LIBRARY 
 AT URBANA-CHAMPAIGN 
 BOOKSTACKS
 
 CAPITAL AND INTEKEST 
 
 BY 
 
 EUGEN V. BCJHM-BAWEKK 
 
 PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF INNSBRUCK 
 
 TRANSLATED WITH A PREFACE AND ANALYSIS 
 BY 
 
 WILLIAM SMAKT, M.A. 
 
 LECTURER ON POLITICAL ECONOMY IN QUEEN MARGARET COLLEGE 
 GLASGOW 
 
 NEW YORK 
 BRENTANO'S 
 
 1922,
 
 
 TRANSLATOR'S PREFACE 
 
 MY only reasons for writing a preface to a work so exhaustive, and 
 
 <t in itself so lucid, as Professor Bohm-Bawerk's Kapital und Kapi- 
 
 talzins. are that I think it may be advisable to put the problem 
 
 with which it deals in a way more familiar to English readers, and 
 
 to show that the various theories stated and criticised in it are 
 
 based on interpretations implicitly given by practical, men to com- 
 
 po nion phenomena. 
 
 First, to state the problem. A manufacturer who starts business 
 with a capital of 20,000 takes stock at the end of a year, and 
 finds that he is richer by 2000 that is to say, if he sold plant, 
 stock, and debts at a fair valuation, he would obtain for them 
 22,000. The increment of 2000 he will probably call his 
 "profit." If asked to explain what is the origin of profit in 
 general, and of this amount of profit in particular, and r further, why 
 this profit should fall to him, his first answer will probably be that 
 the goods he manufactures meet a want felt by a certain section of 
 the public, and that, to obtain the goods, buyers are willing to pay 
 a price high enough to allow him, over the whole field of his 
 production for one year, to obtain the profit of 2000. 
 
 This, however, immediately suggests the question why a public 
 which, as a rule, is not willing to pay more than it can help for 
 anything, should pay prices such as allow of this profit. The 
 manufacturer's answer probably would be, that it would not be 
 worth his while to put forth his energies in manufacturing for less 
 than this amount of profit, as he could, with at least equal safety 
 and without personal exertion, obtain, say 1000 by lending his 
 capital to any ordinary productive undertaking. 
 
 In this answer two statements are involved : first, that of the 
 2000 one part is wage for personal exertion, and, second, that the 
 remainder is the "usual return to capital" without personal 
 exertion. Thus is drawn a rough dividing line between what is 
 usually called " undertaker's profit " and interest. Interest seems to 
 be denned as that annual return to capital which may be obtained, 
 as a rule, without personal exertion. Accepting this answer we
 
 vi TRANSLATOR'S PREFACE 
 
 should expect to find the phenomenon of interest most easily 
 studied in the case of a Limited Liability Company, where the 
 personal exertion of the shareholders is limited to choosing the 
 investment, subscribing the capital, and receiving the dividends. 
 The portion of total " profit " obtained by the private employer or 
 undertaker, as such, is here eliminated ; or, rather, it is made 
 definite and measurable in being divided among the managing 
 director, the ordinary directors, and the secretary, who are paid a 
 fixed fee, salary, or, accurately and simply, a wage. 
 
 A careful consideration of the balance sheet of any such company 
 will guard us against a common misunderstanding. Such a balance 
 sheet will generally show two funds a Depreciation Fund and an 
 Insurance Fund. The former, sometimes called Sinking, Wear and 
 Tear, Repairs, or Replacement of Capital Fund, secures that fixed 
 capital, or its value, is replaced in the proportion in which it is 
 worn out, and thus provides a guarantee that the value of the 
 parent capital is not encroached upon, or inadvertently paid away 
 in dividend. The latter, sometimes called Equalisation of Dividend 
 Fund, is a provision for averaging the losses that are sure to 
 occur over a series of years, and are really a portion of the current 
 expenses. It is only after these funds are provided for that the 
 dividend is paid over to the shareholders, and this accentuates two 
 important facts: (1) that interest properly so called is something 
 distinct from any portion of parent capital, and (2) that it is not 
 accounted for by insurance against risks. 
 
 The question now is, Is such a dividend pure interest ? Here 
 we have to reckon with the familiar fact that limited companies, 
 under similar conditions, pay the most various rates of dividend. 
 If then we accept " dividend " as the equivalent of " interest " we 
 shall have to conclude that varying rates of interest are obtainable 
 on equal amounts of capital. 1 On looking closer, however, we find 
 the dividing line again reasserting itself. If a sound industrial 
 company is known to be paying a dividend higher than a certain 
 definite percentage on its capital, the value of the stock, or parent 
 capital, will rise to the point where dividend corresponds to an 
 interest no greater than this definite percentage e.g. the 100 
 stock of a great railway paying 5 per cent will rise to something 
 like 125, at which price the 5 per cent dividend on the original 
 capital shows a return of 4 per cent on the new value of the capital. 
 
 1 This consideration of itself suggests the indefiniteness of what is usually called 
 Undertaker's Profit. In the Limited Liability Company this " wage of intellect" is 
 measured and paid, but the varying dividend shows that it by no means exhausts 
 this "profit." The solution probably is that the attempt to assess undertaker's wage 
 on any principle is hopeless in present circumstances. It is a "glorious risk," de- 
 pending, among other things, on adroitness, foresight, opportunity, and exploitation 
 of labour four factors scarcely reducible to figures. But with this line of thought, 
 interesting and important as it is, we have nothing to do here.
 
 TRANSLATOR'S PREFACE vii 
 
 There is, in short, in every country, although varying from 
 country to country, a certain annual return which can be obtained 
 by capital with a minimum of risk, without personal exertion of the 
 owner. Its level is usually determined by the market price of the 
 national security. We count the 2f per cent interest of Consols an 
 absolutely safe return, because the British Constitution is pledged 
 for the annual payment of this amount of interest on its debt on 
 the capital borrowed by the nation from its members in past years. 
 This we should probably consider the proper economic interest for 
 capital invested in Great Britain. Any return above this level we 
 should consider, either as due to the insecurity of the capital as 
 invested (i.e. as a premium for insurance), or as that still vague 
 quantity called "profit." Thus Ave should probably consider the 
 4 per cent of our railway stocks as consisting of, say 2| per cent 
 for interest proper, and l per cent insurance or equalisation of 
 dividend. 
 
 Now it is this interest proper, obtainable by i .e owner of 
 capital without risk and without personal effort, that is the object 
 of our problem. 
 
 In which of the many forms that interest takes can we best study 
 its nature ] It might seem that the 2f per cent of Consols was the most 
 appropriate subject for examination, but a glance will show that 
 this form of interest is secondary and derivative. The nation as a 
 whole cannot pay interest on its debts unless the citizens as 
 individuals produce the wealth wherewith this interest is paid, other- 
 wise the nation will be paying away its capital. To study interest 
 as expressed in the annual payments on the Consolidated National 
 Debt would be to make the common mistake of explaining Natural 
 Interest by Contract Interest, which is very much the same as ex- 
 plaining why people pay interest by showing that they do pay it. 
 The phenomenon, then, must, primarily, be studied as it appears 
 in some or other of the forms of production of wealth. Let us 
 take the case of a manufacturing company. 
 
 The essential features here, as regards our problem, are that, 
 over a year's time, the products manufactured are sold at a price 
 which not only covers the value of raw materials, reimburses the 
 various wages of manual and intellectual labour, and replaces the 
 fixed capital as worn out, but leaves over that amount of value which 
 is divided out among the capitalist shareholders as interest. In 
 normal capitalist production, that is to say, not only is the value 
 of capital consumed in the production process replaced, but a 
 surplus of value appears. It has not always been perceived by 
 economists that this surplus value is the essential phenomenon 
 of what we call interest, ^-that interest on capital consists of this 
 very surplus value and nothing else, but whenever it is perceived 
 the question almost suggests -itself, What does this surplus value
 
 viii TRANSLATOR'S PREFACE 
 
 represent ? Is it merely a surplus, or is it of the nature of a wage ? 
 In other words, is it something obtained either by chance or force, 
 and corresponding to no service rendered by anybody or anything ; 
 or is it something connected with capital or the capitalist that, 
 economically speaking, deserves a return or a wage ? 
 
 A little consideration will show that the idea of a "mere sur- 
 plus" is untenable. When a manufacturer engages his capital in 
 production he, as it were, throws it into solution, and risks it all on 
 the chance of the consuming public paying a certain price for the 
 products into which his capital is transformed. If they will not 
 pay any price at all the capital never reappears ; even the labour, 
 which bound up its fortunes with the materials and machinery of 
 manufacture, loses its wage, or would do so except for the wage 
 contract which pays labour in advance. If the consumers, again, 
 will only pay a price equal to the value of the capital consumed, the 
 various workers, including the employer proper, will get their wage, 
 and the value of the capital itself will be unimpaired, but there 
 will be no interest. It is only if the consumers are willing to pay 
 a higher price that capital can get its interest. 
 
 The surplus then, which we call interest, appears primarily in 
 the value or price of products that is to say, interest is, in the 
 first instance, paid over by the consumer of goods in the price of the 
 products he buys. 
 
 Now it seems intelligible, although it is not really so intelligible as 
 is usually assumed, that the public will always pay a price for products 
 sufficient to reimburse the wages paid in producing them. The 
 labourer, theoretically, is paid by what he makes although this pro- 
 position requires more careful statement and limitation than can be 
 given it here and wages are supposed, prima facie, to represent an 
 equivalent in value contributed to the product by the worker. But 
 that the consuming world, over and above this wage, will pay a 
 surplus which does not represent any equivalent value given to the 
 product, is only conceivable on the supposition that the public is 
 unconscious that it is paying such a surplus. This supposition, how- 
 ever, is incredible in a community where most of the consumers are 
 also producers. To lose as consumer what one gains as producer is 
 a game of Beggar my Neighbour which would scarcely commend 
 itself to business men. 
 
