Capital and Interest

CHAPTER III

BASTIAT’S STATEMENT

BASTIAT’S much discussed theory of interest may be characterised as a copy of Senior’s Abstinence theory forced into the forms of Bastiat’s Value theory, and thereby much deteriorated. The fundamental thought in each is identical. The postponement of gratification, which Senior calls Abstinence, and Bastiat calls sometimes Delay, sometimes Privation, is a sacrifice demanding compensation. But beyond this they diverge from each other in some respects.

Senior, who deduces the value of goods from their cost of production, simply says that this sacrifice is a constituent element of the costs, and is done with it. Bastiat, who bases the value of goods on “exchanged services,” elevates the postponement also to the rank of a service. “Postponement in itself is a special service, since on him who postpones it imposes a sacrifice, and on him who desires it confers an advantage.”1 This service, according to the great law of society, which runs “service for service,” must be specially paid. The payment takes place where the capitalist has borrowed his capital from another person by means of loan interest (intérét).

But even outside of loan interest this service must be compensated; for, speaking generally, every one who receives a satisfaction must also bear the collective burdens which its production requires, including the postponement. This postponement is looked upon as an “onerous circumstance,” and forms therefore, quite universally, an element in the valuation of the service, and at the same time in the formation of the value of goods. This is, in a few words, the substance of what Bastiat says with rhetorical diffuseness and copious repetitions.

I called this doctrine a deteriorated copy of Senior’s. If we put on one side all those defects that belong to Bastiat’s interest theory not as such, but only in virtue of its being embodied in his value theory—which to my mind is exceedingly faulty—the deterioration shows itself chiefly in two respects.

The first is that Bastiat confines his attention and his arguments almost entirely to a secondary point, the explanation of contract interest, and for that neglects the principal thing, the explanation of natural interest. Both in his Harmonies Economiques and in the monograph which he specially devoted to the interest problem, Capiteti et Reute, he is never tired of discoursing by the page on the interpretation and justification of loan interest.

But he applies his theory to the explanation of natural interest only once, and then only in passing, in the passages already quoted (Harmonies, third edition, p. 213); and these leave a great deal to be desired in point of clearness and thoroughness.

The results of this negligence make themselves felt principally in this, that the chief thing in the exposition of interest, the sacrifice of postponement, is not nearly so clearly put by Bastiat as by Senior; for when Bastiat opposes the owner of capital to the borrower of capital, the sacrifice which he speaks of as made by the owner is generally that of doing without the productive use that meantime might have been made of the capital lent.2 This has quite a good signification if it means nothing more than what Salmasius had once tried to prove against the canonists, that, if by employing capital a man can make a natural profit, there is both reason and justification for claiming an interest on the capital when loaned. But to point to that sacrifice is evidently quite inappropriate as an explanation of natural interest, and the phenomenon of interest in general is not satisfactorily explained thereby, the existence of natural interest being already assumed in it as a given fact.

For the deeper explanation of interest it is evident that that other sacrifice on which Senior dwells is the only one that has any importance,—the sacrifice that consists in postponing the satisfaction of needs. Now Bastiat of course speaks of this sacrifice also, but by confusing it with the former sacrifice he gets his doctrine into a tangle; indeed it seems to me that he not only confuses his readers, but himself. At least there are to be found in his writings, especially in his Capital et Rente, not a few passages in which he starts with his Abstinence theory, but comes suspiciously near the standpoint of the Naïve Productivity theorists. The course of explanation suggested, in the often quoted passage in the Harmonies, was to show how under capitalist production the surplus value of the product arises from the necessity of buyers of the product paying for the “onerous circumstance “of the postponement of gratification, as well as for the labour embodied in the product. Instead of following out this line of explanation, he not unfrequently looks upon it as self-evident that capital, in virtue of the productive power that resides in it, must give its owner an “advantage,” a “gain,” an enhanced price, and a bettering of his lot; in a word, a profit.3 But that, as we know already, is not to explain interest, but to assume it.

As a fact, Bastiat has often been accused of having entirely missed the chief point, the explanation of natural interest; the accusation is not, I think, quite justified, but, as we can see, it is very easily explained.4

This is the first point in which Bastiat’s theory does not improve on Senior’s. The second consists in a wonderful addition he makes. Besides the explanation of interest just stated, he gives another—of so different a nature, and at the same time so evidently mistaken, that I cannot even make a guess as to how Bastiat saw any relation between it and his principal explanation.

