CAPITAL E INTERES EUGEN VON BOHM-BAWERK PDF

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Capital and Interest Eugen von raudone.info PDF icon Capital and Interest Eugen von raudone.info Shield icon library. File Capital and Interest Eugen von raudone.info With depth and lucidity , Böhm-Bawerk surveys and critiques failed theories of interest from antiquity to. EUGEN VON BOHM-BAWERK w. WHO LAID . who has not read my Natwe of Capital and Income, a brief summary of ita . MEASURING AT THE DOMESTIC TH~E~HOLD.. 5 6. MONEY .. AGW R m RATES OF INTERE~T


Capital E Interes Eugen Von Bohm-bawerk Pdf

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Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of This is a compressed facsimile or image-based PDF made from scans of the original book. ePub, KB, ePub standard file for your iPad or any e-reader compatible with . Eugen Von Bohm Bawerk - Capital e Interés by gallardomartin. Download as PDF or read online from Scribd. Flag for inappropriate content. Download. save. PDF | Presentation for the Liberalism MasterClass arranged by the Institute for Democracy Download full-text PDF .. E. von Böhm-Bawerk.

Briefly it amounts to this, that all material "goods," the objects of economical attention as distinct from mere "things," are economic only in virtue of their use, real or imaginary. Every good is nothing but the sum of its uses, and the value of a good is the value of all the uses contained in it. If a good, such as gunpowder, can only serve its purpose or afford its use all at one time, we employ the word "consumption" for the act by which the good gives forth its use.

If, on the contrary, it is so constituted that its life-work extends over a period of time, then each individual use diminishes the sum of uses which constitutes the essential nature of the good. But Consumption is only a single exhaustive use, and Use is only a prolonged consumption. This at once enables us to estimate the Use theory of interest. The "use of capital" is not something apart from the using of the goods which constitute the capital; it is their consumption, fast or slow as the case may be; and a payment for the use of capital is nothing but a payment for the consumption of capital.

The true nature of the loan transaction is, not that in it we get the use of capital and return it deteriorated, but that we get the capital itself, consume it, and pay for it by a new sum of value which somehow includes interest.

If, however, we admit this, we are landed in the old problem once more—how do goods, when used as capital in production, increase in value to a sum greater than their own original value? Edition: current; Page: [none] We have seen that the previous theories were founded on some positive work supposed to be done by capital. The Abstinence theory, on the other hand, is founded on the negative part played by the capitalist.

Wealth once produced can be used either in immediate consumption—that is, for the purposes to which, in the last resort, all wealth is intended; or it can be used as capital—that is, to produce more wealth, and so increase the possibilities of future consumption. The owner of wealth who devotes it to this latter purpose deserves a compensation for his abstinence from using it in the former, and interest is this compensation. It must be carefully noted that the abstinence here spoken of is not abstinence from personal employment of capital in production—that would simply throw us back on the previous question, viz.

At the back of this theory of interest is that theory of value which makes it depend upon costs of production. Senior, the first and principal apostle of the Abstinence theory, saw very clearly that the inclusion of interest or profit among costs was an abuse of language. The word "Cost" implies sacrifice, not surplus. But in production, as it seemed to him, there was another sacrifice besides the prominent one of labour, that of abstinence, and interest in his view was the compensation for this sacrifice.

It must be confessed that to those who are in the habit of looking upon all work as sacrifice, and all wage as compensation, there is something a little ridiculous in the statement of this theory. Yet if we ask whether the amount of capital in the world would have been what it is if it had not been for the "abstinence" of those who had the command over wealth, to accumulate or dissipate it, we can see that such jibes are more catching than convincing.

The strength of the Abstinence theory is that the facts it rests on really give the explanation how capital comes into being in primitive conditions and in new countries. The first efforts to accumulate capital must be attended by sacrifice; a temporary sacrifice, of course, to secure a permanent gain, but, in the first instance at least, a material sacrifice.

It is with the beginnings of national capital as it is with the beginnings of individual capital; there is need of foresight, effort, perhaps even curtailment in necessaries.

