Capital and Interest

CHAPTER II

THE NAÏVE PRODUCTIVITY THEORIES

THE founder of the Naïve Productivity theories is J. B. Say.

It is one of the most unsatisfactory parts of our task to state what are Say’s views on the origin of interest. He is a master of polished and rounded sentences, and understands very well how to give all the appearance of clearness to his thoughts. But, as a matter of fact, he entirely fails to give definite and sharp expression to these thoughts, and the scattered observations which contain his interest theory exhibit, unfortunately, no trifling amount of contradiction.

After careful consideration it seems to me impossible to interpret these observations as the outcome of one theory, which the writer had in his mind. Say hesitates between two theories; he makes neither of them particularly clear; but all the same the two are distinguishable. One of them is essentially a Naïve Productivity theory; the other contains the first germs of the Use theories. Thus, notwithstanding the obscurity of his views, Say takes a prominent position in the history of interest theories. He forms a kind of node from which spring two of the most important theoretical branches of our subject.

Of Say’s two chief works, the Traité d’ Economie Politique1 and the Cours Gomplet d’Economie Politique Pratique,2 it is on the former that we must rely almost exclusively for a statement of his views. The Gours Gomplet avoids suggestive expressions almost entirely.

According to Say all goods come into existence through the co-operation of three factors—nature (agents naturels), capital, and human labour power (faeulté industrièlle). These factors appear as the productive funds from which all the wealth of a nation springs, and constitute its fortune.3 Goods, however, do not come into existence directly from these funds. Each fund produces, first of all, productive services, and from these services come the actual products.

The productive services consist in an activity (action) or labour (travail) of the fund. The industrial fund renders its services through the labour of the producing man; nature renders hers through the activity of natural powers, the work of the soil, the air, the water, the sun, etc.4 But when we come to the productive services of capital, and ask how they are to be represented, the answer is less distinctly given. On one occasion in the Traité he says vaguely enough: “It (capital) must, so to speak, work along with human activity, and it is this co-operation that I call the productive service of capital.”5 He promises, at the same time, to give a more exact exposition later on of the productive working of capital, but in fulfilling this promise he limits himself to describing the transformations which capital undergoes in production.6 Nor does the Cours Complet give any satisfactory idea of the labour of capital. It simply says, capital is set to work when one employs it in productive operations (On fait travailler un capital lorsqu’un l’emploie dans des operations productifs), i. p. 239. We learn only indirectly, from the comparisons he is continually drawing, that Say thinks of the labour of capital as being entirely of the same nature as the labour of man and of natural powers. We shall soon see the evil results of the vague manner in which Say applies the ambiguous word “service” to the co-operation of capital.

There are certain natural agents that do not become private property, and these render their productive services gratuitously—the sea, wind, physical and chemical changes of matter, etc. The services of the other factors—human labour-power, capital, and appropriated natural agents (especially land)—must be purchased from the persons who own them. The payment comes out of the value of the goods produced by these services, and this value is divided out among all those who have co-operated in its production by contributing the productive services of their respective funds. The proportion in which this value is divided out is determined entirely by the relation of the supply of and demand for the several kinds of services. The function of distributing is performed by the undertaker, who buys the services necessary to the production, and pays for them according to the state of the market. In this way the productive services receive a value, and this value is to be clearly distinguished from the value of the fund itself out of which they come.7

Now these services form the true income (révenu) of their owners. They are what a fund actually yields to its owner. If he sells them, or, by way of production, changes them into products, it is only a change of form undergone by the income.

But all income is of three kinds, corresponding to the triplicity of the productive services; it is partly income of labour (Sprofit de l’industrie), partly land-rent (profit du fonds de terre), partly profit on capital (profit or révenu du capital). Between all three branches of income the analogy is as complete as it is between the different categories of productive service.8 Each represents the price of a productive service, which the undertaker uses to create a product.

In this Say has given a very plausible explanation of profit. Capital renders productive services; the owner must be paid for these; the payment is profit. This plausibility is still further heightened by Say’s favourite method of supporting his argument by the obvious comparison of interest with wage. Capital works just as man does; its labour must receive its reward just as man’s labour does; interest on capital is a faithful copy of wages for labour.

When we go deeper, however, the difficulties begin, and also the contradictions.

