The Development of Economics

CHAPTER XXII

EUGEN VON BÖHM-BAWERK

The most widely known of the Austrian group is Eugen von Böhm-Bawerk, who was born in Brunn, Austria, December 2, 1851. He studied law and political science at Vienna and political economy at Heidelberg, Leipzig, and Jena, married a sister of Von Wieser and became privatdocent at Vienna in 1880. He was soon transferred to Innsbruck as extraordinary professor and in 1884 raised to the rank of ordinary professor. In 1889 he became a member of the upper house of the Austro-Hungarian Parliament, and Ministerium Rath and chief secretary to the Austro-Hungarian Minister of Finance. In 1904 he became Finance Minister. During the latter years of his life he was professor at the University of Vienna.

In 1881 he published a little book entitled Rechte und Verhältnisse in which he analyzed the economic character of rights and relations and their place in the doctrine of economic goods. This was followed in 1884 by a volume entitled Geschichte und Kritik der Kapitalzins-Theorien. A second and enlarged edition of this book was published in 1900 and a third in 1914. An English translation of the first edition was made by Professor William Smart of Glasgow and published in London in 1890. An English translation of an addendum, reviewing discussions on the subject of interest that had appeared in the interval between the first and second editions, was made by Professor Sieg-mund Feilbogen of the University of Vienna and Professor William A. Scott of the University of Wisconsin and, together with an introductory chapter by the latter describing other important changes and additions in the second edition, was published in London in 1903 under the title Recent Literature on Interest (1884-1899); A Supplement to “Capital and Interest” by Eugen v. Böhm-Bawerk. In 1886 Böhm-Bawerk published Grundzüge der Theorie des wirtschaftlichen Güterwerthes and in 1888 Positive Theorie des Kapitals. Second and third enlarged editions of this latter work were also published, the latter in 1912. Professor William Smart published an English translation of this book in 1891. In 1896 Böhm-Bawerk published Zur Abschluss der Marxischen System and in 1900 Einige strittige Frage der Kapitals-Theorien.

In these books Böhm-Bawerk made valuable contributions to every branch of the Austrian theory, but his greatest work was in the field of interest. In his Geschichte und Kritik der Kapitalzins-Theorien he explained the problem of interest, classified previous attempts at its solution, and subjected them to thoroughgoing and exhaustive criticism. With the ground thus cleared he developed his own solution in the Positive Theorie des Kapitals.

A. The Problem of Interest

In the loan form the problem may be stated by the question, Why is a person who loans another $100 for a year able uniformly to get back at the end of the year not simply the $100 he parted with but an additional sum of four or five or six or ten dollars?

In Book I, in which he reviewed the discussions of interest from the earliest to modern times, he traced what he called the development of the problem, showing how the explanation of interest was frequently confused with its social justification and how the explanations that were offered commonly failed because the problem itself was not clearly grasped and understood. The attempts to grapple with the subject he classified under the heads “The Productivity Theories,” “The Abstinence Theory,” “The Labor Theories,” “The Exploitation Theory,” and “Minor Systems.”

B. The Productivity Theory

Böhm-Bawerk skilfully demonstrated the inadequacy of these arguments and the impossibility of proving that capital can produce value directly. On the latter point he said:

“From the first, it was a hopeless endeavor to explain interest wholly and entirely from a productive power of capital. It would be different, if there were a power that could make value grow directly, as wheat grows from the field. But there is no such power. What the productive power can do is only to create a quantity of products, and perhaps at the same time to create a quantity of value, but never to create surplus value. Interest is a surplus, a remainder left when product of capital is the minuend without at the same time increasing the subtrahend in the same proportion. For the productive power is undeniably the ground and measure of the value of the capital in which it resides. If with a particular form of capital one can produce nothing, that form of capital is worth nothing. If one can produce little with it, it is worth little; if one can produce much with it, it is worth much, and so on;—always increasing in value as the value that can be produced by its help increases; i.e. as the value of its product increases. And so, however great the productive power of capital may be, and however greatly it may increase the minuend, yet so far as it does so, the subtrahend is increased in the same proportion, and there is no remainder, no surplus of value.”

C. The Use Theory

The demonstration of the existence of these independent uses and of their independent valuation is an easy matter in the case of durable goods, an appeal to everyday experience being sufficient, for instance, the rent of horses, automobiles, houses, etc. It is not so easy and simple a matter in the case of raw materials and other forms of capital which change their form with each use. In his Staatswirtschaftliche Unter-suchungen, published in 1832, however, Hermann made the attempt. The substance of his argument is that “technical processes are able, throughout all the change and combination of the usefulness of goods, to preserve the sum of their exchange values undiminished, so that goods, although successively taking on new shapes, still continue unchanged in value. Iron ore, coal, labor, obtain, in the form of pig iron, a combined usefulness to which they all three contribute chemical and mechanical elements. If, then, the pig iron possesses the exchange value of the three exchange goods employed, the earlier sum of goods persists, bound up qualitatively in the new usefulness, added together quantitatively in the exchange value.

“Even goods of perishable material and of only temporary use, by constantly changing their shapes while retaining their exchange value, become re-created so that their use becomes lasting. Thus, as it is in the case of durable goods, so it is in the case of goods changing their form qualitatively, while retaining their exchange value; this use may be conceived of as a good in itself, as a use [Nutzung] which may itself obtain exchange value.”

In the case of durable goods the material services are capable “of obtaining complete economical independence,” as the phenomena of tenancy, hire, etc., show, since in all these transactions “one portion of the services of which a good is capable is divided off and transferred separately, while the rest of the anticipated services, be they many or few, remain with the ownership of the body of the good, in the hands of the owner.”