 The surplus then may be assumed to represent something con- 
 tributed by capital to the value of products. This view is 
 supported by the common consciousness of practical men, " who 
 certainly believe that capital plays a distinct and beneficent r61e in 
 production. 
 
 If, now, we appeal to the common consciousness to say what it 
 is that capital does, or forbears to do, that it should receive interest, 
 we shall probably get two answers. One will be that the owner of
 
 TRANSLATOR'S PREFACE ix 
 
 capital contributes a valuable element to production ; the other, that 
 he abstains from using his wealth in his own immediate consumption. 
 On one or other of these grounds, the capitalist is said to deserve 
 a remuneration, and this remuneration is obtained by him in the 
 shape of interest. 
 
 Now it might possibly be the case that both answers point to 
 elements indispensable in the explanation of interest, but a slight 
 consideration will show that the two answers are very different 
 from one another. The one is positive that capital does something ; 
 the other negative that the capitalist abstains from doing some- 
 thing. In the one case interest is a payment for a tool ; in the 
 other, a recompense for a sacrifice. In the one case the capitalist 
 is paid because the capital he lends produces, or helps to produce, 
 new wealth ; in the other he is paid because he abstains from 
 diminishing wealth already produced. 
 
 It will become evident as we go on that, on these two answers, 
 which spring to the lips of any business man asked to account for 
 interest, are based the most important of the theories criticised in 
 the present book. The first answer is the basis of the Productivity 
 theories and of the Use theories ; the second is the basis of the 
 Abstinence . theory . 
 
 The argument of the Productivity theory may be put thus. 
 Human labour, employing itself on the materials given free by nature, 
 and making use of no powers beyond the natural forces which 
 manifest themselves alike in the labourer and in his environment, 
 can always produce a certain amount of wealth. But when wealth 
 is put into the active forms of capital of which machinery may be 
 takenas instance and type and capital becomes intermediary between 
 man and his environment of nature, the result is -that the pro- 
 duction of wealth is indefinitely increased. The difference between 
 the results of labour unassisted and labour assisted by capital is, 
 therefore, due to capital, and its owner is paid for this service by 
 interest. 
 
 The simpler forms of this theory (where capital is credited with 
 a direct power of creating value, or where surplus of products is 
 tacitly assumed to be the same thing as surplus of value) our author 
 has called the Naive theory. The more complex formulations of it 
 where, for instance, emphasis is laid on the displacement of labour 
 by capital, and interest is assumed to be the value formerly obtained 
 as wage, or where prominence is given to the work of natural 
 powers which, though in themselves gratuitous, are made available 
 only in the forms of capitalist production he has called the Indirect 
 theories. 
 
 How slight a claim this explanation has to the dignity of a 
 scientific theory appears in its practical definition of interest as the 
 
 \
 
 x TRANSLATOR'S PREFACE 
 
 whole return to capitalist production which is not accounted for 
 by labour. Yet the statement just given is elaborate and logical 
 in comparison with that of many of the economists who profess the 
 Productivity theory. Their usual treatment of the interest problem 
 is to co-ordinate capital with the other factors of production, land 
 and labour, and assume that interest is the payment for the services 
 of capital, as wage is for the services of labour, give ample illustra- 
 tion of the triumphs of capitalist production, and pass on to discuss 
 the rise and fall of its rate. 
 
 If, however, we demand an answer to what we have formulated 
 as the true problem of interest, we shall make the discovery that 
 the Productivity theory has not even put that problem before itself. 
 The amount of truth in the theory is that capital is a most powerful 
 factor in the production of wealth, and that- capital, accordingly, is 
 highly valued. But to say that capital is " productive " does not 
 explain interest, for capital would still be productive although it 
 produced no interest ; e.g. if it increased the supply of commodities 
 the value of which fell in inverse ratio, or if its products were, 
 both as regards quantity and value, greater than the products of 
 unassisted labour. The theory, that is to say, explains why the 
 manufacturer has to pay a high price for raw materials, for the 
 factory buildings, and for the machinery the concrete forms of 
 capital generally. It does not explain why he is able to sell the 
 manufactured commodity, which is simply these materials and 
 machines transformed by labour into products, at a higher price 
 than the capital expended. It may explain why a machine doing the 
 work of two labourers is valued at 100, but it does not explain 
 why capital of the value of 100 now should rise to the value of 
 105 twelve months hence ; in other words, why capital employed 
 in production regularly increases to a value greater than itself. 
 
 It must be admitted that there is something very plausible in 
 this theory, particularly in apparently simple illustrations of it. 
 A poor widow owns a chest of tools valued at 50. An unemployed 
 carpenter borrows them. The fifty shillings interest he pays seems 
 almost an inadequate return for the added productiveness given to 
 his labour over the year. Is not the interest made possible by the 
 qualities of the tools ? The facts here are as stated : without pro- 
 duction there would be no interest. So without land there would 
 be no turnips, but the existence of land is scarcely the sufficient 
 cause of the turnips. Suppose the widow sold the chest of tools to 
 another carpenter for 50. His labour also would be rendered 
 productive, and in the same degree, but he would pay no interest. 
 Or suppose she sold the tools for 50, but did not get payment for 
 a year ; the reason she would give for asking fifty shillings extra 
 would be, not that the tools were productive, but that the payment 
 was deferred. The important circumstance forgotten in this theory
 
 TRANSLATOR'S PREFACE xi 
 
 is that the productiveness of concrete capital is already discounted 
 in its price. The chest of tools would be of no value but for the 
 natural forces embodied in them or made available by them. 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. 
 Meanwhile we may note one significant circumstance in all these 
 transactions, that the emergence of interest is dependent on a 
 certain lapse of time between the borrowing and the paying. 
 
 It cannot be too often reiterated that the theory which explains 
 interest must explain surplus value not a surplus of products which 
 may obtain value and may not ; not a surplus of value over the 
 amount of value produced by labour unassisted by capital ; but a 
 surplus of value in the product of capital over the value of the 
 capital consumed in producing it. The insufficiency of the 
 present theory to meet these requirements may be shown in 
 another way. It is often assumed that, if a labouring man 
 during his week's work consumes the value of, say 20s. in food, 
 tools, etc., and during that week turns 20s. worth of raw material 
 into finished commodities, these commodities, together, will sell in 
 the market for something over 40s. But the ordinary life of many 
 a peasant proprietor who lives by continual toil, and never " gets 
 out of the bit," that is, never does more than reproduce his bare 
 living might show that the assumption is not universally valid, 
 and that labour by no means always produces more value than it 
 consumes. But the plausibility of the Productivity theory is the 
 parallelism it assumes between labour and capital "the suggestion 
 that interest is wage for capital's work. If, however, the emer- 
 gence of surplus value in the case of simple labour needs explan- 
 ation, much more does it in the case of capitalist production. 
 What is a product or commodity but raw material plus labour? 
 Labour and capital co-operate in making it, and the individual 
 form and share of each is lost in the joint product. But, of the 
 two, labour is the living factor, and if surplus value does emerge in 
 capitalist production as a regularly recurring phenomenon, it is more 
 likely that it comes from the living agent than from the dead tool. 
 Thus the Productivity theory ends in suggesting that other and 
 hostile theory according to which surplus value comes from labour, 
 and is only snatched away by capital. 
 
 But the fact is that, in all this, we have an entire misconception 
 of the origin of value. Value cannot come from production. 1 
 Neither capital nor labour can produce it. What labour does is to 
 produce a quantity of commodities, and what capital co-operating 
 with labour usually does is to increase that quantity. -These 
 commodities, under certain known conditions, will usually possess 
 value, though their value is little proportioned to their amount ; 
 1 See the striking passage on pp. 134, 135.
 
 xii TRANSLATOR'S PREFACE 
 
 indeed, is often in inverse ratio. But the value does not arise in the 
 production, nor is it proportional to the efforts and sacrifices of that 
 production. The causal relation runs exactly the opposite way. To 
 put it in terms of Monger's law, the means of production do not 
 account for nor measure the value of products ; on the contrary, the 
 value of products determines and measures the value of means of pro- 
 duction. Value only arises in the relation between human wants and 
 human satisfactions, and, if men do not " value " commodities when 
 made, all the labour and capital expended in the making cannot confer 
 on them the value of the smallest coin. But if neither capital nor 
 labour can create value, how can it be maintained that capital 
 employed in production not only reproduces its own value, but 
 produces a value greater than itself ? 
 
 I confess I find some difficulty in stating the economic argument 
 of what our author has called the Use theory of interest, and I am 
 almost inclined to think that he has done too much honour to some 
 economists in ascribing to them this theory, or, indeed, any definite 
 theory at all. 
 
 It is of course a familiar expression of everyday life that interest 
 is the price paid for the " use of capital," but most writers seem to 
 have accepted this formula without translating it. If the formula, 
 however, is considered to contain a scientific description of interest, 
 we must take the word " use " in something like its ordinary signifi- 
 cation, and consider the " use of capital " as something distinct from 
 the capital itself which affords the use. The loan then will be a 
 transfer and sale of this "use," and it becomes intelligible how, at 
 the end of the loari period, the capital lent is returned undeteriorated 
 in value ; it was .not the capital that was lent, but the use of the 
 capital. To put it in terms of Bastiat's classical illustration : James, 
 who lends a plane to William, demands at the year's end a new 
 plane in place of the one worn out, and asks in addition a plank, on 
 the ostensible ground that over a year William had the advantage, 
 the use of the plane. 
 