If the productive services of capital are to be paid by an amount of value taken out of the value of the product, it is above all necessary that there be an amount of value in the product available for that purpose. The question immediately forces itself on us—and it is a question to which in any case the interest theory is bound to give a decisive answer—Why is there always that amount of value? To put it concretely, Where capital has co-operated in the making of a product, why does that product normally possess so much value that, after the other co-operating productive services, labour and use of land, are paid for at the market price, there remains over enough value to pay for the services of capital—enough, indeed, to pay these services in direct proportion to the amount and the duration of the employment of capital?

Suppose a commodity requires for its production labour and use of land to the value of £100, and suppose that it takes so long to make the commodity that the capital advanced to purchase those services (in this case £100) is not replaced for a year, why is the commodity worth, not £100, but more—say £105? And suppose another commodity has cost exactly the same amount for labour and use of land, but takes twice as long to make, why is it worth, not £100, nor £105, but £110—that being the sum with which it is possible adequately to pay for the productive services of the £100 of capital over two years?9

It will be easily seen that this is a way of putting the question of surplus value accommodated to Say’s theory, and that it goes to the very heart of the interest problem. So far as Say has yet gone, the real problem has not been even touched, and we have yet to find what his solution is.

When we ask what ground Say gives for the existence of this surplus value, we find that he does not express himself with the distinctness one could wish. His remarks may be divided into two groups, pretty sharply opposed to each other.

In one group Say ascribes to capital a direct power of creating value; value exists because capital has created it, and the productive services of capital are remunerated because the surplus value necessary for this purpose is created. Here, then, the payment for the productive services of capital is the result of the existence of surplus value.

In the second group Say exactly transposes the causal relation, by representing the payment of the services of capital as the cause, as the reason for the existence of surplus value. Products have value because, and only because, the owners of the productive services from which they come obtain payment; and products have a value high enough to leave over a profit for capital, because the co-operation of capital is not to be had for nothing.

Omitting the numerous passages where Say speaks in a general way of a faculté productive and a pouvoir productif of capital, there falls within the first group a controversial note in the fourth chapter of the first book of his Traité (p. 71). He has been arguing against Adam Smith, who, he says, has mistaken the productive power of capital when he ascribes the value created by means of capital to the labour by which capital itself was originally produced. Take the case of an oil mill. “Smith is mistaken,” he says. “The product of this preceding labour is, if you will, the value of the mill itself; but the value that is daily produced by the mill is another and a quite new value; just in the same way as the rented use of a piece of ground is a separate value from that of the piece of ground itself, and is a value which may be consumed without diminishing the value of the ground.” And then he goes on: “If capital had not in itself a productive power, independent of the labour that has created it, how could it be that a capital, to all eternity, produces an income independent of the profit of the industrial activity which employs it? “Capital, therefore, creates value, and its capability of doing so is the cause of profit. Similarly in another place: “The capital employed pays the services rendered, and the services rendered produce the value which replaces the capital employed.”10

In the second group I place first an expression which does not indeed directly refer to profit, but must by analogy be applied to it. “Those natural powers,” says Say, “which are susceptible of appropriation become productive funds of value because they do not give their co-operation without payment.”11 Further, he constantly makes the price of products depend on the height of the remuneration paid to the productive services which have co-operated in their making. “A product will therefore be dearer just in proportion as its production requires, not only more productive services, but productive services that are more highly compensated… . The more lively the need that the consumers feel for the enjoyment of the product, the more abundant the means of payment they possess; and the higher the compensation that the sellers are able to demand for the productive services, the higher will go the price.”12

Finally, there is a decided expression of opinion in the beginning of the eighth chapter of book ii. on the subject of profit. “The impossibility of obtaining a product without the co-operation of a capital compels the consumers to pay for that product a price sufficient to allow the undertaker, who takes on himself the work of producing, to buy the services of that necessary instrument.” This is in direct contradiction to the passage first quoted, where the payment of the capitalist was explained by the existence of the surplus value “created,” for here the existence of the surplus value is explained by the unavoidable payment of the capitalist. It is in harmony with this latter conception, too, that Say conceives of profit as a constituent of the costs of production.13

Contradictions like these are the perfectly natural result of the uncertainty shown by Say in his whole theory of value. He falls into Adam Smith and Ricardo’s theory of costs quite as often as he argues against it. It is very significant of this uncertainty that Say in the passages already quoted (Traité, pp. 315, 316) derives the value of products from the value of the services which produce them; and at another time (Traité, p. 338) he does quite the opposite, in deriving the value of the productive funds from the value of the products which are obtained from them (Leur valeur—des fonds productifs—vient done de la valeur du produit qui peut en sortir),—an important passage to which we shall return later.