Böhm-Bawerk concludes (a) “that we value and desire goods only on account of the material services we expect from them,” these services forming “the economical substance with which we have to do,” “the goods themselves” forming only the bodily shell; (b) that “the economical substance” of the acquisition or transfer of “entire goods” “lies in the acquisition and transfer of material services,” of “the totality of these services,” “the transference of the goods themselves” constituting “only an accompanying and limiting form”; and (c) “that the value and price of a good is nothing else than the value and price of all its material services thrown together into a lump sum; and that accordingly the value and price of each individual service is contained in the value and price of the good itself.”

D. The Abstinence Theory

The author of this theory was Nassau Senior, whose contribution to the explanation of value was described in a preceding chapter. In the form of the sacrifice theory Senior supplied a deficiency in the explanation of value left by Ricardo and others who recognized the part played by interest in valuation but failed to furnish an explanation of it. Senior said that all costs of production should be reckoned in terms of sacrifices, one of which was the sacrifice of abstinence, others being those of labor and of risks.

Böhm-Bawerk’s third objection to Senior’s theory is the fact that it is based upon the sacrifice-cost theory of value, which, with the other Austrians, he regarded as unsound.

E. The Labor Theories

The feature common to this group of theories is the explanation of interest “as a wage for labour rendered by the capitalist.” This labor is differently described by the English, French, and German representatives of the theory. The English group, of which Böhm-Bawerk takes James Mill as the representative, means by it the “labor embodied in the capital factor of production” described as “accumulated,” “hoarded,” or “indirect” labor or as labor “in a secondary sense.” The French group, represented by Courcelle-Seneuil, call it the labor involved in the saving of capital; and the German group, represented by Schäffle, describe it as the labor of the entrepreneur “in directing the economical labour and the economical means of the nation in consonance with the national need, and, therefore, in exerting those functions which, in the ideal state of collective ownership, would be exerted through national officers.”

The labor here under consideration as described by the French group Böhm-Bawerk regarded as substantially equivalent to abstinence, and as an explanation of interest open to the same objections as the abstinence theory. The German form of the theory he regarded as worthy of attention as a justification, but inadequate as an explanation, of interest. If interest is to be explained by this kind of labor, he said, “there must be shown some normal relation between the alleged result, the interest of capital, and the asserted cause, the expenditure of labour on the part of the capitalist. But in the actual world we should look for any such relation in vain. A million bears 50,000 of interest, whether the saving and employment of the million has cost its owner much, little, or no trouble. A million bears ten thousand times as much interest as a hundred, even if there should be infinitely more anxiety and vexation in the saving of the hundred than in the saving of the million. The borrower who guards another man’s capital and employs it, notwithstanding this ‘expenditure of labour,’ receives no interest; the owner receives it although his labour be nil. Schäffle himself once was fain to confess: ‘A distribution of wealth according to amount and desert of work, obtains neither among the capitalists as compared with each other, nor among the workers as compared with the capitalists. The distribution is neither guided by any such principles nor yet does it harmonize with them accidentally.’ ”

F. The Exploitation Theory

There are three steps in Marx’s attempt to demonstrate this doctrine: namely, (1) that the exchange of two goods implies the existence of a common element of equal quantity in the two; (2) that “this common element cannot be the use value, for in the exchange of goods the use value is disregarded”; and (3) that “if the use value of commodities be disregarded, there remains in them only one common property— that of being products of labor.” Böhm-Bawerk passed the first step without criticism, but he asserts that the second “can only be maintained by a logical fallacy of the grossest kind,” namely, that of confusing a genus with the special forms in which it manifests itself. For example, from the proposition that “the special forms under which use value may appear,—whether the use be for food, clothing, shelter, or any other thing,—are disregarded” in the determination of exchange value, Marx drew the conclusion that use value per se is disregarded; that is, to use Böhm-Bawerk’s illustration, from the fact that in the explanation of a salary of $1,000 per night paid each of three singers the question of whether the singer be a bass, a tenor, or a soprano is disregarded, the conclusion is drawn that the question of whether the singer has a good, bad, or indifferent voice, that is, the quality of the voice, in general is disregarded.

The third step, according to Böhm-Bawerk, involves still worse fallacies. “If the use value of commodities is disregarded, says Marx, there remains in them only one common property—that of being products of labor.” Böhm-Bawerk asks, “Is this true? Is there only one property? In goods that have exchange value, for instance, is there not also the property of being scarce in proportion to the demand? Or that they are objects of demand and supply? Or that they are appropriated? Or that they are natural products?”

“Now why, I ask, may not the principle of value reside in any one of these common properties, as well as in the property of being the product of labour?”

“But this is not all. Is it even true that in all goods possessing exchange value there is this common property of being the product of labour? Is virgin soil a product of labour? Or a gold mine? Or a natural seam of coal? And yet, as every one knows, these often have a very high exchange value. But how can an element that does not enter at all into one class of goods possessing exchange value be put forward as the common universal principle of exchange value? How Marx would have lashed any of his opponents who had been guilty of such logic!”

(2) “all goods that are produced not by common, but by skilled labour”;

(3) goods produced by “abnormally badly paid labour”;

(4) fluctuations above and below normal costs admitted by all costs theorists; and (5) goods which require the greater advance of previous labor.

G. Minor Systems

Under this head Böhm-Bawerk includes explanations of interest offered by writers whom he classes as eclectics and what he calls the “The Labor Fructification Theory” of Henry George. The eclectics combine two or more of the theories already criticized, e.g., the productivity and the abstinence, or the productivity and the labor, or the productivity and the exploitation. The criticism of these explanations is that the combinations are purely artificial, the result being no new theory, but merely a conglomeration of inconsistent ideas. The authors of these combinations were unconscious of their inconsistencies, and are, perhaps, rather to be criticized for not attempting a serious explanation of interest. They saw truth in these various ideas and used each one in connections in which it seemed appropriate, but failed to see the inconsistency of connecting them all with the explanation of interest.

