Recent Literature on Interest

CHAPTER VIII

THE ECLECTICS

BY no means inconsiderable in the most recent times is the number or the importance of those theorists who base their explanation of interest in an eclectic way on elements of different theories. As I have taken the opportunity on a previous occasion to say, this is not to be wondered at.1 One can scarcely fail to recognize the truth, which has been very clearly brought to view by the most recent investigations in this field, that more than one group of facts stand in a casual relation with interest. Especially is this the case with the greater fruitfulness of capitalistic production on the one hand, and of the postponement of gratification connected with every investment of capital on the other. On each of these two points independent theories have been founded, and as long as no outcome in the form of a solution appeared, or was acknowledged as such, which permitted one to view the inter-workings of these heterogeneous half causes from one single point of view, authors of broad vision who do not close their eyes to any of the facts of experience are easily led to an eclectic combination.

I have already spoken of Loria, who combined elements of the abstinence with those of the exploitation theory.2 Diehl combines a sort of indirect productivity theory with considerations and expressions peculiar to the use theory.3 Modes of expression characteristic of the latter theory are found in Sidgwick side by side with arguments which expound and defend the abstinence theory.4 On this account I think it likely that the modes of expression which reflect the spirit of the use theory are employed in a merely incidental manner, and that the real opinion of that distinguished writer is actually represented by the abstinence theory. Neurath’s somewhat vague expressions do not indicate any clearly worked-out theory, but rather a partial agreement with or inclination toward a whole series of traditional methods of explanation.5 I do not believe that I shall meet with opposition, if I place the learned and intellectual author of “Progrès de la Science Economique depuis Adam Smith,” Maurice Block, among the eclectics. As a convinced believer in the complete justification of interest, he could not make up his mind to abandon any of the numerous conceptions which seemed to him equally plausible and favourable to interest. In his copious disquisitions on that subject I find the productivity theory represented as well as the abstinence and the use theories.6 That for the eminent scholar himself the thought of being considered an eclectic had no terrors is proved by an earnest plea, doubtless intended as an oratio pro domo, which he once made in favour of eclecticism.7

Charles Gide’s expressions seem to me to lean partly toward the use and partly toward the agio theory,8 Nicholson’s partly toward the agio and partly toward the abstinence theory.9 The latter combination appears rather frequently in recent times, as I have shown in Chapters II and IV.

Among the authors inclined to eclecticism Dietzel occupies a special place. This always intellectual, but not always coolly reflective, author, in a detailed review of my theory of interest, has acknowledged himself to be an eclectic on principle, in the sense that he regards the different current theories of interest, especially the exploitation and productivity theories taken together, as pertinent and applicable each to a part of the phenomenon of interest. He thinks that “in the field of interest different explanations, conditioned by the difference in the economic positions and relations of individuals, should be formulated for the different categories of socio-economic phenomena.” For example, if the hirer of a piano or a house possesses a capital large enough for the purchase of the piano or house, yet prefers to invest or leave it in a productive undertaking, the interest which the possessor of the house or piano receives may be fittingly explained by the productivity of capital. If, however, the tenant does not possess capital sufficient to buy the hired object, then the interest could only be explained as an exploitation of the tenant, and the “exploitation theory (undeniable in its essence) becomes the explanation of interest.”10 Dietzel also defends the use theory,11 and finally, if I have correctly understood him, grants to my theory of interest justification for a certain group of interest phenomena, namely, for the explanation of interest in the case of credit granted for purposes of consumption.12

As I fully explained in another place13 not long ago, I consider Dietzeln point of view regarding methods as very unfortunate and quite untenable. Something may indeed be said against eclecticism of every kind. Still it makes a great difference whether, as eclectics have been accustomed to do, one invents for the explanation of a phenomenon a theory in which incoherent elements of different theories are combined into an external unity, or whether, as Dietzel desires, for each group of instances of one and the same phenomenon one works out or recognizes a totally new and fundamentally different theory. If that form of income, which economists are accustomed to comprehend under the head of interest or rent of capital, in contradistinction to rent of land, wages of labour, and profits of the entrepreneur, has anything really characteristic about it which binds together the cases belonging under this head and separates them from the other sorts of income, then that characteristic something cannot possibly be different in every case, certainly not fundamentally different and even contradictory. Nevertheless, he who, with Dietzel, attempts to explain instances of the same fundamental phenomenon by means of contrasting theories, in the first place cannot avoid getting entangled in absurd inferences; as, for example, Dietzel, when he concludes that the possessor of a house who in two succeeding years lets the sanu luxurious dwelling for 2000 florins, one year to the manager of a bank with a salary of 15,000 florins, and the second year to a manufacturer with an income from property of 15,000 florins, owes his interest in the first case to exploitation and in the second to the productivity of capital! In the second place, he cannot avoid entanglement in the most obvious contradictions, since each contrasting theory contains premises which we must acknowledge if we wish to explain a single instance in the spirit of that theory, and which are in complete opposition to the premises of other theories which it would be likewise necessary to recognize in order to explain other instances according to Dietzeln plan. Can any one who regards the exploitation theory as essentially correct explain any given case of interest in the spirit of the productivity theory or vice versa? In my opinion, Dietzel has been able to escape these palpable inconveniences only because he, perhaps rather hastily, announced his maxim in the capacity of a critic instead of that of a systematic exponent of doctrines, and therefore had no occasion to attempt to put its applicability to a practical test.