What has been said is perhaps sufficient to show that no injustice is done to Say in assuming that he had not himself any clear view as to the ultimate ground of interest, but hesitated between two opinions. According to the one opinion interest comes into existence because capital produces it; according to the other, because “productive services of capital” are a constituent of cost, and require compensation.

Between the two views there is a strong and real antagonism,—stronger than one would perhaps think at first sight. The one treats the phenomenon of interest as above all a problem of production; the other treats it as a problem of distribution. The one finishes its explanation by referring simply to a fact of production: capital produces surplus value, therefore there is surplus value, and there is no occasion for further question. The other theory only rests by the way on the co-operation of capital in production, which it of course presupposes. It finds its centre of gravity, however, in the social formations of value and price. By his first view, Say stands in the rank of the pure Productivity theorists; by his second he opens the series of the very interesting and important Use theories.

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

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

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

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

But it was not long before Say’s conception was applied with more defmiteness to the explanation of interest. The first to do so was Schön.14 The explanation he gives is very short. He first claims for capital, in fairly modest words, the character of being a “third and distinct source of wealth, although an indirect source” (p. 47). But at the same time he considers it proved and evident that capital must produce a “rent.” For “the produce belongs originally to those who co-operated towards its making” (p. 82), and “it is clear that the national produce must set aside as many distinct rents as there are categories of productive powers and instruments” (p. 87). Any further proof is, very characteristically, not considered necessary. Even the opportunity he gets when attacking Adam Smith does not draw from him any more detailed reasoning for his own view. He contents himself with blaming Adam Smith, in general terms, for only considering the immediate workers as taking part in production, and overlooking the productive character of capital and land—an oversight which led him into the mistake of thinking that the rent of capital has its cause in a curtailment of the wages of labour (p. 85).

Riedel gives the new doctrine with more detail and with greater distinctness.15 He devotes to its statement a special paragraph to which he gives the title “Productivity of Capital,” and in the course of this he expresses himself as follows: “The productivity which capital when employed universally possesses is manifest on observation of the fact that material values which have been employed, with a view to production, in aiding nature and labour, are, as a rule, not only replaced, but assist towards a surplus of material values, which surplus could not be brought into existence without them.  . . .  The product of capital is to be regarded as that which in any case results from an employment of capital towards the origination of material values, after deduction of the value of that assistance which nature and labour afford to the employment of capital.  . . . It is always incorrect to ascribe the product of capital to the working forces of nature or labour which the capital needs in order that it may be employed. Capital is an independent force, as nature and labour are, and in most cases does not need them more than they need it” (i. § 366).

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

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

This distinguished economist, whose most signal merits do not, I admit, lie in the sphere of acute theoretical research, has unfortunately given but little care to the systematic working out of the doctrine of interest. This shows itself, even on the surface, in many remarkable misconceptions and incongruities. Thus in § 179 of his great work 16 he defines interest as the price of the uses of capital, although evidently this definition only applies to contract and not to “natural” interest, which latter, however, Roscher in the same paragraph calls a kind of interest on capital. Thus also in § 148 he explains that the original amount of all branches of income “evidently” determines the contract amount of the same; therefore also the amount of the natural interest on capital determines the amount of the contract interest. Notwithstanding this, in § 183, when discussing the height of the interest rate, he makes its standard not natural interest but loan interest. He makes the price of the uses of capital depend on supply and demand “specially for circulating capitals”; the demand again depends on the number and solvability of the borrowers, specially the non-capitalists, such as landowners and labourers. So that from Eoscher’s statement it seems as if the height of interest were first determined by the relations of contract interest on the loan market, and then transferred to natural interest, in virtue of the law of equalisation of interest over all kinds of employment; while admittedly the very opposite relation holds good. Finally, in the theoretic part of his researches Roscher does not take up the most important question in point of theory, the origin of interest, but touches on it only slightly in his practical supplement on the politics of interest, where he discusses its legitimacy.