 If, however, we look carefully into this illustration, we shall see 
 that William not only had the use of the plane but the plane itself, as 
 appears from the fact that the plane was worn out during the 
 year. Here then the using of the plane is the same thing as the 
 consumption of the plane ; payment for a year's "use" is payment for 
 the whole capital value of the plane. Yet the payment demanded at 
 the year's end is not the capital value of the plane, the sum lent, but 
 also a surplus, a plank, under the name of interest. To put it another 
 way. . If William on the 1st of January had bgught the plane 
 outright from James, he would have paid him on that date a value 
 equivalent, say, to a precisely similar plane ; he would have had the 
 "use" of the plane over 365 days ; and by 31st December the plane
 
 TRANSLATOR'S PREFACE xiii 
 
 would have been consumed. As things are, he pays nothing on 1st 
 January; he has the use of the plane over the year; by 31st 
 December the plane is consumed ; and next day he has to pay over 
 to James a precisely similar plane plus a plank. The essential 
 difference between the two transactions is that, on 1st January the 
 price of the plane is another similar plane ; on the 31st December 
 it is a plane plus a plank. 
 
 This again suggests a very different source of interest, viz. that it 
 is to be found in the difference of time between the two payments. 
 
 Thus the Use theory, as put in this illustration, has only to be 
 clearly stated to show that it involves a confusion of thought as 
 regards the word "use." It is not difficult to find the origin of the 
 confusion, and the fallacy of the theory may be most easily shown 
 thereby. It has arisen in too exclusively studying the loan under 
 the form properly called Hire that is, where a durable good is lent 
 and is returned at the year's end, deteriorated indeed but not 
 destroyed. If we lend out a horse and cart, a tool, a house, we are 
 apt to conclude that the interest paid us is a price for the "use" of 
 these, because we get the goods themselves back in a year's time, 
 somewhat deteriorated in value, but visibly the same goods ; and 
 probably most of us would fall into the common error of supposing 
 the interest to be the equivalent of the wear and tear, i.e. a portion 
 of the parent capital. This is rendered more plausible by the 
 fact that most loans of capital are made in money ; we unconsciously 
 assume the gold or notes we receive to be the same gold or notes 
 we lent. But if we take the case of coals, or grain, or perishable 
 goods generally, and ask how it is possible to conceive of these 
 goods giving off a use and being returned to us substantially the 
 same as before, less wear and tear, wa must perceive that interest, 
 in this case at least, cannot be a payment for the " use " of goods, 
 but for the consumption of them, for the goods themselves. Are we 
 to conclude then that durable goods admit of an independent use 
 possessing independent value, and that perishable goods do not ? 
 If so, interest cannot be the price of the " use " of capital, as interest 
 is paid for all capital, whether durable or perishable. 
 
 This theory, in fact, affords a striking instance of how our science 
 has revenged itself for our unscientific treatment of it. It was 
 almost a misfortune that Adam Smith put its first great treatise in 
 such an attractive form that "the wayfaring men, though fools, might 
 not err therein." The result, in a good many cases, has been 
 an emulation among economists to keep their work at the same 
 level of clearness and attractiveness, and this was more easily effected 
 by discussion on the great social and industrial problems than by 
 severe attention to scientific method. In no other way can I 
 account for the fact that, a hundred years after the appearance 
 of JFealth of Nations, the great American and German economists
 
 xiv TRANSLATOR'S PREFACE 
 
 should be devoting so much of their time to elementary and 
 neglected conceptions. One of these neglected conceptions is that 
 of the " Use of goods," and one of the most important contribu- 
 tions to economic theory is the section devoted by Dr. Bohm- 
 Bawerk to that subject 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 ? and the Use th*eory ends in raising all the difficulties 
 of the Productivity theories. 
 
 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 absti- 
 nence from personal employment of capital in production that 
 would simply throw us back on the previous question, viz. how the 
 owner could make interest (as distinct from wage) by the use of his 
 capital but abstinence from immediate consumption in the many 
 forms of personal enjoyment or gratification.
 
 TRANSLATOR'S PREFACE xv 
 
 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. 
 The "abstinence "'of a rich man from what he probably cannot 
 consume, the capitalist's "compensation" for allowing others to 
 preserve his wealth from moth and rust by using it, the millionaire's 
 "sacrifice" measured by his 100,000 a-year these are the familiar 
 weapons of those who consider the evils of interest aggravated by 
 its claim. 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 commamd 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 1 And if, as we saw, 
 productivity cannot account for interest, no more can abstinence. 
 
 Dr. Bohm-Bawerk's chief criticism, however, is directed to a more 
 fundamental mistake in Senior's famous theory. Senior included 
 abstinence among the costs of production as a second and 
 
 b
 
 xvi TRANSLATOR'S PREFACE 
 
 independent sacrifice. In a singularly subtle analysis Bohm-Bawerk 
 shows that abstinence is not an independent sacrifice but an 
 alternative one. 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 com- 
 mon, by the greater satisfaction which would have been got from 
 the immediate use of capital as wealth at an earlier period of time. 
 
 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, provid- 
 ing 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
 
 TRANSLATOR'S PREFACE xvii 
 
 people ; a tribute, not a tax. Rodbertus's picture of the working 
 man as the lineal descendant of the slave " hunger a good substi- 
 tute for the lash "; Lassalle's mockery of the Rothschilds as the 
 chief " abstainers " in Europe ; Marx's bitter dialectic on the degra- 
 dation 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. 
 
 The Exploitation theory then makes interest a concealed contri- 
 bution ; 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 coun- 
 try, 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. in six hours' 
 work, then, if the capitalist can get the worker to work longer than 
 six hours for the same wage, he may pocket the extra value in the 
 name of profit or interest. 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 necessi-
 
 xviii TRANSLATOR'S PREFACE 
 
 tate 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." We saw that the value paid by a Limited Liability 
 Company as dividend, or the return to capital which a private owner 
 generally calls his profit, consists of two parts : of interest proper 
 and of undertaker's profit. The latter, rightly considered, is a wage 
 for work, for intellectual guidance, organisation, keen vision, all the 
 qualitiesthat makea good business man. 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., to get ahead of 
 his fellows, and " take the trade " from them. 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. 
 
 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 determin- 
 ing 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 1 
 
 It should then be at once and frankly confessed that the Socialist
 
 TRANSLATOR'S PREFACE xix 
 
 contention may afford an explanation of a great proportion of what 
 is vaguely known as "undertaker's profit." To go farther however, 
 and extend this explanation to all return to capitalist production 
 which is not definitely wage, is economic shortsightedness, that 
 brings its own revenge. 
 
 Bohm-Bawerk's refutation of the Exploitation theory is not a 
 refutation of Socialism, but -of a certain false economical doctrine 
 hitherto assumed by the great Socialist economists as negative basis 
 for that social, industrial, and political reconstitution of things 
 which is Socialism. 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 rela- 
 tion 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. But while the 
 advantage accruing from the use of capital would here be regulated 
 by a mechanical system, interest would remain, economically, exactly 
 as Bohm-Bawerk has stated it. 
 
 As to Dr. Bohm-Bawerk's own theory of interest I do not feel at 
 liberty to anticipate, or put in short compass, the contents of the 
 second volume now published, Die Positive Theorie des Kapitals. 
 The reader will find the essence of it in pp. 257-259 of the present 
 work. 
 
 It might be advisable, however, to put his theory into concrete 
 terms. 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 under-
 
 xx TRANSLATOR'S PREFACE 
 
 takings that save labour and increase wealth. But as capital 
 takes no active role in production, but is simply material on 
 which and tools by which labour works, the reward for working 
 falls to the worker, manual and intellectual ; the reward for waiting, 
 to the capitalist only. 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. 
 
 Dr. Bohm-Bawerk's theory of Interest, then, is an expansion of 
 an idea thrown out by Jevons but not applied. " The single and 
 all-important function of capital," said Jevons, "is to enable the 
 labourer to await the result of any long-lasting work to put an 
 interval between the beginning and the end of an enterprise." 
 Capital, in other words, provides an indispensable condition of 
 fruitful labour in affording the labourer time to employ lengthy 
 methods of production. 
 
 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. James Bonar 1 that, 
 while it would be bold to affirm that Professor Bohm-Bawerk has 
 said the last word on the theory of Interest, his book must be 
 regarded as one with which all subsequent writers will have to 
 reckon. 
 
 My thanks are due to Professor Edward Caird, of Glasgow 
 University, at whose instance this translation was undertaken, for 
 many valuable suggestions, and, not less, for the stimulus afforded 
 by hope of his approval ; to my former student Miss Christian 
 Brown, of Paisley, whose assistance in minute and laborious revision 
 of the English rendering has been simply invaluable ; and not 
 least, to Professor Bohm-Bawerk himself, who has most patiently 
 answered all questions as to niceties of meaning, and to whose 
 criticism all the proofs and this preface itself were submitted. 
 
 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. 
 