14 See “Capital and Interest,” Smart’s translation, p. 396.

15 See above, Ch. IV.

16 P. J. Proudhon, “Seine Lehre und sein Leben,” Pt. II, Jena, 1890, pp. 217–225, and p. 204.

17 “Principles of Political Economy,” 2d ed., London, 1887, pp. 167, 168, 255 sq. and 264.

18 “Elemente der Volkswirtschaftslehre,” 2d ed., Vienna, 1892, pp. 282 sq., 313 sq., and 324 sq.

19 See “Progrès” (Paris, 1890), Vol. II, pp. 319, 320, 328, 335 sq.; also pp. 321, 326, 339, 340–342, and 348.

20 Ibid., p. 334; see also p. 349.

21 “Principes d’Economie Politique,” 5th ed., p. 451, footnote.

22 “Principles of Political Economy,” London, 1893–1897; see especially Vol. I, p. 388, and Vol. II, pp. 217 and 219.

23 Gottinger Gelehrte Anzeigen, 1891, No. 23, p. 930 sq., especially pp. 932–935.

24 Ibid., p. 933.

25 Ibid., p. 932 sq.

26 “Einige strittige Fragen der Capitalstheorie,” Vienna, 1900, p. 84 sq.

• 1“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.
• 2“Principles of Economics,” 3d ed., pp. 142–664.
• 3Besides 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.
• 4Ricca-Salerno (“Teorie del Valore,” Rome, 1894), Monte-martini (“Il Risparmio dell’ Economia pura,” Milan, 1896); Crocini (“Di alcune questioni relative alP utilità finale,” Turin, 1896); Graziani (“Studi sulla teoria delP interesse,” Turin, 1898); further in essentials perhaps, Barone (“Sopra un libro di Wickseil,” Giornale degli Economisti, November, 1895, and “Studi sulla distributione” in the same journal for February and March, 1896); and partly at least, Benini (“Il valore e la sua attribuzione ai beni strumentali,” Bari, 1893).
• 5Smart’s translation, p. 185.
• 6lbid., p. 186.
• 7Ibid., p. 334; see also p. 349.
• 8The italics are mine.
• 9pp. 216, 315.
• 10Cf. the exposition of Senior’s theory to be found in my “Capital and Interest,” Smart’s translation, p. 271 sq.
• 11Ibid., p. 933.
• 12Ibid., p. 932 sq.
• 13“Einige strittige Fragen der Capitalstheorie,” Vienna, 1900, p. 84 sq.
• 14In 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.
• 15Professor 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.
• 16The 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.
• 17The 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.
• 18The injustice of Marshall’s charges and his evident misunderstanding of Böhm-Bawerk’s real attitude toward the authors he criticises is further shown by reference to certain passages in the first edition in which our author pointed out the affinity between the use and the productivity theories. In one place he called the former an offshoot of the latter, and in another he said: “This theory [the use theory] assumes capital to be productive.” Again, on page 187, he said: “The relation of use theories to the productive power of capital will not, however, be found stated so clearly in the writings of their representatives as I have thought necessary to state it. On the contrary, indeed, appeals to the productive power of capital long accompany the development of the use theory proper, and we are very often left in doubt whether the author relies, for his explanations of surplus value, more on the productive power of capital or on the arguments peculiar to the use theory.”
• 19The injustice of Marshall’s charges and his evident misunderstanding of Böhm-Bawerk’s real attitude toward the authors he criticises is further shown by reference to certain passages in the first edition in which our author pointed out the affinity between the use and the productivity theories. In one place he called the former an offshoot of the latter, and in another he said: “This theory [the use theory] assumes capital to be productive.” Again, on page 187, he said: “The relation of use theories to the productive power of capital will not, however, be found stated so clearly in the writings of their representatives as I have thought necessary to state it. On the contrary, indeed, appeals to the productive power of capital long accompany the development of the use theory proper, and we are very often left in doubt whether the author relies, for his explanations of surplus value, more on the productive power of capital or on the arguments peculiar to the use theory.”
• 20I have already spoken of Loria, who combined elements of the abstinence with those of the exploitation theory. Diehl combines a sort of indirect productivity theory with considerations and expressions peculiar to the use theory. Modes of expression characteristic of the latter theory are found in Sidgwick side by side with arguments which expound and defend the abstinence theory. On this account I think it likely that the modes of expression which reflect the spirit of the use theory are employed in a merely incidental manner, and that the real opinion of that distinguished writer is actually represented by the abstinence theory. Neurath’s somewhat vague expressions do not indicate any clearly worked-out theory, but rather a partial agreement with or inclination toward a whole series of traditional methods of explanation. I do not believe that I shall meet with opposition, if I place the learned and intellectual author of “Progrès de la Science Economique depuis Adam Smith,” Maurice Block, among the eclectics. As a convinced believer in the complete justification of interest, he could not make up his mind to abandon any of the numerous conceptions which seemed to him equally plausible and favourable to interest. In his copious disquisitions on that subject I find the productivity theory represented as well as the abstinence and the use theories. That for the eminent scholar himself the thought of being considered an eclectic had no terrors is proved by an earnest plea, doubtless intended as an oratio pro domo, which he once made in favour of eclecticism.