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

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

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

Evidently the authority which the respected name of Roscher enjoys among German economists has stood him in good stead with his interest theory. If what I have said be correct, his theory has a very modest claim indeed to the cardinal theoretic virtues of unity, logic, and throughness; yet it has met with acceptance and imitation in many quarters.17

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

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

From the Italian literature of our subject I shall, finally, instead of a number of writers, only mention one; but his method of treatment, with its simplicity in form and its obscurity in substance, may be taken as typical of the Naïve Productivity theory—the much read Scialoja.18

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

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

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

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

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

To begin with the first form.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But from what has been said another important application may be drawn, and I give it here, although it is not directed against the Productivity theory. What is right for the one must be fair for the other; and if capital can possess no value-creating power because value is not “created, “on the same ground no other element of production, be it land or be it human labour, possesses such a power. This has escaped the notice of that numerous school which directs the sharpest weapons of its criticism against the assumption that land or capital have any value-creating power, only with greater emphasis to claim that very power for labour.19

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

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

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

I grant at once that capital actually possesses the physical productivity ascribed to it—that is to say, by its assistance more goods can actually be produced than without it.20 I will also grant—although here the connection is not quite so binding—that the greater amount of goods produced by the help of capital has more value than the smaller amount of goods produced without its help. But there is not one single feature in the whole circumstances to indicate that this greater amount of goods must be worth more than the capital consumed in its production,—and it is this phenomenon of surplus value we have to explain.

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

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

What then, if, in accordance with these views, the value of real capital accommodates itself entirely to the value of the product, and becomes quite equal to it? And why should it not? But in that case where would be the surplus value?21

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

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

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

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

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

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

 

22 Published 1803. I quote from the seventh edition, Paris. Guillaumin and Co., 1861.

23 Paris, 1828-29.

24 Cours, i. p. 234, etc.

25 Traité, p. 68, etc.

26 Book i. iii. p. 67.

27 Book i. chap. x.

28 Traité, pp. 72, 343, etc.

29 Cours, iv. p. 64.

30 In this illustration, besides the expenditure for labour and use of land, I do not introduce any separate expenditure for substance of capital consumed, because, according to Say, that entirely resolves itself into expenditure for elementary productive services.

31 Book ii. chap. viii. § 2, p. 395, note I.

32 Book i. chap. iv. at end.

33 Book ii. chap. i. p. 315, etc.

34 Traité, p. 395.

35 Neue Untersuchung der National-Oekonomie, Stuttgart and Tübingen, 1835.

36 National-Oekonomie oder Volkswirthschaft, 1838.

37 Grundlagen der National-Oekonomie, tenth edition, Stuttgart, 1873.

38 I venture to pass over a goodly number of German writers who since Roscher’s time have simply repeated the doctrine of the productive power of capital, without adding anything to it. Of these Friedrich Kleinwächter may be mentioned as one who has worked at the doctrine, if not with much more success, at least with greater thoroughness and care. See “Beitrag zum Lehre vom Kapital” (Hildebrand’s Jahrbücher, vol. ix. 1867, pp. 310-326, 369-421) and his contribution to Schönberg’s Handbuch. In the same category may be put Schulze-Delitzsch. For his views, which, like Roscher’s, are somewhat eclectic, and not free from contradictions, see his Kapitel zu einem Deutsehen Arbeiterkatechismus, Leipzig, 1863, p. 24.

In the German edition of 1884 there are three pages of criticism on Kleinwächter, which, by desire of Professor Böhm-Bawerk, I here omit.—W. S.

39 Principî della Economia Sociale, Naples, 1840.

40 This view is widely accepted even outside the ranks of the Socialists proper. See, e.g. Pierstorff, Lehre vom Unternehmergewinn, p. 22.

41 I purposely disclaim at this point any inquiry whether the physical productivity of capital thus conceded is an originating power in capital, or whether the productive results attained by the help of capital should not rather be put to the account of those productive powers through which capital itself originates; particularly to the account of the labour which made the capital. I do this to avoid diverting the discussion from that sphere where alone, in my opinion, the interest problem can be adequately solved,—that of the theory of value.