 1 Quarterly Journal of Economics, April 1889. 
 GLASGOW, April 1890.
 
 ANALYTICAL TABLE OF CONTENTS 
 
 INTRODUCTION 
 
 TJie Problem of Interest 
 
 The phenomenon of an income flowing constantly from all 
 
 kinds of capital, without personal exertion of the owner 
 The conditions of solution ..... 
 Tlte theoretical must be distinguished from the social and political 
 
 problem. Characteristics of each .... 2 
 
 Danger of confounding the two ; its common effects . . 3-4 
 
 Our task is the critical history of the theoretical problem . 5 
 
 Preliminary definitions. Capital? a " complex of produced means 
 
 of acquisition " .... 6 
 
 The difference between National and Individual capital ... 6 
 
 between Gross interest and Net interest ... 7 
 
 between Natural and Contract (or Loan) interest . . * 8 
 
 Interest as distinguished from Undertaker's Profit . . 8-9 
 
 Limitation of the subject to Interest proper . . . 10 
 
 BOOK I 
 
 The Development of the Problem 
 CHATTER I 
 
 THE OPPOSITION TO INTEREST IN CLASSICAL AND MEDIAEVAL TIMES 
 
 Loan interest, or Usury, as evidently income without labour, 
 was discussed long before Natural interest, where labour is 
 always present, and is supposed to account for the income . 13-14 
 
 The first period a rather barren one, extending to the eight- 
 eenth century is taken up with the struggle for and 
 against usury ...... 14-15
 
 xxii ANALYTICAL TABLE OF CON-TENTS 
 
 PAGE 
 
 Dislike of interest shown in all undeveloped stages of industry . 15 
 
 Hostility of the philosophic writers . . . . 16 
 
 Aristotle's argument, that money does not breed . . 17 
 
 Thus far the question is only theoretical, interest being recognised 
 
 as an established institution .... 17-18 
 
 Reaction under Christianity ; victory of the Church over temporal 
 
 legislation ; prohibition of interest . . . .18 
 
 The subject treated theologically till twelfth century, when begin 
 
 appeals to the jus divinum, jus humanum, and jus naturals . 1 9 
 
 The explanation of this ; the vexatious pressure of the prohibi- 
 tion on industry, and the necessity for rational defence of it 20 
 Stock arguments ,6f this period 
 
 (1) The barrenness of money . . . .21 
 
 (2) The consumability of money (Thomas Aquinas) . 22 
 
 (3) The Use transferred with the capital . . 23 
 
 (4) The selling of Time, a good common to all . . 23 
 But the prohibition did not apply to profit made by personal 
 
 employment of capital . . . . .24 
 
 CHAPTER II 
 
 THE DEFENCE OF INTEREST FROM THE SIXTEENTH TILL THE 
 EIGHTEENTH CENTURY 
 
 Zenith of the prohibition in the thirteenth century . ' . 25 
 
 The straggle of practical life. Direct exceptions to the prohibi- 
 tion ; evasions of it. The " interesse " . .26 
 
 The effect on theory. Compromise of the reformers with the 
 
 " parasitic profit " . . . . . .27 
 
 Rise of direct opposition to the prohibition ... 28 
 
 Calvin rejects authority, and dismisses the rational arguments, but 
 
 does not unreservedly allow interest . . . 28-29 
 
 Molinaeus ; his scholastic review and criticism of the canon argu- 
 ments ; his conclusions and concessions . . . 30-31 
 
 Calvin and Molinaeus, however, stand almost alone in the six- 
 teenth century ...... 
 
 Besold an able follower of Molinaeus .... 
 
 Bacon sees in interest an economical necessity, but only toler- 
 ates it . . . . .34 
 
 In the seventeenth century there is great development of theory, 
 especially in the mercantile Netherlands. Grotius theoretic- 
 ally condemns interest ..... 34
 
 ANALYTICAL TABLE OF CONTENTS xxiii 
 
 PAGE 
 
 but practically allows it. A few years later the tide fairly turns 
 
 with Salmasius . . . . . .35 
 
 Salmasius's argument; if the Commodatum is allowable, so 
 also is the Loan. To the objection founded on the perishable 
 nature of goods, he answers : (1) that such an argument 
 would prevent the lending of perishable things even without 
 interest, and (2) that the perishableness is another argument 
 for interest ...... 36-37 
 
 Character of his writings ..... 37-39 
 
 His works mark high water for a hundred years . . 40 
 
 In Germany after the seventeenth century there is not much 
 
 question about the legitimacy of interest . . . 41 
 
 Justi says nothing about it Sonnenfels, who has nothing good 
 
 to say of it, ridicules the canon doctrine and the prohibition 41-42 
 
 In England the prohibition was removed before the theoretic 
 question emerged. Hence the only debated question was 
 as to legal fixed rates of interest . . . . 43 
 
 Thus Culpepper, Child, North ... 44 
 
 Locke goes deeper into the subject. Money, he admits, is barren, 
 but interest is justified ; for, owing to bad distribution, one 
 has land which he cannot use, and another has capital, and 
 interest for the one is as fair as rent for the other . . 45-46 
 
 Locke's real importance, however, lies in the idea kept in the 
 background, that all wealth is made by labour. Thus also 
 Steuart ....... 40 
 
 Hume on the connection between profit and interest . . 47 
 
 By the time of Bentham (1787) the canon doctrine is only a 
 
 subject for ridicule ..... 48 
 
 In Italy the legal prohibition was quite inoperative . . 48 
 
 But before the eighteenth century there appeared no theoretical 
 
 defence of interest . 49 
 
 Galiani's pregnant idea (1750). From the analogy of bills of ex- 
 change, he argues that present sums of money are worth more 
 than future sums of similar amount, and that interest repre- 
 sents the difference . . . . .49 
 
 But he ascribes this to the different degree of their security, and 
 
 so makes interest a mere insurance premium . . ^0 
 
 Beccaria. In France legislation and theory held by the canon 
 
 doctrine long after it was abandoned elsewhere. Pothier . 51-52 
 
 Fanatical opposition of the elder Mirabeau . . 53-54 
 
 Finally, Turgot gave the canon doctrine its coup -de -grace. 
 
 Summary of the Me'moire ..... 55-5G
 
 xxiv ANALYTICAL TABLE OF CONTENTS 
 
 PAOE 
 
 Critical retrospect. The canon had said that interest was a 
 defrauding of the borrower ; for (1) money is barren, and (2) 
 there is no separate use of it. The new doctrine said (1) 
 money is not barren when the owner, employing it himself, 
 can make a profit by it, and (2) there is a use of capital 
 separable from capital itself .... 57 
 
 In short, it explained Loan interest from Natural interest, but 
 
 did not go on to ask the meaning of Natural interest . 58-59 
 
 All the same it was no small gain that the question was now 
 formally put, Why can a man, employing his own capital, 
 make a profit ? . . . . . .60 
 
 It was not long before a part of employer's profit was seen to be 
 
 an income sui generis . . . . .60 
 
 CHAPTER-III 
 
 TURGOT'S FRUCTIFICATION THEORY 
 
 The reason why Contract interest was first studied . . 61 
 
 Scientific research now replaced the outside motive. The 
 
 Economists : Quesnay, De la Riviere . . . 62 
 
 Turgot's argument the possession of land guarantees rent. 
 But land may be priced in capital, and so every capital be- 
 comes the equivalent in value of a piece of land. Capital 
 must therefore bear as much profit as land bears rent ; other- 
 wise all forms of industry would be abandoned for agriculture 63-64 
 
 This, however, is arguing in a circle. Land is priced by dis- 
 counting its future uses ; calculating so many years' purchase 
 at the customary rate of interest. Rent and interest then are 
 forms of the one phenomenon which we are investigating . 6569 
 
 CHAPTER IV 
 ADAM SMITH AND THE DEVELOPMENT OF THE PROBLEM 
 
 Adam Smith has no distinctive theory of interest . . 70 
 
 His principal suggestion its necessity as an inducement to the 
 
 productive employment of capital . . . .71 
 
 His contradictory accounts of its origin (1) in an increased value of 
 
 products over the labour value, (2) in a curtailment of wage 72, 73 
 While Adam Smith is thus neutral, these suggestions formed 
 
 the erms of later theories 74
 
 ANALYTICAL TABLE OF CONTENTS xxv 
 
 PAGE 
 
 The growth of capital and the antagonism of capital and labour 
 soon made neutrality impossible, and compelled discussion of 
 interest as income obtained without work . . . 75-76 
 
 Hence the appearance of a number of interest theories . . 77 
 
 Division of the subject. The various interest theories as answers 
 to the central question : Why is Surplus Value a constant 
 phenomenon of capitalist production ? . . 78-79 
 
 CHAPTER V 
 
 THE COLOURLESS THEORIES 
 
 Sartorius, Lueder, Kraus, Hufeland, Seuter, Politz, Murhard, 
 
 Schmalz, Cancrin. ..... 80-81 
 
 Count Soden on interest as diverted from the product of labour. 82 
 
 Lotz makes the capitalist's sole claim replacement of his expenses ; 83 
 
 but this would not be sufficient inducement to the productive 
 
 employment of capital ; hence the necessity of interest . 84 
 
 Insufficiency of this illustrated from rent ... 85 
 
 Jakob, Fulda, Eiselen, Rau . . . . .86 
 
 Eicardo's account 
 
 (1) Of the origin of interest the inducement to productive 
 
 employment of capital . . . .87-88 
 
 (2) Of the rate of interest. As result of his rent theo'ry, 
 
 profit and wage together are determined by the 
 
 return to the worst land in cultivation . . 89 
 
 But wages being determined by the " Iron Law," profit 
 is the remainder. And as more unfavourable culti- 
 vation is resorted to, the decreasing product leaves 
 less to profit ..... 90 
 
 But profit cannot disappear, otherwise accumulation 
 would cease, and wealth and population would be 
 checked . . . . . .91 
 
 In this Ricardo has neglected the constant causes Avhich 
 
 prevent the absorption of profit by wage ; . . 92 
 
 for the weakening of the motives of accumulation 
 may prevent resort to land which yields too small 
 a profit . . . . . .93 
 
 (3) Of the connection between profit and value. Profit as 
 
 paid out of increased price. Inconsistency of this 
 
 with the " Labour principle " . . . 94- -9? 
 
