production?

The careful reader will note that in this discussion we have come back into the same groove of ideas into which we were brought by our criticism of Strasburger’s Productivity theory.6 In this part of his work George has under-estimated the interest problem in the same way as Strasburger did, only to a greater extent and with still greater naïvety. Both hastily conclude that the powers of nature are the cause of interest. But Strasburger at least made an attempt to investigate exactly the alleged causal connection between the two, and to follow it out in detail. George, on the contrary, gives us nothing but assertions which take for granted that, in certain productions, time is an “ element.” It is certainly not in this superficial way that the great problem is to be solved.

7 By desire of the author I here omit, as of little interest to English readers, a statement and criticism of Schellwien’s theory (Die Arbeit und ihr Recht, Berlin, 1882, p. 195, etc.), which occupies pp. 477-486 of the German edition.—W. S.

8 Progress and Poverty. Kegan Paul, 1885.

9 Capital et Rente. See above, p. 289.

10 Parallel with the “vital forces of nature,” according to George, works also “the utilisation of the variations in the forces of nature and of man by exchange.” This too leads to “an increase which somewhat resembles that produced by the vital forces of nature “ (p. 129). But I need not here enter into a more exact exposition of this somewhat obscure element, since George himself ascribes to it only a secondary rôle in the origination of interest.

11 See my remarks on “Computation of Wealth “ in Rechte und Verhältnisse, p. 80, etc.

12 See above, p. 178.

• 1This consideration of itself suggests the indefmiteness of what is usually called Undertaker’s Profit. In the Limited Liability Company this “ wage of intellect “ is measured and paid, but the varying dividend shows that it by no means exhausts this “profit.” The solution probably is that the attempt to assess undertaker’s wage on any principle is hopeless in present circumstances. It is a “ glorious risk,” depending, among other things, on adroitness, foresight, opportunity, and exploitation of labour—four factors scarcely reducible to figures. But with this line of thought, interesting and important as it is, we have nothing to do here.
• 2See Endemann, Grundsätze, pp. 9, 21.
• 3See the striking passage on pp. 134, 135.
• 4Quarterly Journal of Economics, April 1889.
• 5Kapitalzins. The word “Interest” in English does not require any addition.—W. S.
• 6“Es heisst Mietlioder Pachtzins, wenn das überlassene Kapital aus dauerbaren Gütern bestand. Es heisst Zinsen oder Interessen, wenn das Kapital aus verbrauchlichen oder vertretbaren Gütern bestand.” I have translated the passage to suit our English usage of the words. The adjective “vertretbar” (for which the legal “fungible” is the only equivalent) indicates that the thing lent is not itself given back, but another of the same kind. Grain and money are the typical fungibles.—W. S.
• 7The question now is, Is such a dividend pure interest? Here we have to reckon with the familiar fact that limited companies, under similar conditions, pay the most various rates of dividend. If then we accept “dividend” as the equivalent of “interest” we shall have to conclude that varying rates of interest are obtainable on equal amounts of capital. On looking closer, however, we find the dividing line again reasserting itself. If a sound industrial company is known to be paying a dividend higher than a certain definite percentage on its capital, the value of the stock, or parent capital, will rise to the point where dividend corresponds to an interest no greater than this definite percentage—e.g. the £100 stock of a great railway paying 5 per cent will rise to something like £125, at which price the 5 per cent dividend on the original capital shows a return of 4 per cent on the new value of the capital.
• 8THE canon doctrine of interest had to all appearance reached its zenith sometime during the thirteenth century. Its principles held almost undisputed sway in legislation, temporal as well as spiritual. Pope Clement V, at the Council of Vienna in 1311, could go so far as to threaten with excommunication those secular magistrates who passed laws favourable to interest, or who did not repeal such laws, where already passed, within three months. Nor were the laws inspired by the canon doctrine content with opposing interest in its naked and undisguised form; by the aid of much ingenious casuistry they had even taken measures to prosecute it under many of the disguises by which the prohibition had been evaded. Finally, literature no less than legislation fell under the sway of the canon doctrine, and for centuries not a trace of opposition to the principle of the prohibition dared show itself.
• 9But the fact is that, in all this, we have an entire misconception of the origin of value. Value cannot come from production. Neither capital nor labour can produce it. What labour does is to produce a quantity of commodities, and what capital co-operating with labour usually does is to increase that quantity. These commodities, under certain known conditions, will usually possess value, though their value is little proportioned to their amount; indeed, is often in inverse ratio. But the value does not arise in the production, nor is it proportional to the efforts and sacrifices of that production. The causal relation runs exactly the opposite way. To put it in terms of Menger’s law, the means of production do not account for nor measure the value of products; on the contrary, the value of products determines and measures the value of means of production. Value only arises in the relation between human wants and human satisfactions, and, if men do not “value” commodities when made, all the labour and capital expended in the making cannot confer on them the value of the smallest coin. But if neither capital nor labour can create value, how can it be maintained that capital employed in production not only reproduces its own value, but produces a value greater than itself?
• 10In concluding, I should like to say with Dr. James Bonar—that, while it would be bold to affirm that Professor Bòhm-Bawerk has said the last word on the theory of Interest, his book must be regarded as one with which all subsequent writers will have to reckon.
• 11The income that flows from capital, sometimes called in German Bent of Capital, we shall simply call Interest.
• 12The owner of capital, however, frequently prefers to give up the chance of obtaining this natural interest, and to hand over the temporary use of the capital to another man against a fixed compensation. This compensation bears different names in common speech. It is called Hire, and sometimes Rent (in German Miecthzins and Pachtzins) when the capital handed over consists of durable or lasting goods. It is generally called Interest when the capital consists of perishable or fungible goods. All these kinds of compensation, however, may be appropriately grouped under the name of Contract interest or Loan interest.