“I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters—that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes—that interest would be but the robbery of industry, and could not long exist. . . But all wealth is not of the nature of planes or planks, or money, nor is all production merely the turning into other things of the inert matter of the universe. It is true that if I put away money it will not increase. But suppose instead I put away wine. At the end of a year I will have an increased value, for the wine will have improved in quality. Or suppose that in a country adapted to them I set out bees; at the end of a year I will have more swarms of bees, and the honey which they have made. Or supposing, where there is a range, I turn out sheep, or hogs, or cattle; at the end of the year I will, upon the average, also have an increase. Now what gives the increase in these cases is something which, though it generally requires labour to utilise it, is yet distinct and separable from labour—the active power of nature; the principle of growth, of reproduction, which everywhere characterises all the forms of that mysterious thing or condition which we call life. And it seems to me that it is this that is the cause of interest, or the increase of capital over and above that due to labour.”

He finds George’s theory open to two objections. First, he “repeats in somewhat altered form the old mistake of the physiocrats, who would not allow that nature cooperates in the work of production except in one single branch of it, agriculture”; and second, “he has not explained that prior phenomenon of interest by which he seeks to explain all the others. He says all kinds of goods must bear interest because they can be exchanged for seed corn, cattle, or wine, and these bear interest. But why do these bear interest?”

H. The Nature, Origin, and Functions of Capital

After clearing the ground by his criticisms of existing theories, Böhm-Bawerk introduces the development of his own explanation of interest by a discussion of the nature, origin, and functions of capital and an analysis of the processes of production. Accepting substantially Adam Smith’s conception of capital as “a group of products which serve as means to the acquisition of goods” and, as a subdivision, a smaller group characterized as “products destined to serve towards further production,” he described the functions in production of labor and capital respectively. The former is characterized as that of “completing” and “assisting” natural processes by “putting objects in motion” and dictating the “where” and the “how” and the “when” of the operation of materials and forces,” insisting that “the origin of goods remains, purely a natural process, . . . not disturbed by man but completed . . . by apt intervention of his own natural powers.”

In this work of manipulating natural materials and forces man investigates “the causal relations of things,” “the natural conditions under which the desired goods come into existence” and learns “where human force can be applied with advantage and where not” and how nature can be divided against herself, one natural force being set against another or made to cooperate with another.

In this latter process man has learned to use what Böhm-Bawerk calls “round-a-bout” processes, that is processes in which, instead of putting forth labor “just before the goal is reached,” it is put forth “in such a way that it . . . completes the circle of conditions necessary for the emergence of the desired good, . . . by associating with the more remote causes of the good, with the object of obtaining, not the desired good itself, but a proximate cause of the good; which cause, again, must be associated with other suitable materials and processes, till, finally,—perhaps through a considerable number of intermediate members,—the finished good, the instrument of human satisfaction is obtained ” As an illustration Böhm-Bawerk contrasts the “direct” and the “round-a-bout” methods of supplying the resident of a hut with water from a remote spring. By the direct method, each time water is wanted he must go to the spring and use the water on the spot; by the “round-a-bout” method he may fell trees of suitable size, gouge out grooves in them, lay them end to end from the spring to the hut, construct a trough in the hut as a receiver, and thus conduct a continuous stream of water suitable for use at the hut at any time and in any amount desired. Previous to all this—and this is also a necessary part of the “round-a-bout” process—he must gather from natural sources the raw materials and construct the tools and implements required for felling and gouging the trees and manufacturing the trough.

In the “round-a-bout” processes of production are brought into existence goods “destined to serve towards further production,” that is, capital, and Böhm-Bawerk’s analysis of these processes enables him to answer questions regarding the origin, functions, and nature of capital which have troubled economists and aroused controversy—such questions, for example, as the relation of saving to capital and the exact sense, if any, in which capital can be said to be productive.

“Capital is also the indirect cause of other profitable round-a-bout ways of production being entered upon—other, that is, than those in the course of which it itself has come into existence. When a people possesses much capital not only can it successfully complete those processes in the course of which the capital presently existing has come into being, but it can also adopt other and new methods. For the stock of capital in hand (which, essentially, is nothing else than an aggregate of consumption goods in a transition state) throws off every year a certain quantity of its constituents, which have just completed their transition state and become finished goods, and places them at the disposal of the current economic period for purposes of immediate consumption. In this way the greater the stock of capital, the larger is the share taken by the productive powers of the past in providing means of consumption for the present, and the less are the new productive powers of the present drawn on for the present. Thus a larger proportion of these current powers is free for the service of the future, that is, for investment in more or less far-reaching processes of production.”

This analysis led Böhm-Bawerk to answer in the negative “the much disputed question, whether any independent productive power is inherent in capital; or, to put the question in its usual form, whether capital is a third and independent factor in production along side of labour and nature.” “Capital,” he concluded, “is an intermediate product of nature and labour, nothing more. Its own origin, its existence, its subsequent action, are nothing but stages in the continuous working of the true elements, nature and labour. They and they alone do everything from beginning to end in bringing consumption goods into existence. The only distinction is that sometimes they do it all at once, sometimes by several stages. In the latter case the completion of each stage is marked outwardly by the appearance of a fore-product, and capital has emerged.”