 Torrens, arguing against Malthus, declares profit a surplus, IK t 
 
 a cost ; but says nothing as to its origin . . . 96 f>"'
 
 xxvi ANAL YTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 M'Culloch finds that value is determined by labour alone, 
 capital being only the product of previous labour ; includes 
 profit among costs ; and at the same time defines profit as a 
 surplus .... ... 97-98 
 
 His absurd illustrations of the cask of wine ; . . .99 
 
 of the two capitals in leather and wine ; of the timber. General 
 
 untrustworthiness .... 100-102 
 
 M'Leod sees no problem ; considers profit self-explanatory and 
 
 necessary . . . . . .103 
 
 His faith "in the formula of supply and demand . . 104 
 
 Gamier. Canard; " necessary " and " superfluous " labour . 105 
 Possible agreement of Canard with Turgot's theory . . 106 
 
 Droz makes saving an element of productive power, but devotes 
 
 his attention chiefly to Contract interest . . . 107 
 
 BOOK II 
 
 The Productivity Theories 
 CHATTER I 
 
 THE PRODUCTIVE POWER OF CAPITAL 
 
 Apparent simplicity of the new explanation that Capital produces 
 
 its own interest . . . . . .111 
 
 Real ambiguity of the word "productive," as () producing 
 
 more goods, (ft) producing more value . . 112 
 
 (a) Physical Productivity ; Reseller's illustration . 113 
 
 (6) Value Productivity ; its two possible meanings . 113 
 
 Its usual meaning Capital produces more value than it has in 
 
 itself . . . . . . .114 
 
 Conspectus of the four interpretations of " Capital is productive" 114 
 
 Danger of confusing these. The task assigned to productive 
 
 power by the Productivity theories . . . 115 
 
 Restatement of the problem as essentially a problem of Surplus 
 
 Value . . . . . . .116 
 
 Surplus Value may conceivably be explained from productive 
 power by ascribing to capital (1) direct creation of value ; (2) 
 direct creation of goods possessing surplus value, this value 
 being assumed as self-explanatory; (3) direct creation of 
 goods and indirect creation of surplus value . 117118
 
 ANALYTICAL TABLE OF CONTENTS xxvii 
 
 PAGE 
 
 Corresponding to these explanations are three groups of theories : 
 (1) The Naive Productivity theory ; (2) the Indirect Pro- 
 ductivity theories ; (3) the Use theories . 118-119 
 
 CHAPTER II 
 
 THE NAIVE PRODUCTIVITY THEORIES 
 
 J. B. Say their founder . . . . .120 
 
 Nature, Labour, and Capital are the factors of wealth, and, like 
 
 rent and wage, interest is the price of a Productive Service 121-122 
 
 Adapting the problem to Say's terms we get two answers : (1) 
 Capital directly creates surplus value, and takes that as its 
 payment (thus making it a production problem) ; (2) the 
 Service must be paid and prices must rise to cover the 
 payment (thus a distribution problem) . . . 123-25 
 
 The development after Say . . . . .126 
 
 Schon and Riedel consider it self-evident that Capital must 
 
 produce a "rent" or surplus . . . .127 
 
 Roscher, wavering between Natural and Loan interest, co- 
 ordinates the Productivity and the Abstinence theory . 128-30 
 
 In France, Leroy-Beaulieu, in Italy, Scialoja, represent this 
 
 theory . . . . . . .131 
 
 Criticism. Division of the theory into its two forms . . 132 
 
 The first form that capital directly produces value rests on the 
 mere empirical observation that the employment of capital 
 is followed by surplus value . . . .133 
 
 But to find the origin of value in production involves an 
 
 erroneous theory of value . . . . .134 
 
 For value corresponds with costs only as goods are useful and 
 
 scarce; ....... 135 
 
 and though production turns out valuable goods, it is not pro- 
 duction that gives them value it is a cause, not the cause . 136 
 
 An application : if value does not arise in production, the other 
 
 factor of production, labour, cannot confer it . . 137 
 
 The second form that the increased product must contain a 
 surplus of value over the capital consumed is by no means 
 self-evident . . . . . .138 
 
 Why should not the value of the capital rise to the value of its 
 
 product, and surplus value vanish ? . . .139 
 
 Summary : failure of this theory in either form to explain Value, 
 
 and therefore Surplus Value . . . .140
 
 xxviii ANALYTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 It connects the undeniable fact that capital is productive, and 
 that products of capitalist industry, as a rule, have value, 
 with the phenomenon of surplus value which also appears 
 in capitalist production, and capital is made the cause of 
 surplus value . . . . . .141 
 
 CHAPTER III 
 
 THE INDIRECT PRODUCTIVITY THEORIES 
 
 These theories do not assume as self-evident that surplus value 
 is bound up with increased quantity of products, but give 
 reasons why it should be so. The conflicting accounts of 
 these reasons, however, necessitate individual statement 
 and criticism . . . . . .142 
 
 Lauderdale finds the source of profit in the power of capital to 
 
 supplant labourers and appropriate their wage . 143-144 
 
 The familiar fact of such profit being usually less than such 
 
 wages he explains by reference to competition . 144-145 
 
 But the share thus proved to go to capital is not interest at all, 
 but gross return to capital ; and no proof is offered that net 
 interest must remain after deduction of tear and wear 146-147 
 
 True, if there is no saving of labour there is no profit ; but it is 
 
 as true that if there is no labour there is no profit . . 148 
 
 Malthus correctly states the nature of profit as the difference 
 between the value of the advances and the value of products, 
 but omits to ask the cause of this constant difference . 149 
 
 His most important contribution to the subject is the formal 
 
 inclusion of profit among the Costs of Production . 150 
 
 a crude recognition of the fact, afterwards recognised, that there 
 
 is another sacrifice in production besides labour . . 151 
 
 He does not, however, measure the rate of interest by the amount 
 of sacrifice, but by the level of wage on the one side, and 
 the level of prices on the other ; . . . 152 
 
 Not asking why there is a constant difference between these two, 
 and having, at the same time, no better explanation of the 
 level of price than Supply and Demand . . .153 
 
 Carey, a confused and blundering writer . . 154-155 
 
 His illustration of the axes .... 156158 
 
 In which he confuses (1) gross use with net use; (2) the cap- 
 italist's proportion of the total return to capitalist production 
 with the rate of interest ; i.e. confounds the return to capital 
 with capital itself . . . . 159-160
 
 Peshine Smith repeats all Carey's blunders with more than 
 
 Carey's deliberation . . . . 161-164 
 
 Tinmen, a most careful investigator . . . . . 164 
 
 His genetical account of the growth of capital, origin of interest, 
 
 and rate of interest . . . . 165-167 
 
 In which we find (1) labour, assisted by capital, obtaining a 
 greater amount of products ; (2) this surplus composed of net 
 interest and replacement of capital consumed ; (3) this excess 
 production falling to the capitalist ; and (4) this plus of 
 products regularly possessing a value greater than that of the 
 real capital consumed . . . . 168-169 
 
 But no proof is offered for this last proposition, which assumes 
 that capital has the power to reproduce its own value and 
 leave something over . . . . .169 
 
 Now (1) why should not the value of capital rise till it becomes 
 equal to the value of its products ; or (2) why should not 
 competition of capitals increase till the claim of capital is 
 reduced to its simple replacement ? . . . 170-171 
 
 Strasburger, writing in reply to Marx, defines profit as payment 
 for natural powers, which, while in themselves gratuitous, 
 are made available to production by capital only . 173-174 
 
 But in actual life how does the capitalist get paid for natural \ 
 powers ? By selling the services of his capital at a higher 
 price than the price of the labour embodied in the capital .. 175 
 
 This in three ways : (1) as Undertaker, getting a gross return 
 greater than the value of the capital consumed ; (2) as Hirer- 
 out, getting a payment greater than the labour value ; (3) as 
 Seller of the capital itself, including all its services . . 176 
 
 But in this latter case also the natural powers here made 
 available will raise the value of the capital above the 
 payment of the labour which produced it. But if capital 
 value rises proportionally with the value of its services 
 (products), there is no interest, although natural powers have 
 been paid for. If, on the other hand, competition presses 
 down the capital value to the value of the labour embodied, 
 it is evident there can be no claim for natural powers . 177-178 
 
 All then that Strasburger proves is that command over natural 
 powers may increase the gross return to capital above what 
 was paid to produce the capital. But whatever raises the 
 value of products will raise the value of capital, and no 
 explanation is thereby given of the constant difference 
 between capital and products, which is interest 178-179
 
 xxx ANALYTICAL TABLE OF CONTENTS 
 
 PAQB 
 
 Summary : interest is the difference between the minuend 
 (product) and the subtrahend (capital consumed), and, as the 
 value of capital is bound up with the value of its products, 
 productive power can only affect the one as it affects the 
 other, leaving the difference between them unchanged, and 
 the question of interest untouched . . . 179-180 
 
 BOOK III 
 
 The Use Theories 
 CHAPTER I 
 
 THE USB OF CAPITAL 
 
 The growing recognition of the identity betweeti value of product 
 and value of means of production was bound to suggest that 
 something had been overlooked among the sacrifices of 
 production . . . . . .185 
 
 The new theory found this in the Use as distinct from the 
 
 Substance of capital . . . . .186 
 
 Relation of this to the Productivity theories . . 186-187 
 
 CHAPTER II 
 
 HISTORICAL STATEMENT 
 
 Say's ambiguous account of the Services of capital . 188-189 
 
 Storch's perverted explanation . . . 190-191 
 
 Nebenius's eclectic suggestions . . . . . 192 
 
 Mario's brief epitome of Say . . . . .193 
 
 Hermann elaborates the fundamental conception of the inde- 
 pendent " use " of goods. Distinguishing first between 
 durable and transitory goods, he points out that the former, 
 so long as they last, have a use which may be conceived 
 as a good in itself, and may obtain an exchange value, called 
 interest . . . . . . .194 
 