42 See also on this point my Rechte und Verhältnisse, p. 104, etc.; and particularly pp. 107-109.

• 1Grundlagen der National-Oekonomie, tenth edition, Stuttgart, 189. I
• 2Paris, 1828-29.
• 3This 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.
• 4See Endemann, Grundsätze, pp. 9, 21.
• 5On his attitude towards loan interest see above, p. 53. As regards natural interest, he approves of interest as regards capital invested in agriculture (Philosophie Rurale, p. 83, and then p. 295) without going any deeper in explanation; but he speaks of what is gained in commerce and industry in hesitating terms, looking on it rather as a fruit of activity, de la profession, than of capital (p. 278).
• 6Book i. chap. x.
• 7See the striking passage on pp. 134, 135.
• 8I may append some of the passages oftenest referred to. Plato in the Laws, p. 742, says: “No one shall deposit money with another whom he does not trust as a friend, nor shall he lend money upon interest.” Aristotle, Nicho-inachean Ethics, iv. § 1: “Such are all they who ply illiberal trades; as those, for instance, who keep houses of ill-fame, and all persons of that class; and usurers who lend out small sums at exorbitant rates: for all these take from improper sources, and take more than they ought.” Cicero, De Officiis, ii. at end: “Ex quo genere comparationis illud est Catonis senis: a quo cum quaereretur, quid maxime in re familiari expediret, respondit, bene pascere. Quid secundum? Satis bene pascere. Quid tertium? Male pascere. Quid quartum? Arare. . . . Et, cum ille, qui quaesierat, dixisset, quid foenerari? Turn Cato, quid hominem, inquit, occidero?” Cato, De Be Rustica: “Majores nostri sic habuerunt et ita in legibus posuerunt, furem dupli condemnare, foeneratorem quadrupli. Quanto pejorem civem existimarunt foeneratorem quam furem, bine licet existimari. “ Plautus, Mostellaria, Act iii. scene 1: “ Videturne obsecro hercle idoneus, Danista qui sit? genus quod improbissimum est…. Nullum edepol liodie genus est hominuni tetrius, nec minus bono cum jure quam Danisticum.” Seneca, De Beneficila, vii. 10: “Quid enim ista sunt, quid foenus et calendarium et usura, nisi liumanae cupiditatis extra naturam quaesita nomina? ... quid sunt istae tabellae, quid computationes, et venale tempus et sanguinolentae centesimae? voluntaria mala ex constitutione nostra pendentia, in quibus nihil est, quod subici oculis, quod teneri manu possit, inanis avaritiae somnia.”
• 9Quarterly Journal of Economics, April 1889.
• 10Kapitalzins. The word “Interest” in English does not require any addition.—W. S.
• 11On the spread of the prohibition of interest see Endemann, National-ökonomische Grundsätze, p. 8, etc.; Studien in der romanisch-kanonistischen Wirthschafts-und Bechtslehre, p. 10, etc.
• 12“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.
• 13I think it advisable to translate Unternehmer and Unternehmung throughout by Undertaker and Undertaking. Rowland Hill, when he adapted Greensleaves to a psalm, said he did not see why the devil should have all the good tunes. Neither, in my opinion, should our science any longer deny itself these useful words, introduced by Adam Smith himself, simply because they are usually confined with us to one special branch of industry.—W. S.
• 14On the whole question see Pierstorff, Die Lehre vom Unternehmergewinn Berlin, 1875.
• 15To give the reader some idea of the tone which the fathers of the Clmrcli adopted in dealing with the subject I append some of their most quoted passages. Lactantius, book vi. Divin. Inst. chap, xviii. says of a just man: “Pecuniae, si quam crediderit, non accipiet usuram: ut et benefichila sit incolume quod succurat necessitati, et abstineat se prorsus alieno in hoe enim genere officii debet suo esse contentus, quam oporteat alias ne proprio quidem parcere, ut bonum faciat. Plus autem accipere, quam dedevit, injustam est. Quod qui facit, insidiatur quodam modo, ut ex alterius necessitate praedetur. “Ambrosius, De Bono Mortis, chap. xii.: “Si quis usuram acciperit, rapinam facit, vita non vivit.” The same De Tobia, chap. iii.: “Taliasunt vostra, divites ! beneficia. Minus datis, et plus exigitis. Talis humanitas, ut spolietis etiam dum subvenitis. Foecundus vobis etiam pauper est ad quaestum. Usurarius est egenus, cogentibus nobis, habet quod reddat: quod impendat non habet. “So also chap. xiv.: “Ideo audiant quid lex dicat: Neque usuram, inquit, escarum accipies, neque omnium rerum.” Chrysostom on Matthew xvii. Homily 56: “Noli mihi dicere, quaeso, quid gaudet et gratiam habet, quod sibi foenore pecuniam oolloces: id enim crudelitate tua coactus fecit. “Augustine on Psalm cxxviii.: “Audent etiam foeneratores dicere, non liabeo aliud unde vivam. Hoc mihi et latro diceret, deprehensus in fauce: hoc et effractor diceret ... et leno ... et maleficus.” The same (quoted in the Decret. Grat. chap. i. Causa xiv. quaest. 3): “Si plus quam dedisti expectas accipere foeneratores, et in hoc improbandus, non laudandus.”
• 16Of course only so far as it is net interest.
• 17Variorum Resolutionum, iii. chap. i. No. 5.
• 18Lib. i. Nov. Deelar. Jus. Civ. chap. xiv. quoted in Böhmer’s Jus Ecles. Prot. Halle, 1736, p. 340.