“We see, therefore, as a fact, an intimate connection between saving and formation of capital. If no individual saves, the people, as a whole, cannot accumulate capital, because the great consumpt of consumption goods forces the producers, by the impulse of prices, so to employ the productive powers that, every year, the produce of a whole year’s endowment is demanded and used up in the shape of consumption goods, and no productive powers are left free for the increasing of capital. But if individuals save, the altered demand, again through the impulse of prices, compels the undertakers to dispose of the productive powers differently; fewer powers are put each year, at the service of the present, and thereby is increased the amount of those productive powers whose produce will be found in suspense as intermediate products; in other words, the capital will be increased with a view to an increased consumption in the future.”

I. Böhm-Bawerk’s Contributions to the Theory of Value

Since interest is a phenomenon connected with the valuation of capital, Böhm-Bawerk next discusses the subject of value by way of introduction to the special phase of it with which he is primarily concerned. Here he follows the marginal utility line of reasoning, putting in his own way, however, the doctrine of complementary and cost goods and differing in some particulars with Menger and Von Wieser.

Böhm-Bawerk shows that the theory of the valuation of complementary goods is the key to the explanation of the distribution of wealth in the present state of society, labor, land, and capital being merely “three complementary factors of production.” By “showing how much of the joint product may economically be considered as due to each of these, and what share of the total value may, accordingly, be assigned to each of them,” this theory “lays down, at the same time, the most decisive basis for determining the amount of remuneration which each of three factors obtains.” In the cases of labor and land it does this “quite directly,” but in the case of capital it explains only “the gross remuneration” for its cooperation, not what “remains over after deducting from the gross remuneration the value of the worn-out capital,” namely interest.

Böhm-Bawerk’s treatment of costs deserves attention not because he contributed anything new to the theory of the subject but because of the clearness and completeness with which he has traced what he calls the “concatenation of value, price and costs.”

The “causal connection which has ended in this price . . . runs in the clearest possible way, in an unbroken chain from value and price of products to value and price of costs—from iron wares to raw iron, and not conversely. The links in the chain are these. The valuation which consumers subjectively put upon iron products forms the first link. This helps, next, to determine the figures of the valuation—the money price at which consumers can take part in the demand for iron products. These prices, then, determine, in methods with which we are now familiar, the resultant price of iron products in the market for such products. This resultant price, again, indicates to the producers the [exchange] valuation which they in turn may attach to the productive material iron, and thus the figure at which they may enter the market as buyers of iron. From their figures, finally, results the market price of iron.”

The perfect working of the cost principle, even within the sphere in which it operates, is prevented by “friction,” i.e., hindrances “great or small, permanent or temporary to the due investment of the original productive powers in the employments and forms of consumption which are the most remunerative at the time,” and by the “lapse of time,” “the weeks, months, years which stretch between the inception of the original productive powers, and the presentation of their finished and final products.” It is this latter circumstance which gives rise to the phenomena of interest.

J. The Valuation of Future Goods

Regarding differences in want and provision for want between the present and the future, he considers three cases: first, those of the needy whose present wants as compared to their means of satisfying them are so pressing that they would gladly give a much larger amount of goods in the future for those requisite at the moment; secondly, “all kinds of beginners who have no means, such as young lawyers, artists, officials, budding doctors, men going into business” [who] “are only too ready, in return for a sum of present goods which assists them to start in the vocation they have chosen, and acts as foundation of their economical existence, to promise a considerably larger sum on the condition that they do not require to pay it until they are in receipt of a decent income”; third, those persons “who are comparatively well off at the moment, and who are likely to be worse off in the future.” In such cases present goods are equally as valuable as future, since the machinery of modern society makes it possible to make them available in the future and they may be more valuable on account of possible needs, not known at the time, but which may appear at any time in the future. A present good is available at any time in the future and may thus be used to satisfy any unforeseen want no matter when it may appear.

“We may, then, draw up the balance-sheet which shows the influence of the different circumstances of Want and its Provision in present and future as follows. A great many persons who are not so well provided for in the present as they expect to be in the future, set a considerably higher value on present goods than on future. A great many persons who are better provided for in the present than they expect to be in the future, but who have the chance of preserving present goods for the service of the future, and, moreover, of using them as a reserve fund for anything that may turn up in the meantime, value present goods either at the same figure as future, or a little higher. It is only in a fractional minority of cases, where communication between present and future is hindered or threatened by peculiar circumstances, that present goods have, for their owners, a lower subjective use value than future. This being the state of things, even if there was nothing else co-operating with this difference of want and provision in present and future, the resultant of the subjective valuations, which determines the objective exchange value, would obviously be such that present goods must maintain a proportionate advantage, a proportionate agio over future. But, besides this, there are other co-operating circumstances which work, even more distinctly, in the same direction.”

One of these cooperating circumstances mentioned in the passage just quoted is the habit of underestimating the future which characterizes most people, a habit the explanation of which Böhm-Bawerk finds in “the incompleteness of the imaginations we form to ourselves of our future wants,” in the weakness of our wills which results in our inability always to do what we perfectly well know it is in our interest to do, and in “the shortness and uncertainty of life.” The first two of these causes probably operate to a greater or less degree upon all people, and the third operates quite universally when the future in question is separated from us by a long period; moreover, as we advance in years, it affects us even when the distance between the present and the future is relatively short. Indirectly, however, through the mechanism of the market, the effect of the undervaluation of the more or less distant future spreads itself over the intervening period. “Equalizing tendencies, and transactions” which may be compared with “stock exchange arbitrage, spread the differences of value, which obtain as regards long periods, uniformly over the intermediate period.”

“The superiority of present goods, as making round-a-bout and more fruitful ways of production possible, cannot be increased by the perspective undervaluation of future goods, because the utility got from lengthy processes is itself a future utility, to which the perspective undervaluation applies as much as it applies to the future goods with which the present goods are compared.