 But goods of transitory material, when combined and trans- 
 formed by manufacture into durable goods, may also acquire 
 this use. On this capability of affording an independent use 
 he bases his conception of capital . . . .195
 
 ANALYTICAL TABLE OF CONTENTS xxxi 
 
 PAGE 
 
 In production, besides the sacrifices of existent wealth (material 
 and tools), and besides labour (manual and intellectual), there 
 is thus another sacrifice, the Uses of fixed and floating capital 
 over the period of production. Immediately that any form 
 of capital is engaged in production, the disposal of it in any 
 other way is made impossible ; it enters, with its exchange 
 value, into the product, and is suspended till the sale of the 
 product. Thus what is paid for in the product is not simply 
 the renunciation of the immediate consumption of wealth, 
 but a new use, consisting in the holding together of the 
 technical elements of the product . . . 196-198 
 
 Superiority of this to Say's outline. Some inconsistencies . 199 
 
 Hermann's views on the rate of profit. A product ultimately is 
 a sum of labours and uses of capital. Thus all exchange is 
 an exchange of labours and uses against other labours and 
 uses, either direct or embodied in products. The rate of 
 profit, then, depends on the amount of labours and uses 
 obtainable for uses alone. If capital increases in amount 
 more uses are offered, and the exchange, value of use against 
 use is unchanged ; but, if labour is stationary, the exchange 
 value of uses sinks in comparison with labour, and the rate of 
 profit falls. If capital, again, increases in productiveness, the . 
 result is the same, except that, f>r their reduced profits, the 
 capitalists receive more means of enjoyment than they formerly 
 obtained for their high profit . . . 200-201 
 
 Thus increasing productiveness lowers interest . . . 202 
 
 This application of the Use theory to explain the rat: of interest 
 is certainly incorrect What his argument proves is the 
 relation between total profit and total wage ; not between 
 profit and parent capital .... 202-204 
 
 Hermann's views on productivity . . . .204 
 
 Bernhardi, Mangoldt, Mithoff ..... 205 
 Schaffle has two conceptions of Use : in his Gesellschaftlidie 
 System, for the most part, we find the subjective conception, 
 which connects it with the undertaker ; . . . 206 
 
 in his Ban imd Leben, the objective uses are " functions of goods " 207 
 Knies, although at one time adopting Galiani's conception of 
 
 interest as part equivalent of parent loan, . . . 208 
 
 of late years, in Geld und Kredit, conceives of the Use as quite 
 distinct from the good itself, the ft . bearer of the Use," and 
 describes it as obtaining value as all goods obtain value 
 by satisfying human needs . . . .209 
 
 c
 
 xxxii ANALYTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 Menger, who represents the highest point of the Use theory, 
 bases it on a complete theory of value. His great law : the 
 value of goods of higher rank (means of production) is deter- 
 mined by the value of goods of lower rank (products) 209-211 
 
 How then is the value of the product always higher than the 
 
 value of the means of production ? . . . . 211 
 
 His answer : the production process requires the " disposal " over 
 capital for periods of time. This disposal is, economically, 
 the Use of capital ; it enters, as an economic good, into the 
 value of the product, and is the source of value. Interest is 
 thus a distribution, not a production problem . . 212 
 
 CHAPTER III 
 
 PLAN OF CRITICISM 
 
 The theses to be proved are : (1) that there is no independent 
 use of capital as assumed ; (2) that, if there were such a use, 
 it would not explain interest . . . .214 
 
 CHAPTER IV 
 
 THE USE OF CAPITAL ACCORDING TO THE SAY-HERMANN SCHOOL 
 
 Uncertainty in the various accounts given of the use. Defin- 
 itions of Say, Hermann, Knies, Schaffle . . . 216 
 
 These definitions, in correspondence with popular usage, are 
 divisible into two conceptions a subjective and an objective. 
 Obviously it is the latter alone which corresponds with the 
 character of the Use theory . . . .217 
 
 What then is the objective use of goods ? . . . 218 
 
 THE TRUE CONCEPTION OF THE USE OF GOODS 
 
 The character of material "goods," as distinct from material 
 " things," is that, in them, the working of the natural powers 
 inherent in all matter permits of being directed to human 
 advantage . . . . . .219 
 
 The function of goods, then, consists in the forth-putting of their 
 available energy, and the use of goods consists in the receiv- 
 ing of useful results from this forth-putting of energy . 220
 
 ANALYTICAL TABLE Of CONTENTS xxxiii 
 
 PAGE 
 
 This is strictly an economic as well as a physical conception ; its 
 
 application in regard to "ideal" goods . . 221-222 
 
 Material Services (Nutzleistungeri) an appropriate name for this 
 
 function of goods ...... 223 
 
 Inferences from this conception. Every economic " good " must 
 be capable of rendering material services, and ceases to be a 
 good on the exhaustion of this capability . . . 224 
 
 But the number of services which a good may render varies. 
 Perishable goods exhaust themselves at a single use ; durable 
 goods only by successive acts or continuous service . . 225 
 
 In virtue of this the single use, or definable period of service, 
 obtains economic independence apart from the body of the 
 good, which remains capable of further uses . . 226 
 
 Finally, as material services constitute the economic substance of 
 goods, it follows that the economic essence of the transfer of 
 a good is the transfer of all its services, and that the value 
 of a good contains the value of all its services . . 227 
 
 CHAPTER VI 
 
 CRITICISM OP THE SAY-HERMANN CONCEPTION 
 
 The Use of capital, according to this conception, is not identical 
 with what we call Material Services. Its use is the basis 
 of net interest ; ours of gross interest (in the case of durable 
 goods) or the basis of the entire capital value (in the case of 
 perishable goods) . . . . . .228 
 
 No use of goods other than their Material Services is conceivable 229 
 
 either in durable goods (illustration of the mill) or in perishable 
 
 (illustration of the coals) . . . . .230 
 
 This will best be proved by showing that any other kind of use 
 (1) is an unproved assumption, and (2) leads to untenable 
 conclusions . . . . . .231 
 
 CHAPTER VII 
 
 THE INDEPENDENT USE : AN UNPROVED ASSUMPTION 
 
 " In all the reasoning by which the Use theorists thought they 
 had proved the existence of this Use, an error or misunder- 
 standing has crept in." Say's services productifs are nothing 
 more than our Material Services, and cannot be the basis of 
 net interest ...... 
 
 So also Schaffle's " functions " of goods
 
 xxxiv ANALYTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 Hermann introduces his independent use when speaking of dur- 
 able goods the use which does not exhaust the good that 
 renders it, and is accordingly capable of independent valua- 
 tion (note that this is a gross use, and its payment is not 
 interest) ....... 233 
 
 By analogy he finds a similar use in perishable goods, technically 
 
 transformed into durable goods . . . .234 
 
 But this analogy does not hold : durable goods are immediately 
 " used " when successively giving forth a part of their content ; 
 perishable goods in each immediate use exhaust their entire 
 content, and what Hermann calls a durable use in this latter 
 case is a mediate use . . . . .235 
 
 Thus Hermann has drawn his parallel between the immediate use 
 
 of a durable good and the mediate use of a perishable good 236-238 
 
 Kniea goes carefully into the question of the existence of an 
 
 independent -use ; . . 239 
 
 finds that there are economical transfers, where the intention is 
 to transfer a use and retain the good that bears the use ; and 
 inquires if this does not hold also in the case of fungible 
 goods . . . . . . . 240 
 
 His illustration of the loan of corn . . . .241 
 
 Where, by using Nutzung in a double sense, he actually assumes 
 the very point at issue that there can be a use (Nutzung) of 
 grain separate from its consumption (Verbrauch) . 242-244 
 
 Thus all the Use theorists first allude to the Material Services of 
 capital, then note the successive services of durable goods as 
 obtaining value independent of the good itself (the sum of 
 the remaining services), and end by assuming a use and 
 independent value in all goods, outside and independent of 
 the use and value of the (undiminished) good from which 
 they come ...... 245 
 
 CHAPTER VIII 
 
 THE INDEPENDENT USE : ITS UNTENABLE CONCLUSIONS 
 
 The usual assumption of this theory is the existence of a gross 
 Nutzung (basis of hire) and a net Niitzung (basis of interest). 
 Yet Nutzung is always taken as synonymous with Gebrauch . 247 
 
 But it is impossible to think of two simultaneous uses in every 
 act by which a good renders its material services. If, then, 
 the 'name of Use or Nutzung is rightly given to the gross iise, 
 what is this net use ? 248-249
 
 ANALYTICAL TABLE OF CONTENTS xxxv 
 
 PAGE 
 
 If it exists, it must be part of the gross use, and interest is paid 
 for something contained in the gross use. Now the gross use 
 of a meal is its consumption. But if we repay the meal on 
 the moment of its consumption, we pay no interest ; we only 
 pay interest for the delay in replacing the meal. That is, 
 we pay for something not contained in the gross use 250-251 
 
 Further absurdities involved . . . . .251 
 
 Summary of what has been proved . . . .252 
 
 CHAPTER IX 
 
 THE INDEPENDENT USE : ITS ORIGIN IN LEGAL FICTION 
 
 The need of fiction in jurisprudence . . . .253 
 
 The first fiction here -of the identity between fungible goods lent 
 
 and those returned ..... 254 
 
 The second fiction that the goods replaced had themselves been 
 used and not consumed ; hence usura, a durable use obtained 
 from all goods ..... 254-255 
 