But to account for the origin of capital by abstinence from consumptive use is one thing; to account for interest is another. In all production labour sacrifices life, and capital sacrifices immediate enjoyment.

It seems natural to say that one part of the product pays wage and another pays interest, as compensation for the respective sacrifices. But labour is not paid because it makes a sacrifice, but because it makes products which obtain value from human wants; and capital does not deserve to be paid because it make sacrifices—which is a matter of no concern to any one but the capitalist—but because of some useful effect produced by its co-operation.

Thus we come back to the old question, What service does capital render that the abstinence which preserves and accumulates it should get a perpetual payment? And if, as we saw, productivity cannot account for interest, no more can abstinence. Edition: current; Page: [none] Dr. Senior included abstinence among the costs of production as a second and independent sacrifice. The analysis may be more easily understood from the following concrete example.

An owner of capital embarks it in a productive undertaking. In doing so he decides to undergo the sacrifice of labour in personally employing his capital , and that labour is made productive and remunerative by the aid of the capital. If, in calculating the remuneration due him, he claims one sum as wage for labour, and another as reward for abstaining from the immediate enjoyment of his own wealth, he really makes the double calculation familiarly known as eating one's cake and having it.

His labour would not have yielded the profitable result which returns him the undertaker's wage without the assistance of the capital; he cannot charge for the sacrifice of his wealth as wealth and for the sacrifice of his wealth as capital. The truth is that, in this case, the one sacrifice of labour admits of being estimated in two ways: one by the cost to vital force; the other and more common, by the greater satisfaction which would have been got from the immediate use of capital as wealth at an earlier period of time.

Compound interest

In view of the unsatisfactoriness of the answers hitherto given to our problem it is easy to see how another answer would arise. The power wielded by the owners of wealth in the present day needs no statement. It is not only that "every gate is barred with gold," but that, year by year, the burden of the past is becoming heavier on the present.

Wealth passes down from father to son like a gathering snowball, at the same time as industry gets massed into larger and larger organisations, and the guidance and spirit of industry is taken more and more out of the hands of the worker and given to the capitalist. Of two men, in other respects equal, the one who has wealth is able not only to preserve the value of his wealth intact, but to enjoy an annual income without risk or trouble, and, providing that he lives well within his income, can add steadily to the sum of his wealth.

The other has to work hard for all he gets; time does nothing for him. If he saves it is at a sacrifice; yet only in this sacrifice is there any chance of his rising out of the dull round which repeats each day the labour of the last—that is, only as he becomes an owner of capital.

Thus, in course of time there appears a favoured class who are able not only to live without working, but to direct, control, and even limit the labour of the majority. Now if, when the onus of justifying its existence is thrown upon capital, economic theory can only account for this income without risk and without work by pointing to the "productive power" of capital, or to the "sacrifice of the capitalist," it is easy to see how another theory should make its appearance, asserting that interest is nothing else than a forced contribution from helpless or ignorant people; a tribute, not a tax.

Rodbertus's picture of the working man as the lineal descendant of the slave—"hunger a good substitute for the lash"; Lassalle's mockery of the Rothschilds as the chief "abstainers" in Europe; Marx's bitter dialectic on the degradation of labour, are all based on generous sympathy with the helpless condition of the working classes under capitalist industry, and many shut their eyes to the weakness of Socialist economics in view of the strength of Socialist ethics.

Edition: current; Page: [none] The Exploitation theory then makes interest a concealed contribution; not a contribution, however, from the consumers, but from the workers. Interest is not a pure surplus obtained by combination of capitalists. It does represent a sacrifice made in production, but not a sacrifice of the capitalists. It is the unpaid sacrifice of labour. It has its origin in the fact that labour can create more than its own value.

A labourer allowed free access to land, as in a new country, can produce enough to support himself and the average family, and have besides a surplus over. Translate the free labourer into a wage earner under capitalism, pay him the wage which is just sufficient to support himself and his family, and here also it is the case that he can produce more than his wage. Suppose the labourer to create the value of his wage, say 3s. Here the modern conditions of industry favour the capitalist.