• 19Secundo (usura est prohibita) ex fame, nam laborantes rustici praedia colentes libentius ponerent pecuniam ad usuras, quam in laboratione, cum sit tutius lucrum, et sic non curarent homines seminare seu metere.”—See Endemann, National-ökonomische Grundsätze, p. 20.
• 20To prove the relation in which Salmasius stands to Molinaeus, it may not be superfluous, considering the explicit statement of Endemann (Studien, i. p. 65) that Salmasius does not quote Molinaeus, to establish the fact that such quotations do exist in considerable number. The list of authors appended to the works of Salmasius shows three quotations from Molinaeus for the book De Usuris, twelve for the De Modo Usura-rum, and one for the De Foenore Trapezitico. These quotations are principally taken from Molinaeus’s chief work on the subject, the Contractus Contractuum et Usurarum. One of them (De Usuris, p. 21) refers directly to a passage which stands in the middle of the most pertinent of his writings ( Tractatus, No. 529. Nos. 528, etc., contain the statement and refutation of the arguments of the ancient philosophy and of the canonists against interest). There can, therefore, be no doubt that Salmasius accurately knew the writings of Molinaeus, and it is just as much beyond doubt—as indeed his sub-stantial agreement would lead us to suspect—that he has drawn from them. In the Confutatio Diatribae mentioned above (p. 36) it is said in one place (p. 290) that Salmasius at the time when, under the pseudonym of Alexis a Massalia, he wrote the Diatriba de Mutuo, was not acquainted with the similar writings of Molinaeus in his Tractatus de Usuris. But this expression must only relate to his ignorance of those quite special passages in which Molinaeus denies the nature of the loan as an alienation, or else, if what I have said be true, it is simple incorrect.
• 21Salmasius begins with the argument of the improper double claim for one commodity. His opponents had contended that whatever was taken over and above the principal sum lent could only be taken either for the use of a thing which was already consumed—that is for nothing at all—or for the principal sum itself, in which case the same thing was sold twice. To this replies Salmasius: “Quae ridicula sunt, et nullo negotio difflari possunt. Non enim pro sorte usura exigitur, sed pro usu sortis. Usus autem ille non est nihilum, nec pro nihilo datur. Quod haberet rationem, si alicui pecuniam mutuam darem, ea lege ut statini in flumen eam projiceret aut alio modo perderet sibi non profuturam. Sed qui pecuniam ab alio mutuam desiderat, ad necessarios sibi usus illam expetit. Aut enim aedes inde comparat, quas ipse habitet, ne in conducto diutius maneat, vel quas alii cum fructu et compendio locet: aut fundum ex ea pecunia emit salubri pretio, unde fructus et reditus magnos percipiat: aut servum, ex cujus operis locatis multm quaestus faciat: aut ut denique alias merces praestinet, quas vili emptas pluris vendat” (p. 195).
• 22Physical productivity manifests itself in an increased quantity of products, or, it may be, in an improved quality of products. We may illustrate it by the well-known example given by Koscher: “Suppose a nation of fisher-folk, with no private ownership in land and no capital, dwelling naked in caves, and living on fish caught by the hand in pools left by the ebbing tide. All the workers here may be supposed equal, and each man catches and eats three fish per day. But now one prudent man limits his consumption to two fish per day for 100 days, lays up in this way a stock of 100 fish, and makes use of this stock to enable him to apply his whole labour-power to the making of a boat and net. By the aid of this capital he catches from the first perhaps thirty fish a day.”
• 23Of Say’s two chief works, the Traité d’ Economie Politique and the Cours Gomplet d’Economie Politique Pratique, it is on the former that we must rely almost exclusively for a statement of his views. The Gours Gomplet avoids suggestive expressions almost entirely.
• 24The 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.
• 25THE 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.
• 26Mercier de la Rivière, more correctly, recognises that capital produces a net profit; but he only points out that there must be this profit on the capital that is employed in agriculture, if agriculture is not to be abandoned for other pursuits. He does not go on to ask why capital in general should yield interest. As little does Mirabeau, who, as we saw, has written a great deal on the subject of interest, and has written very badly.