Every branch of production, he explains, is an aggregate of efforts. But between various efforts an important distinction is to be drawn. One category of efforts is connected with services which we are presently engaged in rendering. A second category of efforts, on the other hand, is connected with an indefinite series of services. To the first category, for instance, belong the daily efforts of the water-carrier, which are directed immediately to the fetching of water; or, in the sphere of agriculture, the labours of sowing, weeding, ploughing, harrowing, reaping, threshing, which are collectively directed to obtain a single harvest. To the second category belongs the labour which the water-carrier expends in making his barrow and water cask; which the farmer expends on his hedging, harrowing, draining, building, improvements generally: all those labours which, as the economists say, go to the formation of a fixed capital, and result in benefit to a whole series of consumers, or a whole series of harvests.5

Bastiat now raises the question, How, according to the great law of “service for service,” are these two categories of efforts to be estimated or rewarded? As regards the first category, he finds this very simple. These services must be compensated, on the whole, by those who profit by them. But that does not apply in the case of the second category, those services which lead to the formation of a fixed capital; for the number of those who profit by this capital is indefinite. If the producer were to get paid by the first consumers it would not be just; for, in the first place, it is unreasonable that the first consumers should pay for the last; and in the second place, there must come a point of time when the producer would have at once the stock of capital not yet consumed, and also his compensation, which again involves an injustice.6 Consequently, Bastiat concludes with a mighty logical salto mortale, the distribution among the indefinite series of consumers is only managed thus: the capital itself is not distributed, but the consumers are burdened with the interest of the capital instead—a way of getting out of it which Bastiat explains to be the only conceivable one for the solution of the problem in question,7 and one which, offered spontaneously by the “ingenious natural mechanism of society,” saves us the trouble of substituting an artificial mechanism in its place.8 Thus Bastiat explains interest as the form in which an advance of capital is redistributed over a sum of products: “C’est là, c’est dans la repartition d’une avance sur la totalitó des produits, qu’est le principe et la raison d’être de I’Intêrêt” (vii. p. 205).

It must have occurred to every one while reading these lines that, in this analysis, Bastiat has fallen into some errors almost inconceivably gross. It is, first, an error to say that it is not possible to distribute the capital itself over the purchasers. Every business man knows that it is possible; and knows too that it is done, and how it is done. He simply calculates the probable duration of the capital laid out, and, on the basis of this calculation, charges every single period during which the capital is employed, and every single product, with a corresponding quota for wear and tear and replacement of the capital sum. When the purchasers pay the quota for replacement of the fixed capital in the price of the finished commodities, “the capital itself” is of course distributed over them. Perhaps not with absolute “justice,” because there may be an error in the calculated duration of the capital, and in the calculated quota for wear and tear which is based on that; but, on the average, the prices successively paid will, in any case, cover the capital sum that is to he replaced.

And it is a second gross error to assume that the producers receive interest instead of receiving back the capital itself, which, he says, cannot be distributed. The fact is, as every one knows (1), that, in the quota for replacement, they receive back the capital itself, and (2) so long as a part of this capital lasts they receive interest besides. Interest, therefore, rests on an entirely distinct foundation from the replacement of capital. It is really difficult to understand how Bastiat could make a mistake in such simple and well-known matters.

In conclusion, I may note in passing that Bastiat has borrowed his practical law of interest from Carey: the law that with the increase of capital the absolute share obtained by the capitalist in the total product increases, and the relative share diminishes.9 In his attempts to prove this law—which from the point of view of theory are quite worthless—like Carey he carelessly confuses the conception of “percentage of total product “with the conception of “percentage on capital”(rate of interest).

On the whole, Bastiat’s interest theory seems to me to be quite unworthy of the reputation which it has, at least in certain circles, so long enjoyed.

10 Harmonies Economiques (vol. vi. of complete works), third edition, Paris, 1855, p. 210. See also the pages immediately preceding, 207-209, and generally the whole of Chapter VII.