 Under the attack of the canonists on interest generally . . 255 
 
 the fiction attained a new importance as apparently affording 
 the sole defence of interest, and, thanks to Salmasius, the 
 fiction was proclaimed a fact . . . .256 
 
 Modern Political Economy turned this practical justification of 
 
 interest into a theoretical one, and hence the Use theory . 256 
 
 The mistake has lain in considering that 100 replaced now, is 
 the full equivalent of .100 lent a year ago, and interest an 
 extra payment ..... 257-258 
 
 The true conception of the loan: it is a real exchange of present 
 goods against future goods ; the capital replaced pltis interest 
 is the full equivalent of the capital loaned . . . 259 
 
 CHAPTER X 
 MENGER'S CONCEPTION OF USE 
 
 " Disposal over goods for a period of time," as an independent 
 
 good ....... 260 
 
 Its indirect proof : the existence of surplus value not otherwise 
 
 accounted for ...... 261 
 
 Insufficiency of this : (l) surplus value can be explained other- 
 wise ; (2) " disposal " for a period of time proved to have 
 no existence beyond the capital value of goods 262-263
 
 xxxvi ANALYTICAL TABLE OF CONTENTS 
 
 CHAPTER XI 
 
 FINAL INSUFFICIENCY OF THE USE THEORY 
 
 FADE 
 
 Even if the independent use were admitted, it would not explain 
 interest For the explanation of surplus value as caused by 
 a new element, the use of capital, necessarily assumes that 
 the value of capital in itself does not contain the value of 
 this use. This, however, is disproved by the familiar fact, 
 that if, in selling a commodity, any of its future uses are 
 retained, the capital value of the commodity is reduced 264 
 
 Thus the use of capital is contained in the loan of the capital, 
 
 and cannot explain a surplus value greater than, that capital 265 
 
 BOOK IV 
 
 The Abstinence Theory 
 
 CHAPTER I 
 
 SENIOR'S STATEMENT OF THE THEORY 
 
 The Labour Principle and its difficulties in accounting for interest. 
 Is interest a wage for labour, or is it a cost of production along- 
 side of labour ? . . . . . 269-270 
 Foreshadowings of the theory in Nebenius and Scrope . 271 
 Senior. Abstinence from unproductive use of wealth a third 
 element in production. Like labour and natural agents, it 
 enters into the costs or sacrifices of production, and demands 
 compensation . . . . 272-273 
 
 CHAPTER II 
 
 CRITICISM OF SENIOR 
 
 Pierstorffs estimate much too severe . . .275 
 
 Lassalle notwithstanding, the very existence of capital requires 
 postponement of immediate consumption, and this is con- 
 sidered in price of products which cannot be obtained with- 
 out postponement . . . . . .276 
 
 Yet interest and sacrifice by no means invariably correspond . 277 
 Principal defect of Senior's theory : that he represents interest as 
 
 an independent sacrifice in addition to labour-sacrifice . 278
 
 ANALYTICAL TABLE OF CONTENTS xxxvii 
 
 PAGE 
 
 A concrete example : a rustic, choosing to fish instead of shoot 
 or gather fruit, may estimate his sacrifice in terms, either of 
 the labour undergone, or the gratification intermitted . 278 
 
 It is the same if, instead of fishing, he devotes his labour to 
 obtain future results ; he cannot calculate the sacrifice of 
 labour in addition to the sacrifice of abstinence . . 279 
 
 But must choose one or the other mode of calculation . . 279 
 
 This double calculation, however, is made by Senior . . 280 
 
 According to his theory, the sacrifice involved in a day's planting 
 of potatoes is a day's labour plus a year's abstinence, while a 
 day's harvesting of the same involves the sacrifice of a day's 
 labour only. But if the potatoes I sowed yesterday are 
 eaten by deer overnight, is my sacrifice a day's labour plus 
 an infinite abstinence ? . . . 281-282 
 
 Speciousness of the argument. The misleading element is the 
 consideration of time. Time is not a second independent 
 sacrifice, but it determines the amount of the one sacrifice 
 actually made. E.g. sacrifice, in the majority of economical 
 cases, is estimated, not by (positive) pain, but by (negative) 
 renunciation of alternative enjoyments . . . 282 
 
 Not so, however, as regards the sacrifice of labour, where some 
 amount of positive pain is always present. Yet, as a rule, in 
 civilised communities the methods of labour are so various 
 that sacrifice is not estimated by its pain, but by its alterna- 
 tive results. Now, of these results some are immediate, some 
 take time ; the attraction of a present over a future result of 
 labour, increases the estimate of the sacrifice made by those 
 who devote themselves to the distant result. The sacrifice in 
 terms of labour is the same; in terms of alternative results 
 it is calculated by the greater of the alternatives intermitted 283-285 
 Reasons for the popularity of this theory. Cairnes, Cherbuliez, 
 
 Wollemborg, Dietzel .... 286-287 
 
 CHAPTER III 
 
 BASTIAT'S STATEMENT 
 
 Delay or Privation as a service demanding payment . . 288 
 
 His statement inferior to Senior's in two respects 
 
 (1) As confined to Contract interest, in the course of which 
 
 he seems to suggest that the sacrifice spoken of is the sac- 
 rifice of the productive use, not the postponement of needs 289-290 
 
 (2) In confounding interest with replacement of capital 291-293
 
 xxxviii ANALYTICAL TABLE OF CONTENTS 
 
 BOOK V 
 
 The Labour Theories 
 
 THESE THEORIES AGREE IN EXPLAINING INTEREST AS WAGE OP THE 
 CAPITALIST'S LABOUR 
 
 The English Group 
 
 PAGE 
 
 Traces interest to that labour which produces capital . . 297 
 
 James Mill starts with the proposition that labour alone regulates 
 
 value . .... 297 
 
 And defines profit as wage of indirect labour . . . 298 
 
 But as the labour formative of capital has been already paid, this 
 must be an extra wage, and raises the question why such 
 mediate labour should be more highly paid than immediate . 299 
 
 The French Group 
 
 Courcelle's conception of the Labour of Saving : the conservation 
 of capital requires effort of intellect and will, which is so far 
 painful, and the return to this labour is interest . 300301 
 
 Not to speak of this being merely another way of putting Senior's 
 theory, what correspondence is there between the painful ex- 
 ertion of intellect and will and the so-called wage ? 302 
 
 And if interest is explained by these painful exertions, why does 
 
 the borrower not get interest instead of paying it ? . 303-304 
 
 Cauwes, an eclectic follower of Courcelle . . 304-305 
 
 The German Group 
 
 Its origin in a remark of Rodbertus . . . 305-306 
 
 expanded by Schaffle into the statement that interest is a 
 remuneration for the office, now filled by private capitalists, 
 of binding together production processes by means of capital 307 
 
 Wagner characterises the capitalist's saving and disposing activi- 
 ties as labours, and constitutive elements of value . . 308 
 
 It is difficult to know whether these Katheder Socialists mean 
 to give a theoretical explanation or a socio-political justifica- 
 tion of interest ..... 308 
 
 Difference between the two illustrated by a parallel case ; land 
 rent could not be explained by the original exertion of labour 
 on the land 309
 
 ANALYTICAL TABLE OF CONTENTS xxxix 
 
 PAGE 
 
 but might be justified as a political measure of expediency 310 
 
 Similarly, the permission of interest may possibly be the most 
 effective means to the accumulation and employment of national 
 capital, and this may be a sound reason for its maintenance 
 by society, but the capitalist's " labour " gives no economic 
 explanation of what is, obviously, an income from ownership 311 
 It is impossible to doubt that interest is not a wage for labour . 312 
 
 BOOK VI 
 
 The Exploitation Theory 
 CHAPTER I 
 
 HISTORICAL SURVEY 
 
 The essence of the theory the exploitation from the labourer, 
 by means of the wage contract, of the wealth which he 
 exclusively produces . . . . .315 
 
 An inevitable consequence of the Labour- value theory . . 316 
 
 Preceding developments the acceptance of the Ricardian theory 
 
 and the spread of capitalist production . . . 317 
 
 Sismondi, the writer of a transition period, . . . 318 
 
 states its main propositions, . . . . . 319 
 
 Vnt, illogically, justifies interest as founded on the original 
 
 labour which produces capital . . . .320 
 
 Proudhon : all value being produced by labour, the labourer 
 has a natural claim to his entire product, but this he ignor- 
 antly gives up for a wage ..... 321 
 and cannot buy even his own product at what it cost him . 322 
 
 Rodbertus, a profound scientific investigator . . . 322 
 
 Lassalle, the most eloquent but least original . . . 323 
 
 Marx, the most important theorist after Rodbertus . . 323 
 
 Many writers adopt the Exploitation theory, but stop short at its 
 
 consequences, as Guth and Duhring . . .324 
 
 Others ad. its ideas eclectically to their other theories, as James 
 
 Mill and Schaffle ..... 325 
 
 The Katheder Socialists, again, accept the proposition, Labour is 
 the sole source of value a proposition which, has had a 
 singular history in economic theory . . . 325 
 
 Plan of criticism 326-327
 
 xl ANALYTICAL TABLE OF CONTENTS 
 
 CHAPTER II 
 
 RODBERTUS 
 
 PAGE 
 
 His starting-point : that goods, economically considered, are the 
 
 products of labour alone . . . . . 328 
 
 The labourers accordingly have a just claim to the whole product, 
 
 or its value ...... 329 
 
 But in the present system they receive only a part, the remainder 
 
 going as rent (including land-rent, and profit) . . 330 
 
 Rent owes its existence to two facts : (1) that, thanks to the divi- 
 sion of labour, each worker can produce a surplus ; (2) that 
 the indispensable conditions to labour land and capital are 
 private property, this necessitating a wage contract, which 
 virtually restores the original condition of labour, slavery . 331 
 
