Recent Literature on Interest

CHAPTER III

THE USE THEORIES

OF the numerous opinions which have contended for mastery upon the literary battlefields of the past, some have received no reënforcement whatever in recent times, and others have had only an occasional champion. Of the first kind, for the most part, has been the fate of those groups of theories which have either reduced the problem of interest to too great simplicity, or have subjected it to a refinement of treatment which is fatal. For the first reason the colourless theories,1 the naive productivity theory, the fructification theory of Turgot, and the theory of Henry George, have remained without new adherents; and for the second reason theories of the type of Schellwien’s.

To the group which has only received occasional reënforcement belongs the interesting use theory. From its most distinguished representative, Karl Menger, nothing new has appeared; though in his highly esteemed monograph on “The Theory of Capital”2 this author has subjected the concept of capital to a thoroughgoing and fruitful investigation, which, however, does not extend to the contested question of interest. Walras, who had previously expounded the use theory in a form which reminds us of J. B. Say, still holds to this theory.3

Among recent works which adhere clearly and firmly to the standpoint of the use theory (occasional allusions to this theory are frequent, especially among eclectic writers4), only that of Ladislas Zaleski in the Russian language on “The Doctrine of Capital”5 is known to me. Since for linguistic reasons my knowledge of this work is confined to a few extracts placed at my disposal, I can only make the statement that Zaleski expresses his adherence to the use theory ahd attempts to base it upon the doctrine of natural science regarding “the unity of matter and the conservation of energy.” How far removed he is in this new departure from the use theory of Menger, and to what extent he approaches the intricate productivity theory, I am unable to say.

6 I am almost inclined to class under this head the interest theory of Lehr (“Grundbegriffe und Grundlagen der Volkswirtschaft,” Leipzig, 1893, Pt. VII, Ch. 6); at least, I am unable to discover any characteristic point in his rather voluminous disquisition upon this subject. He refuses his adherence to most of the theories ordinarily held, but on his part presents only such statements as in substance constitute either an appeal to the reality, propriety, justice, and equity of certain phenomena or echo certain universal motives (such as the motive referred to by Adam Smith, that without the prospect of interest, capital would not be accumulated for purposes of production or loan, p. 332), but in my opinion constitute no real explanation of the phenomenon of interest.

7 Conrad’s Jahrbücher, new series, Vol. XXII (1888).

8 “Eléments d’Économie politique pure,” ist ed., Lausanne, 1874, 2d ed., 1889. Walras considers interest as the payment for the productive service (“service producteur”) of capital, which is a distinct immaterial good (see, for example, pp. 201, 2n, and XIII of the 2d ed.). In essentials Pareto (Corns d’Economie politique, Vol. I, p. 40 sq.) adheres to the conception of Walras, but not without occasional allusions to the difference in value between present and future goods (see, for example, p. 50).

9 For example, Conrad (“Grundriss zum Studium der politischen Ökonomie,” Jena, 1896, Pt. I, § 67); Dietzel, in an article quoted farther on (Gottinger gelehrten Anzeigen) Diehl (“Proudhon, seine Lehre und sein Leben,” Jena, 1890, Pt. II, p. 204); M. Block (“Progrès de la science Économique depuis Adam Smith,” Paris, 1890, Pt. II, Ch. XXIX); Ch. Gide (“Principes d’Économie Politique,” 5th ed., Paris, 1896, p. 451); and several others.