• 27The productive services consist in an activity (action) or labour (travail) of the fund. The industrial fund renders its services through the labour of the producing man; nature renders hers through the activity of natural powers, the work of the soil, the air, the water, the sun, etc. But when we come to the productive services of capital, and ask how they are to be represented, the answer is less distinctly given. On one occasion in the Traité he says vaguely enough: “It (capital) must, so to speak, work along with human activity, and it is this co-operation that I call the productive service of capital.” He promises, at the same time, to give a more exact exposition later on of the productive working of capital, but in fulfilling this promise he limits himself to describing the transformations which capital undergoes in production. Nor does the Cours Complet give any satisfactory idea of the labour of capital. It simply says, capital is set to work when one employs it in productive operations (On fait travailler un capital lorsqu’un l’emploie dans des operations productifs), i. p. 239. We learn only indirectly, from the comparisons he is continually drawing, that Say thinks of the labour of capital as being entirely of the same nature as the labour of man and of natural powers. We shall soon see the evil results of the vague manner in which Say applies the ambiguous word “service” to the co-operation of capital.
• 28But 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?
• 29The legal prohibitions of interest may, of course, be taken as evidence of a strong and widespread conviction of the evils connected with its practice. But it can scarcely be said that they were founded on any distinct theory; at any rate no such theory has been handed down to us. The philosophic writers, again—like Plato, Aristotle, the two Catos, Cicero, Seneca, Plautus, and others—usually touch on the subject too cursorily to give any foundation in theory for their unfavourable judgment. Moreover, the context often makes it doubtful whether they object to interest as such, or only to an excess of it; and, in the former case, whether their objection is on the ground of a peculiar blot inherent in interest itself, or only because it usually favours the riches they despise.
• 30In 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.
• 31The income that flows from capital, sometimes called in German Bent of Capital, we shall simply call Interest.
• 32The dark days which preceded and followed the break up of the Roman Empire had brought a reaction in economical matters, which, in its turn, had the natural result of strengthening the old hostile feeling against interest. The peculiar spirit of Christianity worked in the same direction. The exploitation of poor debtors by rich creditors must have appeared in a peculiarly hateful light to one whose religion taught him to look upon gentleness and charity as among the greatest virtues, and to think little of the goods of this world. But what had most influence was that, in the sacred writings of the New Testament, were found certain passages which, as usually interpreted, seemed to contain a direct divine prohibition of the taking of interest. This was particularly true of the famous passage in Luke: “Lend, hoping for nothing again.” The powerful support which the spirit of the time, already hostile to interest, thus found in the express utterance of divine authority, gave it the power once more to draw legislation to its side. The Christian Church lent its arm. Step by step it managed to introduce the prohibition into legislation. First the taking of interest was forbidden by the Church, and to the clergy only. Then it was forbidden the laity also, but still the prohibition only came from the Church. At last even the temporal legislation succumbed to the Church’s influence, and gave its severe statutes the sanction of Roman law.
• 33The 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.
• 34It may with reason appear questionable if the entire profit realised by an undertaker from a process of production should be put to the account of his capital. Undoubtedly it should not be so where the undertaker has at the same time occupied the position of a worker in his own undertaking. Here there is no doubt that one part of the “profit” is simply the undertaker’s wage for the work he has done. But even where he does not personally take part in the carrying out of the production, he yet contributes a certain amount of personal trouble in the shape of intellectual superintendence—say, in planning the business, or, at the least, in the act of will by which he devotes his means of production to a definite undertaking. The question now is whether, in view of this, we should not distinguish two quotas in the total sum of profit realised by the undertaking; one quota to be considered as result of the capital contributed, a second quota to be considered as result of the undertaker’s exertion.
• 35On the other hand, there are many, especially among the younger economists, who hold that such a division is inadmissible, and that the so-called undertaker’s profit is homogeneous with the profit on capital.
• 36Of the two phases of the canonist writings on this subject, the first is almost without value for the history of theory. Its theologising and moralising do little more than simply express abhorrence of the taking of interest and appeal to authorities.