The working day of ten to twelve hours is a sort of divine institution to the ignorant labourer. As the product does not pass into his own hand, he has no means of knowing what the real value of his day's work is. The only lower limit to his wage is that sum which will just keep himself and his family alive, although, practically, there is a lower limit when the wife and children become the breadwinners and the capitalist gets the labour of five for the wage of one.

On the other hand, the increase of wealth over population gradually displaces labour, and allows the same amount of work to be done by fewer hands; this brings into existence a "reserve" to the industrial army, always competing with those left in work, and forcing down wages. Thus the worker, unprotected, gets simply the reproduced value of a portion of his labour; the rest goes to capital, and is falsely, if conscientiously, ascribed to the efficiency of capital.

I feel that it would be impertinence in me to say anything here that would anticipate the complete and masterly criticism brought against this theory in Book VI.

The crushing confutation of the Labour Value theory is work that will not require to be done twice in economic science, and the vindication of interest as a price for an economic service or good suggested by the very nature of things "which may be modified but cannot be prevented" will necessitate reconsideration by the Socialist party of their official economic basis.

But it would be easy to misunderstand the precise incidence of this criticism, and perhaps it is well to point out what it does and what it does not affect. It proves with absolute finality that the Exploitation theory gives no explanation of interest proper.

But this is far from saying that Exploitation may not explain a very large amount of that further return to the joint operation of capital and labour which is vaguely called "profit. The latter, rightly considered, is a wage for work, for intellectual guidance, organisation, keen vision, all the qualities that make a good businessman.

There are two ways in which this wage may be obtained: to use a Socialist phrase, by exploiting nature and by exploiting man. To the first category belongs all work of which the farmer's is the natural type: that which visibly produces its own wages, whether by directly adding to the amount and quality of human wealth, or preserving that already produced, or changing it into higher forms, or making it available to wider circles. In this category A's gain is B's gain. To the second category belong those perfectly fair modes of business activity where one uses his intelligence, tact, taste, sharpness, etc.

Here A's gain is B's loss, but the community share in A's gain, and even B shares in it, by being better served as a consumer. But to this category also belong those numerous forms of occupation which involve taking advantage of poor men's wants and necessities to snatch a profit, and one of those forms is the underpaying of labour.

Edition: current; Page: [none] Any one who has realised the difficulty of the wages question will understand that this underpaying may be quite unintentional. Capitalists, no less than labourers, are under the domination of the capitalist system, and, under the steady pressure of competition, it is difficult for an employer to be just, not to say generous. His prices are regulated not by his own cost of production, but by the costs of production in the richest and best appointed establishments of his rivals; and yet his workers' wages have to be regulated by an equation between these prices, and the wages of labour in similar trades and in the near vicinity.

In fact the difficulties of determining a "just" wage are so great that the temptation is overwhelming to ascertain what labour is worth by the easy way of ascertaining what labour will take, and if fifty women are at the gate offering their services for a half of what fifty men are earning, who is to determine what a "fair wage" is? It should then be at once and frankly confessed that the Socialist contention may afford an explanation of a great proportion of what is vaguely known as "undertaker's profit.

Morality and practical statesmanship may determine that, in the interests of the community, purely economic laws be subordinated to moral and political laws; or, to put it more accurately, that economic laws, which would assert themselves under "perfect competition," be limited by a social system which substitutes co-operation for competition.

That is to say, the work of capital in production may be quite definitely marked out, and its proper relation to the value it accompanies be exactly determined, and yet the distribution of its results may be taken from private owners and given over to the corporate owning of the state. As to Dr. The reader will find the essence of it in pp. According to it, when we lend capital, whether it be to the nation or to individuals, the interest we get is the difference in popular estimation and valuation between a present and a future good.

If we lend to direct production, the reason we get interest is not that our capital is capable of reproducing itself and more. The explanation of this reproduction is to be found in the work of those who employ the capital, both manual and intellectual workers. We get interest simply because we prefer a remote to a present result.

It is not that by waiting we get more than we give; what we get at the year's end is no more than the equivalent value of what we lent a year before.