“As little can the third factor be strengthened by the first factor, namely, the consideration of a greater present want. For, evidently, employing a good as a great future productive utility, and employing it to satisfy an immediate pressing want, are mutually exclusive employments; and it is clear that a good, which can only be employed in the one way or the other cannot obtain a cumulative advantage from the two together.”

K. The Forms of Interest

The phenomena of interest appear in three forms, loan interest, the “profit of undertaking,” and income from durable goods, “usually called Hire or Lease, and in one case Rent.” In the loan the exchange of present for future goods is apparent. One hundred dollars of present money is exchanged against, for example, one hundred and six dollars of money to be paid one year hence.

“At the beginning of the first year of its use the good, as bearer of six annual services, was worth in present value 100 + 95.23 + 90.70 + 86.38 + 82.27 + 78.35; that is 532.93. At the end of the first year, as now capable of five annual services of the present value of 100 + 95.23 + 90.70 4- 86.38 + 82.27, it is worth 454.58. The loss in value is, therefore, 78.35, which is exactly the same as the former most remote service was. But since the sum received from the current year’s service—the value of the service sold and now deducted—amounted to 100, there remains a net gain of 21.65, which is exactly 5% of 432.93, the sum which the goods became worth immediately on deduction of the first service realized, as one might say, to account.

“Similarly, in the second year’s use, the owner again realizes the service now become present and worth 100. This comes off the value of the parent good. But the succeeding service, which before had become worth 95.23, now arrives at the full value of 100; that succeeding it, becomes worth 95.23, and so on. Only the last service, that originally worth 82.27, finds nothing to replace it. At the end of the second year’s use, then, the good, as capable of four remaining annual services of the individual values of 100 + 95.23 + 90.70 + 86.38, is worth 372.31. As against the value of 454.58 which it had at the beginning of the year, it has suffered a loss of value of 82.27, which is equal to the value of what was the last service; and as against the receipt of 100, it returns 17.53 net, the interest on the somewhat reduced capital that remains. And thus it goes on from year to year, the gross return always remaining the same (because by hypothesis the amounts of service remain unchanged in technical quality), the quota for wear and tear always increasing (because the marginal service, that which determines the loss of value, stands nearer to the present, and so to the full present value), and the net interest always decreasing (in correspondence with the decrease of the capital, owing to wear and tear, on which interest has to be paid), till finally the good has entirely given up its useful content and is, as we say, consumed.

“Put in general terms, then, we get the following very simple explanation of the phenomenon of interest on durable goods. The owner of a durable good can always realize the full [higher] value of the then present utility, and this represents the ‘gross return’ of the good, its ‘gross interest.’ He loses, on the other hand, on account of the steady advance of the more remote services towards the present, only the smaller value of the last service then inherent in the good. This smaller value determines the amount of the ‘wear and tear,’ and thus there is always a difference between gross interest and the amount of wear and tear, which difference forms his net profit or net interest. The cause, then, to which net interest owes its existence, is nothing else than an increase of value of the future services—services which were previously of less value, but during the period of the good’s use have pressed forward into or towards the present.”

L. The Markets for “Means of Production”

Means of production are exchanged for “final and finished present goods” on the labor market, the market for uses of land, and the market for “intermediate products such as raw materials, tools, machines, factories, etc.”

In the labor market the supply is forthcoming from laborers who are unable to engage in any productive process except a direct, or a relatively short “round-a-bout,” one and who in consequence are willing to sell their services for any wage in excess of what the production process available to them will yield. The demand comes from capitalists who can either use their capital to employ their own labor in a relatively long and consequently more productive “round-a-bout” process or, if they do not want to labor themselves or cannot themselves labor, can loan their capital to others who can and will use it in such processes.

The capitalist who has the option of using his capital either in employing himself in a “round-a-bout” process or of hiring laborers with his capital finds that by employing himself exclusively he can engage in twice as long a productive process and consequently in a more remunerative one than would be possible if he should hire a laborer to work with him, since in the latter case he must supply subsistence to two instead of one. He will, therefore, be willing to hire the laborer only in case what is left after paying him will be equal to or greater than his gains would be if he employed himself in a doubly long productive process.

In cases in which the capitalist does not enjoy the option of employing himself alone or of hiring a helper, he has the privilege of lending his capital to those who do enjoy that option. The results are, therefore, the same. The demand of the capitalist for labor ceases at the point where the wages that must be paid will reduce his profit below what it would be if he employed a longer productive process in connection with his own labor alone. The wages of labor will, therefore, be fixed between that point as a maximum and the point at which the laborer can earn as much or more by using his own labor in a direct or a relatively short productive process.

The market for labor is but one aspect of the “general subsistence market,” as Böhm-Bawerk calls it, the other being that of intermediate products. In this market the entire wealth of society, except that consumed by the owners themselves or spent “in furnishing themselves with the necessary maintenance during their production period” and land, is advanced as subsistence during the current productive period. This fact is obscured by the form of a large part of this wealth, which is that of tools, machines, raw materials, etc., instead of finished consumers’ goods. But since this subsistence is not all needed at the beginning of the productive period but in instalments regularly succeeding each other, and since these intermediate products regularly ripen into consumers’ goods in instalments suited to the need of the community, it is evident that the entire amount may be viewed as and really is the subsistence fund for the period.

“The supply, even in the richest nation, is limited by the amount of the people’s wealth at the moment. The demand, on the other hand, is practically infinite; it continues at least so long as the return to production goes on increasing with the extension of the production process, and that is a limit which, even in the richest nation, lies far beyond the amount of wealth possessed at the moment.”