• 37This discussion forms the subject of an independent problem of no little difficulty—the problem of Undertaker’s Profit. The difficulties, however, which surround our special subject, the problem of interest, are so considerable that I do not feel it my duty to add to them by taking up another. I purposely refrain then from entering on any investigation, or giving any decision as to the problem of undertaker’s profit. I shall only treat that as interest which everybody recognises to be interest—that is to say, the whole of contract interest, and, of the “natural” profit of undertaking only so much as represents the rate of interest usually obtainable for capital employed in undertaking. The question whether the so-called undertaker’s profit is a profit on capital or not I purposely leave open. Happily the circumstances are such that I can do so without prejudice to our investigation; for at the worst it is just those phenomena which we all recognise as interest that constitute the great majority, and contain the characteristic substance of the general interest problem. Thus we can investigate with certainty into the nature and origin of the phenomenon of interest without requiring to decide beforehand on the exact boundary-line between the two profits.
• 38First of all, we meet with Aristotle’s argument of the barrenness of money; only that the theoretically important point of interest being a parasite on the produce of other people’s industry, is more sharply brought out by the canonists. Thus Gonzalez Tellez: “So then, as money breeds no money, it is contrary to nature to take anything beyond the sum lent, and it may with more propriety be said that it is taken from industry than from money, for money certainly does not breed, as Aristotle has related.” And in still plainer terms Covarruvias: “The fourth ground is that money brings forth no fruit from itself, nor gives birth to anything. On this account it is inadmissible and unfair to take anything over and above the lent sum for the use of the same, since this is not so much taken from money, which brings forth no fruit, as from the industry of another.”
• 39A similar conclusion is arrived at by a third argument that recurs over and over again in stereotyped form. The goods lent pass over into the property of the debtor. Therefore the use of the goods for which the lender is paid interest is the use of another person’s goods, and from that the lender cannot draw a profit without injustice. Thus Gonzalez Tellez: “For the creditor who makes a profit out of a thing belonging to another person enriches himself at the hurt of another.” And still more sharply Vaconius Vacuna: “Therefore he who gets fruit from that money, whether it be pieces of money or anything else, gets it from a thing which does not belong to him, and it is accordingly all the same as if he were to steal it.”
• 40This judgment was not applied to the interest that accrues from the lending of durable goods, such as houses, furniture, etc. Just as little did it affect the natural profit acquired by personal exertions. That this natural profit might be an income distinct from that due to the undertaker for his labour, was but little noticed, especially at the beginning of the period; and, so far as it was noticed, little thought was given to it. At any rate the principle of this kind of profit was not challenged. Thus, e.g. the canonist Zabarella deplores the existence of loan interest on this ground among others, that the agri-culturists, looking for a “ more certain “ profit, would be tempted to put their money out at interest rather than employ it in production, and thus the food of the people would suffer,—a line of thought which evidently sees nothing objectionable in the investment of capital in agriculture, and the profit drawn from that. It was not even considered necessary that the owner of capital should employ it personally, if only he did not let the ownership of it out of his hands. Thus profit made from a sleeping partnership was, at least, not forbidden. And the case where one entrusts another with a sum of money, but retains the ownership of it, is decided by the stern Thomas Aquinas in the words: that such an one may unhesitatingly appropriate the profit resulting from the sum of money. He need not want for a just title to it, “for he, as it were, receives the fruit of his own estate”—not, as the holy Thomas carefully adds, a fruit that springs directly from the coins, but a fruit that springs from those things that have been obtained in just exchange for the coins.
• 41After thus stating his own position Salmasius devotes himself to refuting the arguments of his opponents point by point. As we read these refutations we begin to understand how Salmasius so brilliantly succeeded where Molinaeus a hundred years before had failed, in convincing his contemporaries. They are extremely effective pieces of writing, indeed gems of sparkling polemic. The materials for them were, of course, in great part provided by his predecessors, principally by Molinaeus; but the happy manner in which Salmasius employs these materials, and the many pithy sallies with which he enriches them, places his polemic far above anything that had gone before.
• 42It may not be unwelcome to some of my readers to have a few complete examples of Salmasius’s style. They will serve to give a more accurate idea of the spirit in which people were accustomed to deal with our problem in the seventeenth century, and far into the eighteenth, and to make the reader better acquainted with a writer whom nowadays many quote, but few read. I therefore give below in his own words one or two passages from the polemic.