Capital plus interest on 31st December is the full equivalent of capital alone on 1st January preceding. Interest then is in some sense what Aquinas called it, a price asked for time. Not that any one can get the monopoly of time, and not that time itself has any magic power of producing value, but that the preference by the capitalist of a future good to a present one enables the worker to realise his labour in undertakings that save labour and increase wealth.

Economically speaking, as wage is a fair bargain with labour, because labour can produce its own wage, so is interest a fair bargain with the capitalist, because in waiting the capitalist merely puts into figures the universal estimate made by men between present and future goods, and the capitalist is as blameless of robbery as the labourer.

If we view the possession of riches as, essentially, a command over the labour of others, we might say that interest is a premium paid to those who do not present their claims on society in the present.

The essence of interest, in short, is Discount. In concluding, I should like to say with Dr. The time I have given to this work may excuse my suggesting that a valuable service might be rendered to the science, and a valuable training in economics given, if clubs were organised, under qualified professors, to translate, adapt, and publish works which are now indispensable to the economic student.

Introduction The Problem of Interest It is generally possible for any one who owns capital to obtain from it a permanent net income, called Interest. It owes its existence to no personal activity of the capitalist, and flows in to him even where he has not moved a finger in its making.

Consequently it seems in a peculiar sense to spring from capital, or, to use a very old metaphor, to be begotten of it. It may be obtained from any capital, no matter what be the kind of goods of which the capital consists: from goods that are barren as well as from those that are naturally fruitful; from perishable as well as from durable goods; from goods that can be replaced and from goods that cannot be replaced; from money as well as from commodities.

And, finally, it flows in to the capitalist without ever exhausting the capital from which it comes, and therefore without any necessary limit to its continuance. It is, if one may use such an expression about mundane things, capable of an everlasting life. Edition: current; Page: [none] Thus it is that the phenomenon of interest, as a whole, presents the remarkable picture of a lifeless thing producing an everlasting and inexhaustible supply of goods.

And this remarkable phenomenon appears in economic life with such perfect regularity that the very conception of capital has not infrequently been based on it. These words contain the theoretical problem of interest. When the actual facts of the relation between interest and capital, with all its essential characteristics, are described and fully explained, that problem will be solved. But the explanation must be complete both in compass and in depth.

In compass, inasmuch as all forms and varieties of interest must be explained. In depth, inasmuch as the explanation must be carried without a break to the very limits of economical research: in other words, to those final, simple, and acknowledged facts with which economical explanation ends; those facts which economics rests on, but does not profess to prove; facts the explanation of which falls to the related sciences, particularly to psychology and natural science.

From the theoretical problem of interest must be carefully distinguished the social and political problem. The theoretical problem asks why there is interest on capital.

The social and political problem asks whether there should be interest on capital—whether it is just, fair, useful, good,—and whether it should be retained, modified, or abolished. While the theoretical problem deals exclusively with the causes of interest, the social and political problem deals principally with its effects. And while the theoretical problem is only concerned about the true, the social and political problem devotes its attention first and foremost to the practical and the expedient.

As distinct as the nature of the two problems is the character of the arguments that are used by each of them, and the strictness with which the arguments are used. In the one case the argument is concerned with truth or falsehood, while in the other it is concerned for the most part with expediency.

To the question as to the causes of interest there can be only one answer, and its truth every one must recognise if the laws of thought are correctly applied.

But whether interest is just, fair, and useful or not, necessarily remains to a great extent a matter of opinion. The most cogent argumentation on this point, though it may convince many who thought otherwise, will never convert all.

Suppose, for instance, that by the soundest of reasoning it was shown to be probable that the abolition of interest would be immediately followed by a decline in the material welfare of the race, that argument will have no weight with the man who measures by a standard of his own, and counts material welfare a thing of no great importance—perhaps for the reason that earthly life is but a short moment in comparison with eternity, and because the material wealth that interest ministers to will rather hinder than help man in attaining his eternal destiny.