“Where a people, as in the case of Roscher’s poor fisher-folk, live from hand to mouth, it goes without saying that they will be eager to acquire the first hardly saved stocks which allow them to make boats and nets, and their exchanges will be made with an agio against future goods. But among comfortably-off and wealthy people the position is different, not in kind, but in degree. If the stock of wealth be sufficient to maintain the population during an average one year’s production period, every one will wish to engage in a two years’ production process with its greater productiveness, and, the stock of wealth not being sufficient to advance subsistence to everybody for two years, there will be, as before, bidding against each other; the circle of suitors will be weeded out; and the agio on present goods will appear. Nor does it make any difference if the community’s wealth is sufficient for an average of five or ten years’ production period. Since the provision for human wants would be still more abundant if, instead of five or ten years, six or eleven years were the average periods, men will always wish to embark on these more fruitful methods, will compete to obtain the subsistence that is not sufficient for all, and will thereby inevitably call forth an agio for present goods. . . . Interest and Agio must appear.”

M. The Rate of Interest

Making all necessary corrections to the assumption made by Böhm-Bawerk, that the wage-worker is the only suitor for the national subsistence fund, namely, introducing into the calculation the suitors for consumption credit and landowners, the principles revealed by the above analysis remain unchanged. These other competitors simply decrease the amount of the national subsistence fund available for the support of productive labor and to that extent decrease the rate of wages and increase the rate of interest.

Footnotes

1 Geschichte und Kritik der Kapitalzins-Theorien, Smart’s translation (London: Macmillan & Co., Ltd., 1890), pp. 1 and 2.

2 Ibid., pp. 77 and 78.

3 Geschichte und Kritik, p. 119.

4 Ibid., p. 132.

5 Ibid., pp. 135, 137.

6 Ibid., pp. 138 and 139.

7 Ibid., pp. 179 and 180.

8 Geschichte und Kritik, p. 186.

9 Quoted by Böhm-Bawerk, Ibid., pp. 194 and 195.

10 Quoted by Böhm-Bawerk, Ibid., 197 and 198.

11 Geschichte und Kritik, pp. 220, 223, 225, and 226.

12 Ibid.

13 Ibid., pp. 262 and 263.

14 Ibid., p. 276.

15 Geschichte und Kritik, pp. 277, 278.

16 Ibid., p. 279.

17 Ibid., pp. 279, 280.

18 Ibid., p. 299.

19 Geschichte und Kritik, p. 311.

20 Böhm-Bawerk summarizes Rodbertus’s reasoning, ibid., pp. 328-337.

21 Ibid., pp. 337, 338. Italics are mine.

22 Ibid., pp. 342, 343.

23 Ibid., p. 374.

24 Ibid., pp. 381-383.

25 Geschichte und Kritik, pp. 383-387.

26 Ibid., p. 387.

27 Ibid., p. 389.

28 Geschichte und Kritik, p. 414.

29 Ibid., p. 416.

30 Ibid., pp. 416, 417.

31 Ibid., pp. 417 and 418.

32 Positive Theory of Capital, Smart’s translation (London: Macmillan & Co., Ltd., 1891), pp. 20, 21, 22.

33 Ibid., pp. 84, 86.

34 Ibid., p. 100 note.

35 Ibid., p. 104.

36 Positive Theory of Capital, pp. 92-96.

37 Ibid., pp. 109-116.

38 Positive Theory of Capital, pp. 171-173.

39 Ibid., p. 224.

40 Positive Theory of Capital, pp. 226, 227.

41 Ibid., pp. 249, 250.

42 Ibid., pp. 251, 252.

43 Ibid., p. 252.

44 Positive Theory of Capital, pp. 258, 259.

45 Ibid., pp. 262 and 263, there is an illustration and elaboration of this point.

46 Ibid., p. 274.

47 Positive Theory of Capital, p. 299.

48 Ibid., p. 305.

49 Ibid., pp. 344-346.

50 Positive Theory of Capital, p. 354.

51 Positive Theory of Capital, pp. 331, 332.

52 Ibid., pp. 332, 333.

53 Ibid., pp. 375 and 376.

54 For an illustration and demonstration of the manner in which this period is determined, see Positive Theory of Capital, pp. 388 and 389.