11 “Si l’on penètre le fond des choses, on trouve qu’en ce cas le cédant se prive en faveur du cessionaire ou d’une satisfaction immediate qu’il récule de plusieurs années, ou d’un instrument de travail qui aurait augmenté ses forces, fait concourir les agents naturels, et augmenté, a son profit, le rapport des satisfactions aux efforts” (vii. p. 209). “Il ajourne la possibilité d’une production.... Je l’emploierai pendant dix ans sous une forme productive “(xv. p. 445). So often in the tract Capital et Rente, e.g. p. 44. James, who has made a plane, and has now lent it to William for a year, makes this the ground for his claim of interest: “I expected some advantage from it, more work done and better paid, an improvement in my lot. I cannot lend you all that for nothing.”

12 Thus Bastiat in Capital et Rente, p. 40, assumes that the borrowed sack of corn puts the borrower in a position to produce a valeur superieure. On p. 43 he calls the reader’s attention, in italics, to the fact that the “principle that is to solve the interest problem “is the power that resides in the tool to increase the productivity of labour. Again he says, on p. 46, “Nous pouvons conclure qu’il est dans la nature du capital de produire un intérét.” On p. 54, “L’outil met l’emprunteur à méme de faire des profits.” Indeed it is the aim of the brochure, as we gather from the introduction to it, to defend the “productivity of capital “against the attacks of the socialists.

13 See, e.g. Rodbertus, Zur Beleuchtung, i. p. 116, etc.; Pierstorff, p. 202.

14 P. 214.

15 P. 216. ‘

16 “... et je (défie qu’on puisse imaginer une telle repartition en dehors du mécanisme de l’intérèt” (p. 217).

17 “ Réconnaissons done que le mécanisme social naturel est assez ingénieuz pour que nous puissions nous dispenser de lui substituer un mécanisme artifieiel “(p. 216, at end).

18 P. 223.

• 1Grundlagen der National-Oekonomie, tenth edition, Stuttgart, 189. I
• 2This 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.
• 3See the striking passage on pp. 134, 135.
• 4Quarterly Journal of Economics, April 1889.
• 5Wiskemann, Darstellung der in Deutsehland zur Zeit der Reformation herrschenden national-ökonomischen Ansichten (Prize Essays of the Jablonowski’sche Society, vol. x. p. 71).
• 6Kapitalzins. The word “Interest” in English does not require any addition.—W. S.
• 7On 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.
• 8“ On the one hand, the necessity and the usefulness of capital for the business of production in its most multifarious forms, and on the other, the hardship of the privations to which we owe its accumulation; these lie at the root of the exchange value of the services rendered by capital. They get their compensation in a share of the value of the products, to the production of which they have cooperated “ (p. 19).
• 9“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.
• 10Physical 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.”
• 11The 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.
• 12But 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?
• 13In 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.
• 14One party remained unshaken in their theoretical conviction that loan interest was a parasitic profit, admitting of no defence before any strict tribunal; but they consented to a practical compromise with the imperfection of man, on which they laid the blame of its obstinate vitality. From the standpoint of an ideal order of society, interest could not be permitted, but men being so imperfect, it cannot conveniently be eradicated, and so it were better to allow it within certain limits. This was the view taken, among others, by several of the great reformers, e.g. as Zwingli, by Luther in his later days (although earlier he had been a relentless enemy of usury), and, with still greater reserve, by Melanchthon.
• 15The income that flows from capital, sometimes called in German Bent of Capital, we shall simply call Interest.
• 16The 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.
• 17In his celebrated work on Public Credit, Nebenius has devoted a brief consideration to our subject, and given a somewhat eclectic explanation of it. In the main he follows Say’s Use theory. He accepts his category of the productive services of capital, and bases interest on the fact that these services obtain exchange value. But in course of the argument he brings out a new element, in pointing to “ the painful privations and exertions “ which the accumulation of capital requires. In the long run he shows ample agreement with the Productivity theory. Thus on one occasion he remarks that the hire which the borrower has to pay for a capital which he employs to advantage may be considered as the fruit of that capital itself (p. 21); and, on another occasion, he emphasises the fact that, “ in the reciprocal valuation by which the hire is determined, it is the productive power of the capitals that forms the chief element” (p. 22).
• 18The 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.