Prudence urgently demands that the two problems which are so fundamentally distinct should be kept sharply apart in scientific investigation. It cannot be denied that they stand in close relation with each other. Indeed it appears to me that there is no better way of coming to a correct decision on the question whether interest be a good thing, than by getting a proper knowledge of the causes which give rise to it.

But we must remember that this connection only entitles us to bring together the results; it does not justify us in confusing the investigations.

Confusing these investigations will, in fact, endanger the correct solution of either problem, and that on several grounds. In the social and political question there naturally come into play all sorts of wishes, inclinations, and passions. If both problems are attempted at the same time, these will find entrance only too easily into the theoretical part of the inquiry, and there, in virtue of the real importance they have in their proper place, weigh down one of the scales—perhaps that very one which would have remained the lighter if nothing but grounds of reason had been put in the balance.

What one wishes to believe, says an old and true proverb, that one easily believes.

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And if our judgment on the theoretical interest problem is perverted, it will naturally react and prejudice our judgment on the practical and political question.

Edition: current; Page: [none] Considerations like these show that there is constant danger that an unjustifiable use may be made of arguments in themselves justifiable. The man who confuses the two problems, or perhaps mistakes the one for the other, and, looking at the matter in this way, forms one opinion upon both, will be apt to confuse the two groups of arguments also, and allow each of them an influence on his total judgment.

He will let his judgment as to the causes of the phenomenon of interest be guided, to some extent, by principles of expediency—which is wholly and entirely bad; and he will let his judgment as to the advantages of interest as an institution be, to some extent, directly guided by purely theoretical considerations—which, at least, may be bad.

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In the case, e. Or it may happen that one comes to the theoretical conclusion that interest has its origin in the exploitation of the labourer, made possible by the relations of competition between labour and capital; and on that account he may, without more ado, condemn the institution of interest, and advocate its abolition.

The one is as illogical as the other. Whether the existence of interest be attended by results that are useful or harmful to the economical production of a people, has absolutely nothing to do with the question why interest exists; and our knowledge of the source from which interest springs, in itself gives us no ground whatever for deciding whether interest should be retained or abolished.

Whatever be the source from which interest comes—even if that source be a trifle muddy—we have no right to decide for its abolition unless on the ground that the real interests of the people would be advanced thereby. In economical treatment this separation of the two distinct problems, which prudence suggests, has been neglected by many writers. But although this neglect has been the source of many errors, misunderstandings, and prejudices, we can scarcely complain of it, since it is the practical problem of interest that has brought the theoretical problem and its scientific treatment to the front.

Through the merging of the two problems into one, it is true, the theoretical problem has of necessity been worked at under circumstances which were not favourable for the discovery of truth. But without this merging very many able writers would not have worked at it at all.

It is all the more important that we profit in the future by such experiences of the past. The intentionally limited task to which I intend to devote myself in the following pages is that of writing a critical history of the theoretical problem of interest. I shall endeavour to set down in their historical development the scientific efforts made to discover the nature and origin of interest, and to submit to critical examination the various views which have been taken of it.

As to opinions whether interest is just, useful, and commendable, I shall only include them in my statement so far as that is indispensable for getting at the theoretical substance that they contain.

Notwithstanding this limitation of subject, there will be no lack of material for a critical history, either as regards the historical or as regards the critical part. A whole literature has been written on the subject of interest, and a literature which, in mere amount, is equalled by few of the departments of political economy, and by none in the variety of opinion it presents. Not one, nor two, nor three, but a round dozen of interest theories testify to the zeal with which economists have devoted themselves to the investigation of this remarkable problem.

Whether these exertions were quite as successful as they were zealous may with some reason be doubted. The fact is that, of the numerous views advanced as to the nature and origin of interest, no single one was able to obtain undivided assent. Each of them, as might be expected, had its circle of adherents, larger or smaller, who gave it the faith of full conviction.

But each of them omitted considerations enough to prevent its being accepted as a completely satisfactory theory. Still even those theories which could only unite weak minorities on their side showed themselves tenacious enough to resist extinction. And thus the present position of the theory exhibits a motley collection of the most conflicting opinions, no one of them strong enough to conquer, and no one of them willing to admit defeat; the very number of them indicating to the impartial mind what a mass of error they must contain.