55 Ibid., p. 401.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”
• 9In other connections he says: “It is very certain that it [money] is not a good in itself and that the quantity of it does nothing for the opulence of a country in general provided there is enough of it to sustain the prices of the goods necessary to life.”
• 10Silver and gold, he says, have as competitors copper, leather, shells, and “a simple piece of paper which costs nothing but nevertheless performs all the functions of money to the amount of millions by passing from hand to hand an infinite number of times.” By way of illustration he refers to the Lyons fair in the following manner: “In a commerce consisting of purchases and sales to the amount of more than eighty millions not a ‘sou marque’ of money is seen. Everything is done by bills of exchange which after passing through an infinite number of hands, finally return to the original drawer.”
• 11In other connections he emphasized the need of an equilibrium between purchases and sales and the importance of proper adjustments of prices, especially of the prices of raw produce and manufactures.
• 12In order to secure these and other needed adjustments, he affirmed that reliance can be placed only on nature. The following words of his taken from Chapter V of the Dissertation present this doctrine clearly:
• 13In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 14In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 15In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 16The author, Richard Cantillon, was born in Ireland between 1650 and 1690. Soon after the death of Louis XIV he removed to Paris and engaged in the business of banking during the period in which John Law flourished. Being confident of the ultimate failure of the Mississippi scheme, Cantillon speculated on the bear side of the market and made a fortune, but incurred the enmity of Law and was obliged to leave France. He was murdered in London on May 16, 1734, by a discharged man-servant, who set fire to his house and stole some of his papers.
• 17The deviation of the market prices of commodities from “their primary and natural price” Ricardo also described as “accidental and temporary.” The demand and supply of a commodity at the moment may be such as to establish a price for it above or below the point indicated by the labor principle, but in that case the profits of the capital employed in its production will be above or below the average in other industries, and this fact will increase in the one case and decrease in the other the amount of capital employed in this industry, thus causing changes in the supply which will tend to bring the market into accord with the natural price. He concludes his discussion with these words: “In speaking, then, of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.”
• 18The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 19The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 20The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 21The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 22Even before land of inferior fertility is taken into cultivation, superior lands may bear rent, according to Ricardo, provided the point of diminishing returns in their cultivation has been reached. “It often, and, indeed, commonly happens,” he says, “that before No. 2, 3, 4 or 5, of the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation.” By way of illustration he assumes that equal amounts of capital and labor will produce on land of qualities numbered 1, 2, and 3, 100, 90 and 80 quarters of corn respectively and then adds: “It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land No. 3.”
• 23“In such a case, capital will be preferably employed on the old land, and will create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour.” The reason for the creation of rent in this case is that the only available opportunities for the employment of additional labor and capital under the conditions assumed are either on land No. 3 or at a diminished return on land No. 1; and, since two rates of profits on the same market are impossible under competitive conditions, capital and labor must be content with the diminished returns represented by their lower productivity when added to the amounts already employed in the cultivation of No. 1, and the landlord can command the difference between their present and their former productivity.
• 24“The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of production; but by the greater quantity of labour necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most unfavorable circumstances; meaning by the most unfavorable circumstances the most unfavorable under which the quantity of produce required renders it necessary to carry on production.” In the case of production from land, the most unfavorable circumstances are those represented by the last application of capital and labor, namely those applied to the poorest quality of land or at the lowest returns on the superior qualities, and these, according to the proposition just discussed, yield no rent.
• 25In another passage he says: “The reason, then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high.”
• 26A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 27A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 28Conversely “it follows from the same principles, that any circumstances in the society which should make it unnecessary to employ the same amount of capital on the land, and which should therefore make the portion last employed more productive, would lower rent.”
• 29Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 30Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 31Ricardo concludes his chapter on rent by noting that the landlord profits in two ways by increasing difficulties in the production of raw produce, namely by securing a larger share of the total produce and by a rise in the price and thus in the purchasing power of each unit of the product. The following are his words : “Since the same cause, the difficulty of production, raises the exchangeable value of raw produce, and raises also the proportion of raw produce paid to the landlord for rent, it is obvious that the landlord is doubly benefited by difficulty of production. First he obtains a greater share, and, secondly, the commodity in which he is paid is of greater value.”
• 32In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 33In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 34It is important to note that Ricardo thought of natural wages in terms of the necessaries and comforts of life, i.e., of the commodities and services laborers use in the satisfaction of the wants of themselves and their families. “The power of the labourer to support himself and the family which may be necessary to keep up the number of labourers,” he says, “does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labour will fall.”
• 35Ricardo’s thinking at this point is substantially like that of Malthus in his Essay on Population. Both thought that there is a certain quantity of necessaries, comforts, and conceivably luxuries to which laborers become so accustomed by habit that, if they receive less than the amount required to purchase these, they will refuse to raise families large enough to maintain their numbers; and that, if they receive more than this amount, they will raise families so large that their numbers will increase. Both believed that the amount of these necessaries, comforts, and luxuries required to induce laborers to maintain their numbers without either increase or decrease is not fixed and unchangeable, but that it varies from time to time. “It is not to be understood,” says Ricardo, “that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries.” It seems to have been Ricardo’s opinion that in England at least it was larger in his time than it had been in times past. “Many of the conveniences now enjoyed in an English cottage,” he says, “would have been thought luxuries at an earlier period of our history.”
• 36Ricardo’s thinking at this point is substantially like that of Malthus in his Essay on Population. Both thought that there is a certain quantity of necessaries, comforts, and conceivably luxuries to which laborers become so accustomed by habit that, if they receive less than the amount required to purchase these, they will refuse to raise families large enough to maintain their numbers; and that, if they receive more than this amount, they will raise families so large that their numbers will increase. Both believed that the amount of these necessaries, comforts, and luxuries required to induce laborers to maintain their numbers without either increase or decrease is not fixed and unchangeable, but that it varies from time to time. “It is not to be understood,” says Ricardo, “that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries.” It seems to have been Ricardo’s opinion that in England at least it was larger in his time than it had been in times past. “Many of the conveniences now enjoyed in an English cottage,” he says, “would have been thought luxuries at an earlier period of our history.”
• 37The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 38The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 39The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 40According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 41According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 42In his discussion of the interaction of the forces which determine market and natural wages, Ricardo makes some statements which indicate his belief that in the natural advance of society laborers will meet with increasing difficulty in maintaining their standard of life. For example, he says :
