Capital and Interest

Eugen von Böhm-Bawerk's Capital and Interest: A Critical History of Economical Theory, translated by William Smart and published by Macmillan in 1890, asks why the owner of capital draws a lasting net income without personal exertion. This recommendation covers only that 1890 English volume, the historical and critical part of the project; Böhm-Bawerk reserves his own explanation for the positive sequel, and neither that work nor the 1959 collected translation is reviewed here. The volume tests each rival theory against one target: a surplus of value in the product over the value of the capital consumed in making it.

Böhm-Bawerk first separates the theoretical problem, why interest exists, from the social and political problem, whether it should, warning that mixing them lets wishes and passions tilt reasoning about causes. He confines capital to a complex of produced means of acquisition, excluding land and consumption goods. The history runs from classical and medieval opposition to usury through the defences of the sixteenth to eighteenth centuries and Turgot to the productivity, use, abstinence, labour and exploitation schools. These chapters reconstruct rival doctrines for the critique.

In the productivity chapters, Böhm-Bawerk takes Roscher's fisher, who saves a stock of fish, builds a boat and net, and then catches far more each day, grants the physical surplus, and separates four claims: capital serves production, yields more goods than labour without it, yields more value than labour without it, or yields more value than it contains. Interest requires the fourth, and treating proof of the earlier claims as proof of the fourth, he says, begs the question. Smart's preface draws the price consequence: the productiveness of capital goods is already discounted in their price, so crediting interest to it charges twice for the same natural forces.

With the use theories the dispute moves into credit. Böhm-Bawerk traces the separate, durable use that writers priced in a loan to legal fiction, which treated returned fungible goods as the same goods lent and so as their full equivalent. Yet coal differs in value at the pit-brow, the railway terminus and the fireside, and a sum available today differs in value from the same sum due later. A loan is a real exchange of present goods for future goods; interest is the agio present goods command, part of the equivalent of the sum lent. He defers its causes to the second volume.

On abstinence, Böhm-Bawerk grants Senior a core of truth: making and preserving capital requires postponing gratification, and new wine that must lie a year sells above a good made with equal labour and ready at once. His objection concerns how sacrifice is counted. A countryman who spends a day fishing may reckon its cost as the day's labour or as the hares he could have shot, never as both, just as money spent on a pleasure trip costs either the money or the Persian carpet it might have bought. When he spends the day planting fruit trees that bear years later, the sacrifice remains one day's work, or alternatively the enjoyments that work could have yielded sooner, and the advantage of having them sooner is already included in what the day gives up. Senior, by adding abstinence to labour, counts the same sacrifice twice. A storm that wrecks the plantation overnight costs a day's work; Böhm-Bawerk asks how surviving trees and a long wait could cost more.

The difference between earlier and later payment underlies the critique of Rodbertus. Böhm-Bawerk imagines labourers building a steam engine in successive stages and dividing its value at completion. Equal shares would favour whoever works last, since the earliest workers wait years for payment, so later workers must cede larger shares to earlier ones to staff the preparatory stages; an undertaker paying each worker on finishing gives the same value sooner. The Marx chapter disputes that labour alone governs exchange value.

The conclusion ranks cost-based theories below those that trace value to the future, and judges Menger's statement of the problem the most complete. Böhm-Bawerk names the influence of time on valuation as the element he believes involves the whole truth and leaves it to the positive volume.