• 21The discussion of the division of labour and of exchange leads to a consideration of value which he explains in accordance with the cost of reproduction theory, to which, however, he makes one important and very significant addition. “When two persons in the same society exchange commodities,” he says (p. 300), “... the exchanges they make are for equal quantities of labour, reckoned according to the time when applied, and the actual order of instruments.” The time element, to which attention is called in this last clause, is considered by Rae of equal importance with labour. Materials, tools, etc., as well as labour, are consumed in production, and they must be represented in the price of the goods. In this connection he shows that not only the labour which produced these instruments must be taken into consideration, but also the length of time that must elapse before that labour is remunerated. The rate of compensation for this element of time will depend upon the effective desire for accumulation. By way of illustration, he assumes the case of a weaver who can weave a certain amount of thread into linen in thirty days with the aid of a loom which cost one hundred days’ labour and which will last seven years. He then proceeds as follows: “Suppose that the effective desire of accumulation of the individual is of strength sufficient to carry him to the order G, doubling in seven years, that the loom cost one hundred days’ labour, and that it will be exhausted in seven years; it would then require to return two hundred days’ labour, or an equivalent, at the end of that period. The return, however, is not delayed so long, but begins to come in daily, immediately after its construction. Calculating then what yearly return is equal to two hundred days at the end of seven years, in the estimation of a man who reckons one day now equal to two then, it will turn out to be nearly twenty days. We may allow that the loom is in employment three hundred days a year; it would, therefore, on these principles, have to return two days’ labour for every thirty days during which it was in operation, and the weaver would consequently have to receive an equivalent to thirty-two days’ labour; at least, had he not a moral certainty of receiving this, he would not have formed the instrument, and were such return to cease, he would not reconstruct it” (pp.169, 170).
• 22Further particulars regarding this proposition result from the universal law of exchange, of which Marshall regards interest as merely, a special case. According to that universal law, the “normal” value of commodities tends constantly to adjust itself to that level at which demand is in equilibrium with the cost of production. Marshall lays special emphasis upon the coordinate position of these two factors which mutually influence each other. The real costs of production are made up of the totality of exertions and sacrifices which must be undergone in the production of goods. Besides labour these include also the sacrifice of waiting or of the postponement of enjoyment which is inseparably connected with the accumulation and employment of capital. The term “abstinence,” which has been widely used since the days of the older economists, Marshall regards as less suitable than waiting, and as the fruitful source of misunderstandings, since the largest accumulations of capital are made by very rich people who experience no abstinence in the sense of privation. It would, therefore, be more correct if, following Mac-vane’s example, we should designate the content of the sacrifice under consideration as a mere postponement of enjoyment. This, however, constitutes a real sacrifice which must be reckoned separately, and in addition to that of labour (p. 668).
• 23I do not think I am wrong in designating the view held by Marshall as in essentials a cautiously formulated abstinence theory with an improved terminology. In its fundamentals his doctrine is in complete agreement with that of Senior. The formation of capital demands on the part of capitalists a real sacrifice which consists in the postponement of enjoyment and forms an independent element in the cost of production side by side with labour. For this an independent payment must be found in the price of goods after the manner and according to the laws (to be sure, more carefully formulated by Marshall) by which in general costs influence the price of goods. Under these circumstances it is evident that my view of Professor Marshall’s interest theory cannot differ much from that which I expressed regarding the abstinence theory in general in my book on “Capital and Interest.” Though I am in full agreement with him on the point that the “prospectiveness” as well as the “productiveness” of capital have something to do with the explanation of interest, I think that the explanation by which he and other abstinence theorists connect these phenomena with interest, is presented in a form which is not in harmony with the facts and which is in unavoidable conflict with the laws of thought.