• 43In a statement following he gives numerical illustrations of his doctrines in which he assumes that the money wages of laborers will be so adjusted that they will be able always to purchase the same quantity of commodities. He expresses the same view in the following words : “In proportion as corn becomes dear, he would receive less corn wages, but his money wages would always increase, whilst his enjoyments, on the above supposition, would be precisely the same. But as other commodities would be raised in proportion as raw produce entered into their composition, he would have more to pay for some of them. Although his tea, sugar, soap, candles and house rent would probably be no dearer, he would pay more for his bacon, cheese, butter, linen, shoes, and cloth; and therefore, even with the above increase of wages, his situation would be comparatively worse” (italics mine).
• 44The pessimistic view of the probable future of the laboring classes suggested in the passages above quoted is placed by Ricardo in contrast with that of the landlord class in the following statements :
• 45Having explained the share in the joint product of land, labor, and capital obtainable by landlords and laborers respectively, Ricardo treats the capitalist as the residual claimant, assigning to him what remains. To Ricardo, therefore, profits are total product minus the sum of the rents and wages paid to the cooperating landlords and laborers. He simplifies the problem still more by directing attention to the no-rent or marginal lands and the no-rent application of capital, thus eliminating rent from the calculation and explaining profits as the product of no-rent lands and no-rent capital minus the wages paid to the coöperating laborers. It follows, therefore, that the greater the share of labor the smaller that of capital. Ricardo says:
• 46Under the same circumstances Ricardo claims that the profits of farmers as well as those of manufacturers would fall in spite of the fact that the rise in the price of corn increases the value of each unit of their product. This is true because, according to his doctrine of value, the rise in the price of each bushel of corn produced on the margin and the number of bushels produced are so related that the total money value of the marginal product remains constant, and, since a larger amount must be paid to laborers in order to enable them to command the same quantity of necessaries, the amount left for the farmers is necessarily smaller. In the following passages Ricardo makes this clear by means of numerical illustrations:
• 47Ricardo puts his doctrine in a nutshell in the statement “that profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food” and concludes that “the natural tendency of profits then is to fall; for, in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour.”
• 48According to the reasoning outlined in the preceding sections of this chapter, the cost of producing corn on the margin of cultivation is a force of major importance in the distribution of wealth. Changes in it affect the proportions between rent, wages, and profits in such a manner as to indicate a real conflict of interest between landlords on the one hand and laborers and capitalists on the other. When this cost rises, rents increase not only absolutely but proportionally, profits fall, and, while money wages rise, real wages, that is what the money wages will buy, at the best remain stationary and at the worst slightly fall. A fall in costs on the margin causes a fall in rents both absolutely and relatively, a rise in profits, and a fall in money but not in real wages. The interests of landlords seem, therefore, to be opposed to that of the other two classes. Ricardo’s manner of expressing this conflict from the standpoint of laborers was indicated in a quotation at the close of the section on wages. From the standpoint of capitalists it is expressed in the following passage : “The farmer, then, although he pays no part of his landlord’s rent; that being always regulated by the price of produce, and invariably falling on the consumers, has, however, a very decided interest in keeping rent low, or rather in keeping the natural price of produce low. As a consumer of raw produce, and of those things into which raw produce enters as a component part, he will, in common with all other consumers, be interested in keeping the price low. But he is most materially concerned with the high price of corn as it affects wages. With every rise in the price of corn, he will have to pay out of an equal and unvarying sum of £720, an additional sum for wages to the ten men whom he is supposed constantly to employ. We have seen, in treating on wages, that they invariably rise with the rise in the price of raw products.”
• 49A variation from, and offshoot of, the productivity theory of interest has been named the use theory, its exponents distinguishing between the sale of the use of capital and of its substance, and identifying the value of the former with interest. Say’s use of the conception productive services of capital was so loose that it is difficult, and perhaps impossible, to determine whether he intended to distinguish between them and the consumption of the substance of the capital itself, and accordingly Böhm-Bawerk classified him among the use as well as the productivity theorists. The principal exponents of this theory, however, were Germans who differentiated between the uses and the substance of capital. In the case of durable goods the making of this distinction is a simple and easy matter. A horse, for example, may be sold outright or its services may be sold separately, as is the case when a liveryman lets it for hire. The same distinction is made every day in the case of a large number of durable goods. It is not so easy to make the distinction, however, in the case of perishable goods or of those capable only of a single use. What, for example, is the distinction between the use of the pig-iron used in the manufacture of steel and the consumption of the pig iron itself? Hermann attempted to point out this distinction in the following manner:
• 50The final summary of his conclusions is thus expressed : “The economical progress of society constituted of landlords, capitalists, and labourers, tends to the progressive enrichment of the landlord class; while the cost of the labourer’s subsistence tends on the whole to increase, and profits to fall. Agricultural improvements are a counteracting force to the two last effects; but the first, though a case is conceivable in which it would be temporarily checked, is ultimately in a high degree promoted by these improvements; and the increase of population tends to transfer all the benefits derived from agricultural improvements to the landlords alone.”
• 51The first one he noted is described in the following passage : “When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital; (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country, that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country therefore on the very verge of the stationary state.” By the minimum of profits he meant “some particular rate of profit, which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively”; and by the stationary state, the state of ”a country in which a minimum has been reached and in which consequently, “no further increase of capital can for the present take place.”
• 52The first one he noted is described in the following passage : “When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital; (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country, that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country therefore on the very verge of the stationary state.” By the minimum of profits he meant “some particular rate of profit, which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively”; and by the stationary state, the state of ”a country in which a minimum has been reached and in which consequently, “no further increase of capital can for the present take place.”
• 53He was convinced that such a minimum of profits is a reality. Some capital would be accumulated, he thought, if there were no profits, but savings under such conditions, he believed, would be used as a provision for bad times and a reserve “for sickness and infirmity” or “as a means of leisure and independence in the latter part of life, or a help to children in the outset of it” and would “have not much tendency to increase the amount of capital permanently in existence.”
• 54“Commercial revulsions” result in the destruction and waste of capital, temporarily diminish its volume, and raise the rate of profit. They occur periodically and have their basis in a characteristic of human nature which Mill suggested in the following passage : “By the time a few years have passed without a crisis, so much additional capital has been accumulated, that it is no longer possible to invest it at the accustomed profit; all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made. . . . But the diminished scale of all safe gains, inclines persons to give a ready ear to any projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which with the subsequent revulsions, destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced.”
• 55The “stationary state,” which Mill believed would result from economic progress under the existing order, would be or might be, he thought, more desirable than the present one. “I confess,” he said, “I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress. . . . The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward.”