Edition: current; Page: [none] I venture to hope that the following pages may bring these scattered theories a little nearer to a point. Before I can apply myself to my proper task I must come to an understanding with my readers as to some conceptions and distinctions which we shall have to make frequent use of in the sequel. Of the many meanings which, in the unfortunate and incongruous terminology of our science, have been given to the word Capital, I shall confine myself, in the course of this critical inquiry, to that in which capital signifies a complex of produced means of acquisition—that is, a complex of goods that originate in a previous process of production, and are destined, not for immediate consumption, but to serve as means of acquiring further goods.

Objects of immediate consumption, then, and land as not produced stand outside our conception of capital. I shall only justify my preference for this definition meantime on two grounds of expediency.

Firstly, by adopting it a certain harmony will be maintained, so far, at least, as terminology is concerned, with the majority of those writers whose views we shall have to state; and secondly, this limitation of the conception of capital defines also most correctly the limits of the problem with which we mean to deal. It does not fall within our province to go into the theory of land rent. We have only to give the theoretical explanation of that acquisition of wealth which is derived from different complexes of goods, exclusive of land.

Goodhart. the Role of Money

The more complete development of the conception of capital I reserve for a future occasion. There is the National conception of capital, which embraces the national means of economic acquisition, and only these; and there is the Individual conception of capital, which includes everything that is a means to economic acquisition in the hands of an individual—that is to say, those goods by means of which an individual obtains wealth for himself, no matter whether the goods are, from the point of view of the national economy, means of acquisition or means of enjoyment, goods for production or goods for consumption.

Thus, e. The national conception, if we except those few objects of immediate consumption lent at interest to other countries, includes merely the produced means of production belonging to a country. In what follows we shall chiefly be concerned with the national conception of capital, and shall, as a rule, keep this before us when the word capital by itself is used.

The income that flows from capital, sometimes called in German Rent of Capital, we shall simply call Interest. First of all, we must distinguish between Gross interest and Net interest. The expression gross interest covers a great many heterogeneous kinds of revenue, which only outwardly form a whole.

It is the same thing as the gross return to the employment of capital; and this gross return usually includes, besides the true interest, such things as part replacement of the substance of capital expended, compensation for all sorts of current costs, outlay on repairs, premiums for risk, and so on. Thus the Hire or Rent which an owner receives for the letting of a house is a Gross interest; and if we wish to ascertain what we may call the true income of capital contained in it, we must deduct a certain proportion for the running costs of upkeep, and for the rebuilding of the house at such time as it falls into decay.

Net interest, on the other hand, is just this true income of capital which appears after these heterogeneous elements are deducted from gross interest. It is the explanation of Net interest with which the theory of interest naturally has to do.

Edition: current; Page: [none] Next, a distinction must be drawn between Natural interest and Contract or Loan interest. In the hands of one who employs capital in production, the utility of his capital appears in the fact that the total product obtained by the assistance of the capital possesses, as a rule, a higher value than the total cost of the goods expended in the course of production.

The excess of value constitutes the Profit of capital, or, as we shall call it, Natural interest.

The owner of capital, however, frequently prefers to give up the chance of obtaining this natural interest, and to hand over the temporary use of the capital to another man against a fixed compensation.

This compensation bears different names in common speech. It is called Hire, and sometimes Rent in German Miethzins and Pachtzins when the capital handed over consists of durable or lasting goods. It is generally called Interest when the capital consists of perishable or fungible goods. While, however, the conception of Loan interest is exceedingly simple, that of Natural interest requires more close definition. It may with reason appear questionable if the entire profit realised by an undertaker from a process of production should be put to the account of his capital.

Here there is no doubt that one part of the "profit" is simply the undertaker's wage for the work he has done.

But even where he does not personally take part in the carrying out of the production, he yet contributes a certain amount of personal trouble in the shape of intellectual superintendence—say, in planning the business, or, at the least, in the act of will by which he devotes his means of production to a definite undertaking.