• 24Among the authors inclined to eclecticism Dietzel occupies a special place. This always intellectual, but not always coolly reflective, author, in a detailed review of my theory of interest, has acknowledged himself to be an eclectic on principle, in the sense that he regards the different current theories of interest, especially the exploitation and productivity theories taken together, as pertinent and applicable each to a part of the phenomenon of interest. He thinks that “in the field of interest different explanations, conditioned by the difference in the economic positions and relations of individuals, should be formulated for the different categories of socio-economic phenomena.” For example, if the hirer of a piano or a house possesses a capital large enough for the purchase of the piano or house, yet prefers to invest or leave it in a productive undertaking, the interest which the possessor of the house or piano receives may be fittingly explained by the productivity of capital. If, however, the tenant does not possess capital sufficient to buy the hired object, then the interest could only be explained as an exploitation of the tenant, and the “exploitation theory (undeniable in its essence) becomes the explanation of interest.” Dietzel also defends the use theory, and finally, if I have correctly understood him, grants to my theory of interest justification for a certain group of interest phenomena, namely, for the explanation of interest in the case of credit granted for purposes of consumption.
• 25Among the authors inclined to eclecticism Dietzel occupies a special place. This always intellectual, but not always coolly reflective, author, in a detailed review of my theory of interest, has acknowledged himself to be an eclectic on principle, in the sense that he regards the different current theories of interest, especially the exploitation and productivity theories taken together, as pertinent and applicable each to a part of the phenomenon of interest. He thinks that “in the field of interest different explanations, conditioned by the difference in the economic positions and relations of individuals, should be formulated for the different categories of socio-economic phenomena.” For example, if the hirer of a piano or a house possesses a capital large enough for the purchase of the piano or house, yet prefers to invest or leave it in a productive undertaking, the interest which the possessor of the house or piano receives may be fittingly explained by the productivity of capital. If, however, the tenant does not possess capital sufficient to buy the hired object, then the interest could only be explained as an exploitation of the tenant, and the “exploitation theory (undeniable in its essence) becomes the explanation of interest.” Dietzel also defends the use theory, and finally, if I have correctly understood him, grants to my theory of interest justification for a certain group of interest phenomena, namely, for the explanation of interest in the case of credit granted for purposes of consumption.
• 26As I fully explained in another place not long ago, I consider Dietzeln point of view regarding methods as very unfortunate and quite untenable. Something may indeed be said against eclecticism of every kind. Still it makes a great difference whether, as eclectics have been accustomed to do, one invents for the explanation of a phenomenon a theory in which incoherent elements of different theories are combined into an external unity, or whether, as Dietzel desires, for each group of instances of one and the same phenomenon one works out or recognizes a totally new and fundamentally different theory. If that form of income, which economists are accustomed to comprehend under the head of interest or rent of capital, in contradistinction to rent of land, wages of labour, and profits of the entrepreneur, has anything really characteristic about it which binds together the cases belonging under this head and separates them from the other sorts of income, then that characteristic something cannot possibly be different in every case, certainly not fundamentally different and even contradictory. Nevertheless, he who, with Dietzel, attempts to explain instances of the same fundamental phenomenon by means of contrasting theories, in the first place cannot avoid getting entangled in absurd inferences; as, for example, Dietzel, when he concludes that the possessor of a house who in two succeeding years lets the sanu luxurious dwelling for 2000 florins, one year to the manager of a bank with a salary of 15,000 florins, and the second year to a manufacturer with an income from property of 15,000 florins, owes his interest in the first case to exploitation and in the second to the productivity of capital! In the second place, he cannot avoid entanglement in the most obvious contradictions, since each contrasting theory contains premises which we must acknowledge if we wish to explain a single instance in the spirit of that theory, and which are in complete opposition to the premises of other theories which it would be likewise necessary to recognize in order to explain other instances according to Dietzeln plan. Can any one who regards the exploitation theory as essentially correct explain any given case of interest in the spirit of the productivity theory or vice versa? In my opinion, Dietzel has been able to escape these palpable inconveniences only because he, perhaps rather hastily, announced his maxim in the capacity of a critic instead of that of a systematic exponent of doctrines, and therefore had no occasion to attempt to put its applicability to a practical test.