10 Kazan, 1898.

• 1Notably Professor John B. Clark and Professor Simon N. Patten.
• 2“Karl Marx and the Close of his System.” A Criticism by Eugene v. Böhm-Bawerk. Translated by Alice M. Macdonald, with a preface by James Bonar, M.A., LL.D. London. T. Fisher Unwin, Paternoster Square, 1898.
• 3“The Positive Theory of Capital and its Critics.” Quarterly Journal of Economics) April, 1895.
• 4“Principles of Economics,” 3d ed., pp. 142–664.
• 5Besides the authors included in the text there are others who hold more or less similar views. For example, J. Bonar (Quarterly Journal of Economics April and October, 1889, and April, 1890); William Smart (“Introduction to the Theory of Value,” London, 1891, “The New Theory of Interest,” Economic Journal, 1891); F. Y. Edgeworth (Economic Journal June, 1892); E. B. Andrews (“Institutes of Economics,” Boston, 1889); Lowrey (Annals of American Academy March, 1892); Ely (“Outlines of Economics,” New York, 1893); Carver (Quarterly Journal of Economics) October, 1893); Taussig (“Wages and Capital,” New York, 1896); Irving Fisher (Economic Journal December, 1896, June and December, 1897); Mixter (“A Forerunner of Böhm-Bawerk,” Quarterly Journal of Economics January, 1897); Macfarlane (“Value and Distribution,” Philadelphia, 1899); and especially also Hobson (“Evolution of Modern Capitalism,” London, 1894); and Hadley (“Economics,” New York, 1896, and Annals of American Academy November, 1893). Giddings has also expressed himself as partially in agreement with this idea, but he believes that in order to complete and extend the theory, it is necessary to make an addition to it, in which he would explain the constant deficiency in the supply of present goods or capital by the fact that the last hours of labour, performed with ever increasing reluctance and pain, contribute to the formation of capital. This increase in the pains of labour constitutes the extra costs of capital building,—in comparison with the cost of the manufacture of goods designed for immediate consumption—which extra costs must find their remuneration in interest. But I am neither able to convince myself of the reality of all the assumptions of fact involved in this theory, nor, if these assumptions be granted, am I able to discover their operation in the process by which interest is produced. See, besides, the exhaustive discussion in the Quarterly Journal of Economics from July, 1889, to April, 1891, in which, besides Giddings and myself, Bonar, David J. Green, and H. Bilgram also took part.
• 6In the United States the appearance of Smart’s translation must be regarded as an event of prime importance in the history of political economy. The work of some of our theorists had already been directed along practically the same line as that of Jevons and the Austrians, and a new generation of young economists had just entered the field. Böhm-Bawerk’s masterly treatise gave support and encouragement to the former, and guidance and stimulus to the latter. It has been discussed over and over again in the courses in economic theory and in the economic seminaries of the country, and it is safe to say that no candidate for the doctorate in economics during the last twelve years has been absolved from the requirement of familiarizing himself with this work.
• 7In 1900 the second edition of the “Geschichte und Kritik der Capitalzins-Theorien” appeared, and the present volume contains in its nine main chapters a translation of the Appendix, in which Böhm-Bawerk reviews the literature on interest which had appeared since 1884, the date to which the first edition translated by Smart brought the subject. In this preface we propose to give a summary of the most important of the other additions contained in the second edition. These are the author’s Preface, chapter XI on John Rae, and a supplement to the chapter on Karl Marx. To the author and the translators it has not seemed necessary or desirable to present a complete translation of these less important additions. A brief summary is sufficient to indicate their general character and scope, and the English-speaking reader who is unfamiliar with German and who desires more may avail himself of Miss Alice M. Macdonald’s translation of Böhm-Bawerk’s criticism of the posthumous volumes of Karl Marx’s “Das Kapital,” of the author’s reply to Walker’s strictures in the Quarterly Journal of Economics, and of Rae’s book itself.
• 8In 1900 the second edition of the “Geschichte und Kritik der Capitalzins-Theorien” appeared, and the present volume contains in its nine main chapters a translation of the Appendix, in which Böhm-Bawerk reviews the literature on interest which had appeared since 1884, the date to which the first edition translated by Smart brought the subject. In this preface we propose to give a summary of the most important of the other additions contained in the second edition. These are the author’s Preface, chapter XI on John Rae, and a supplement to the chapter on Karl Marx. To the author and the translators it has not seemed necessary or desirable to present a complete translation of these less important additions. A brief summary is sufficient to indicate their general character and scope, and the English-speaking reader who is unfamiliar with German and who desires more may avail himself of Miss Alice M. Macdonald’s translation of Böhm-Bawerk’s criticism of the posthumous volumes of Karl Marx’s “Das Kapital,” of the author’s reply to Walker’s strictures in the Quarterly Journal of Economics, and of Rae’s book itself.
• 9Professor Marshall finds the explanation of interest in the coöperation of what he calls the “productiveness” and the “prospectiveness” of capital, the former determining the demand for that factor of production, and the latter limiting the supply. He believes that most of the writers on interest have had both these elements of the problem in mind, and have differed from each other chiefly in the fact that some have laid more emphasis upon the one element, and others upon the other. He has expressed the opinion that many of the authors criticised by Böhm-Bawerk would not have accepted his statements as fair and complete presentations of their views.
• 10The works of Launhardt and Sax fall in the period between the appearance of the first (1884) and the second (1889) volumes of my published work upon “Capital and Interest.” The “Positive Theory of Capital” set forth in the second volume contains an attempt to derive all forms of the interest phenomenon from the difference in value between present and future goods, and to explain this difference by means of the coöperation of a series of causes, partly psychological and partly connected with the technique of production. This attempt met with much opposition, but also with agreement and support from many quarters. Cognate ideas were expressed at about the same time by American thinkers, especially by Simon N. Patten, S. N. Macvane, and J. B. Clark, though in a less exhaustive way, and for the time being without any conscious break with the trend of ideas involved in the old abstinence theory. At the same time there was in operation the impulse given by Jevons’s brilliant work, which has steadily grown in the appreciation of the theorists of the various nations. The fact is that on account of one or the other of these stimulating influences, the theory of the difference in value between present and future goods,—to use a short expression, the agio theory, —has taken root in the literature of all civilized nations, and has even acquired a predominant place in that of some of them. Especially it seems to me that cognate views, with this or that shade of difference, have acquired wide acceptance in English-American, Italian, Dutch, and Scandinavian literature.