The question now is whether, in view of this, we should not distinguish two quotas in the total sum of profit realised by the undertaking; one quota to be considered as result of the capital contributed, a second quota to be considered as result of the undertaker's exertion.

On this point opinions are divided. Most economists draw some such distinction. From the total profit obtained by the productive undertaking they regard one part as profit of capital, another as undertaker's profit. Of course it cannot be determined with mathematical exactitude, in each individual case, how much has been contributed to the making of the total profit by the objective factor, the capital, and how much by the personal factor, the undertaker's activity.

Nevertheless we borrow a scale from outside, and divide off the two shares arithmetically. We find what in other circumstances a capital of definite amount generally yields. That is shown most simply by the usual rate of interest obtainable for a perfectly safe loan of capital. Then, of the total profit from the undertaking, that amount which would be enough to pay the usual rate of interest on the capital invested in it, is put down to capital, while the remainder is put to the account of the undertaker's activity as the profit of undertaking.

On the other hand, there are many, especially among the younger economists, who hold that such a division is inadmissible, and that the so-called undertaker's profit is homogeneous with the profit on capital. The difficulties, however, which surround our special subject, the problem of interest, are so considerable that I do not feel it my duty to add to them by taking up another. I purposely refrain then from entering on any investigation, or giving any decision as to the problem of undertaker's profit.

I shall only treat that as interest which everybody recognises to be interest—that is to say, the whole of contract interest, 11 and, of the "natural" profit of undertaking only so much as represents the rate of interest usually obtainable for capital employed in undertaking.

The question whether the so-called undertaker's profit is a profit on capital or not I purposely leave open. Happily the circumstances are such that I can do so without prejudice to our investigation; for at the worst it is just those phenomena which we all recognise as interest that constitute the great majority, and contain the characteristic substance of the general interest problem.

Thus we can investigate with certainty into the nature and origin of the phenomenon of interest without requiring to decide beforehand on the exact boundary-line between the two profits. I need scarcely say that, in these scanty remarks, I do not suppose myself to have given an exhaustive, or even a perfectly correct statement of the principles of the theory of capital. All that I have attempted to do is to lay down as briefly as possible a useful and certain terminology, on the basis of which we may have a common understanding in the critical and historical part of this work.

It is very rarely indeed that, when a phenomenon first attracts attention, it is seen in its full extent, with all its constituent and peculiar details, and is then made the subject of one comprehensive inquiry. Much more frequently is it the case that attention is first attracted by some particularly striking instance, and it is only gradually that the less striking phenomena come to be recognised as belonging to the same group, and are included in the compass of the growing problem. Edition: current; Page: [none] This has been the case with the phenomenon of interest.

It first became the object of question only in the form of Loan interest, and for full two thousand years the nature of loan interest had been discussed and theorised on, before any one thought it necessary to put the other question which first gave the problem of interest its complete and proper range—the question of the why and whence of Natural interest.

It is quite intelligible why this should be so. What specially challenges attention about interest is that it has its source and spring, not in labour, but, as it were, in some bounteous mother-wealth. In loan interest, and specially in loan interest derived from sums of money that are by nature barren, this characteristic is so peculiarly noticeable that it must excite question even where no close attention has been given it.

Natural interest, on the other hand, if not obtained though the labour, is certainly obtained under co-operation with the labour of the capitalist-undertaker; and to superficial consideration labour and co-operation with labour are too easily confounded, or, at any rate, not kept sufficiently distinct.

Thus we fail to recognise that there is in natural interest, as well as in loan interest, the strange element of acquisition of wealth without labour. Before this could be recognised, and thus before the interest problem could attain its proper compass, it was necessary that capital itself, and its employment in economic life, should take a much wider development, and that there should be some beginning of systematic investigation into the sources of this income.

And this investigation could not be one that was content to point out the obvious and striking forms of the phenomenon, but one that would cast light on its more homely forms. But these conditions were only fulfilled some thousands of years after men had first expressed their wonder at loan interest "born of barren money. This period begins deep in ancient times, and reaches down to the eighteenth century of our era.

It is occupied with the contention of two opposing doctrines: the elder of the two is hostile to interest; the later defends it. The course of the quarrel belongs to the history of civilisation; it is deeply interesting in itself, and has besides had an influence of the deepest importance on the practical development of economic and legal life, of which we may see many traces even in our own day. But to depict the stationary state is only to establish a starting point for a discussion of change.

Several types of changes are suggested, each entailing the idea that real saving is achieved at the expense of consumption and of capital in the outer rings and that the saving makes possible the expansion of capital in the inner rings. Formal or informal, the message is clear: An expansion of the capital structure is not to be viewed as a simultaneous and equiproportional increase in capital in each of the maturity classes; it is to be viewed as a reallocation of capital among the maturity classes.

Overlooked by his predecessors and largely ignored by the modern mainstream, this is the market mechanism that keeps the economy's intertemporal production plans in line with the intertemporal preferences of consumers.

The significance of this market mechanism was at issue in his debate with John B. Clark, who held that once capital is in place, the maintenance of capital is automatic and that production and consumption are, in effect, simultaneous. This step, which was actually taken by Mises and Hayek, would have involved a comparison of changes in the configuration of the rings on the basis of whether those changes were preference-induced or policy-induced.

A change in intertemporal preferences in the direction of increased saving reallocates capital among the rings such that the economy experiences capital accumulation and sustainable growth; a policy-induced change in credit conditions, that is, a lowering of the interest rate achieved by the lending of newly created money, misallocates capital among the rings such that the economy experiences unsustainable growth and economic crisis. His attitude toward this subject matter is revealed in the letters to Swedish economist, Knut Wicksell, whose ideas about the divergence of the market rate of interest and the natural rate would become an important part of the Austrian theory.

Mises is a student of myself and Prof. Wieser, which, however, does not mean that I would want to take responsibility for all his views. I have just begun to read his book myself, and am not yet familiar with its content.

When a profound thinker makes a great leap forward, we are not entitled to complain that the leap was not greater still. Much of the criticism comes from with the Austrian school: His theory was insufficiently subjectivist. His defense of the agio theory of interest relied needlessly on psychological considerations. His reckoning of production time was backward-looking rather than forward-looking. His conclusions about the relationship between the interest rate and the degree of roundaboutness in the production process apply less generally that he would have us believe.

The economy's intertemporal structure of capital cannot be reduced to a single number.

Articles of Interest

The definitional dependence of the average period of production on the rate of interest invalidates much of his theory. As substantial an economist as Schumpeter could claim that interest is a disequilibrium phenomenon and fantasize about a long-run equilibrium where market forces have pushed the interest rate to zero. John Maynard Keynes imagined interest to be a purely monetary phenomenon. Creating what Hayek called a "mythology of capital," Frank Knight, following Clark, held that production and consumption occur simultaneously, that the period of production is irrelevant, and that the interest rate is wholly determined by technological considerations.

Karl Marx and the Close of His System. Translated by Alice McDonald. London: T. Fisher Unwin, New York: Augustus M. Kelley, Capital and Interest 3 vols. By George D. Huncke and Hans F. Capital and Interest , text file of translation by William Smart. South Holland, Ill. Published as Bruce J. Caldwell, ed. Hennings, Klaus H. Brookfield, VT: Edward Elgar, Kirzner, Israel. Brookfield, Vt.Edition: current; Page: [none] The Exploitation theory then makes interest a concealed contribution; not a contribution, however, from the consumers, but from the workers.

In both periods this dislike has left documentary record. Then the two values are considered the maximum and minimum. But time is a common good that belongs to no one in particular, but is given to all equally by God. Edition: current; Page: [none] Considerations like these show that there is constant danger that an unjustifiable use may be made of arguments in themselves justifiable.

It is, as the title suggests, the positive theory of capital. To ascribe interest to the productive power of capital is to make a double charge for natural forces—in the price and in the interest. Capital and Interest.

JOIE from Cathedral City
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