 Thus all rent is exploitation, and under the iron law of wages 
 
 its amount increases with the productivity of labour . 332 
 
 His confused statement of the division of amount exploited be- 
 tween land-rent and profit .... 333-36 
 
 Nevertheless Rodbertus would not abolish rent . . 336 
 
 and would regard it as the salary for a social function . . 337 
 
 Criticism : the first proposition, that all goods, economically 
 considered, are products of labour alone (suggesting the 
 question, What is meant by " economically considered ?") . 337 
 
 is false, as proved by the fact that purely natural goods, if scarce, 
 
 have economic value . . . . .338 
 
 The argument he advances, that labour is economically the only 
 original power, and only original cost, implies that economy 
 has nothing to do with other powers, or their results ; this 
 rests on a quite arbitrary and narrow conception of economic 
 conduct . . . . . . 339 
 
 Lastly, the limitation of labour to material manual labour does 
 
 not need serious confutation .... 340 
 
 But to confute this first proposition is not, as Knies considered, 
 
 to refute Rodbertus's entire interest theory . . 340-341 
 
 The second proposition, that the whole product or its value, 
 should belong to the labourer who produces it, is, rightly 
 understood, quite correct . . . .341 
 
 But as Rodbertus explains it, he would have the labourer now 
 
 receive the entire future value of the product . . 342 
 
 Illustration of the steam-engine. Supposing that its value when 
 
 completed is 550 ..... 342
 
 ANALYTICAL TABLE OF CONTENTS xli 
 
 PAGE 
 
 And that one labourer, working continuously for five years, pro- 
 duces the engine ; the value of his first year's wage is not a 
 fifth part of the value the engine will have when finished, but 
 a much less sum say 100, which, with interest, will be the 
 same as receiving 120 for his fifth year . . 343-344 
 
 But Rodbertus would have the value of the completed product 
 spread proportionally over the five years of production, which 
 would involve that the 550 was paid in two and a half years 345 
 
 Thus giving the individual labourer a value in wage which no 
 
 undertaker could obtain for himself . . . 346 
 
 The same illustration : assuming the work divided among 
 
 labourers working successively .... 347 
 
 Dividing what they produce as wage, as before the first receives 
 
 100, the last XI 20 .... 348-349 
 
 Assuming that the production is carried on under an outside 
 
 undertaker, the labourers will receive exactly the same 350-351 
 
 The only undertaker that could make a higher wage payment is 
 
 the State ....... 351 
 
 But this would not be a fulfilling, but a violation of Rodbertus's 
 
 own proposition . . . . . .352 
 
 The third proposition, that labour alone regulates value, . 353 
 
 overlooks Ricardo's exception of those goods which require 
 time for their production. , But this exception really con- 
 tains the chief feature in natural interest . . 354-355 
 
 To neglect that is to assume the validity of one fixed law of 
 
 value, by simply ignoring that there are others . . 356 
 
 A fourth criticism : Rodbertus's theory of land-rent is based on 
 the statement that the amount of rent does not depend upon 
 the amount of capital, but the amount of labour employed ; . 357 
 
 which would involve that capital bears a rate of profit varying 
 
 from business to business . . . . .358 
 
 But Rodbertus himself lays down the law of the equalisation of 
 
 profits under competition . . . . .359 
 
 This equalisation can only take place by alteration in the exchange 
 
 value of products ..... 359-360 
 
 (unless we suppose it effected by alteration in wage, which is 
 contradictory both of experience and Rodbertus's own iron 
 law) ....... 361 
 
 and in this case what becomes of his law that goods exchange 
 
 according to the labour incorporated in them ? . .361-362 
 
 Criticising the theory as a whole, even if it were granted that it 
 explains the interest on that capital invested in wages, it will
 
 xlii ANALYTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 be found incapable of explaining interest on capital invested 
 in materials ; this is easily proved where capital is large and 
 workers few, as in pearl-stringing . . . 363-364 
 
 But most clearly by the good old illustration of the maturing 
 
 wine ...... 364-365 
 
 CHAPTER III 
 
 MARX 
 
 His fundamental proposition that goods exchange solely accord- 
 ing to the amount of labour spent in producing them. In 
 exchange use-values are disregarded, and nothing remains to 
 account for the equation of exchange but amount of labour 367-368 
 
 Value is measured by " socially necessary labour time " . . 369 
 
 His statement of the problem : Money transformed into com- 
 modities retransforined into money, M C M' . . 370 
 
 This surplus value cannot originate in the circulation, nor yet 
 
 outside of it . . . . . . 371 
 
 But among the commodities which the capitalist buys is one 
 whose Use value is the source of Exchange value Labour 
 Power. The value of labour power is regulated, like other 
 commodities, by the labour time necessary for its reproduction 372 
 
 The capitalist, buying it at this price, is able to appropriate all 
 the value produced beyond this ; i.e. in every minute over 
 the "necessary labour time." Illustration of the spinner. 
 All surplus value then is unpaid labour . . 373-374 
 
 Compared with Rodbertus's statement the most important point 
 in Marx's work is the attempt to prove that all value rests 
 on labour ...... 375 
 
 Adam Smith and Ricardo are generally claimed as authorities 
 for this proposition, but on examination we shall find that 
 they virtually did no more than assume it . . 375-376 
 
 Adam Smith, indeed, spoke of the equivalence of Value and 
 Trouble, but with him it is merely a general remark, without 
 any claim to scientific exactitude .... 377-80 
 
 Marx's argument restated : (l) the common element in exchange ; 
 (2) this element is not the use value ; (3) it can only be 
 labour ....... 381 
 
 As regards (2), the use value is never disregarded in exchange, 
 
 but only the particular form the use assumes . 381-382 
 
 As regards (3), is there no other possible common element, such 
 
 as scarcity ?...... 382
 
 ANALYTICAL TABLE OF CONTENTS xliii 
 
 PAGE 
 
 And in goods that exchange is there always labour ? . 383 
 
 But apart from deduction, experience only confirms the equivalence 
 of labour and value in the case of one class of goods, and that 
 a relatively insignificant one . . . . ' 383 
 
 Exceptions to the Labour principle-^- 
 
 (1) Scarce goods (including land and patented goods) . 384 
 
 (2) Goods produced by skilled labour . . .384 
 
 (3) Goods abnormally badly paid . . . 385 
 
 (4) Even where value and labour correspond, the labour 
 
 value is only the gravitation point . . . 386 
 
 (5) Goods that require greater advances of " previous " 
 labour . . . . . . 386 
 
 Conclusions from these exceptions. Labour is one circumstance 
 
 that affects value an intermediate not an ultimate cause . 387 
 
 Ricardo knew this, but, underestimating the exceptions, spoke of 
 the labour principle as if it were practically universally valid ; 
 it was his followers who formally gave it that extension. 
 The Socialists not only declare that this law is universal, but 
 demand the abolition of interest as contrary to it . . 388 
 
 Later on Marx falls into all Rodbertus's mistakes, such as claim- 
 ing for the labourer in the present the future value of his 
 product . . . . . . . 389 
 
 connecting exploitation and surplus value with wage capital alone, 
 and neglecting to show how labour creates that value which 
 accrues only in virtue of time . . . .390 
 
 Causes of this theory's popularity : (1) it appeals to the heart as 
 
 well as to the head ; (2) the weakness of its critics . 391 
 
 BOOK VII 
 
 Minor Systems 
 CHAPTER I 
 
 THE ECLECTICS 
 
 Reasons for eclecticism on the interest problem . 395-396 
 
 Rossi uses Productivity and Abstinence theory alternately 397-399 
 
 Molinari, Leroy-Beaulieu, Roscher, Cossa . . . 400 
 
 Jevons, finding the function of capital in enabling the labourer 
 to expend labour in advance, makes interest the difference 
 between the product of labour assisted and that of labour 
 unassisted by capital ..... 401
 
 xliv ANALYTICAL TABLE OF CONTENTS 
 
 PAGE 
 
 This is to identify surplus in products with surplus in value (Pro- 
 ductivity theory), to correct which lie reckons the capitalist's 
 abstinence among the costs of production (Abstinence theory) 402-403 
 His pregnant remarks on the effect of time on the valuation of 
 anticipated pleasures and pains only excite our astonishment 
 that he did not develop them into a systematic theory 403404 
 
 Read hesitates among Productivity, Abstinence, and Labour 
 
 theories ....... 405 
 
 Gerstner, Cauwes . . . . . .406 
 
 Gamier, Hoffmann ...... 407 
 
 J. S. Mill includes profits among costs of production . . 408 
 
 and explains it not only by the Productivity and Abstinence 
 
 theory, but by the Exploitation theory . . . 408-10 
 
 Schaffle, in his earlier writings, follows Hermann's Use theory ; 
 in the Bau und Leben makes interest a functional income 
 (Labour theory) ; and resolves all costs of production into 
 labour (which practically amounts to an Exploitation theory) 411-412 
 
 CHAPTER II 
 
 THE LATER FRUCTIFICATION THEORY 
 
 Henry George's variation of Turgot's theory . . . 413 
 
 Criticising Bastiat's illustration, he indicates that the cause of 
 
 interest is the active powers of nature, . . . 414 
 
 distinct from labour as being operative while the labourer sleeps. 
 That all forms of capital produce interest George explains by 
 the equalisation of profits . . . . .415 
 
 Thus interest "springs from the element of time," because dur- 
 ing a year certain forms of capital produce fruit . . 416 
 
 This differs from Turgot's theory chiefly in bringing the source 
 of surplus value within the sphere of capital finding it, not 
 in land, but in certain naturally fruitful goods . . 416 
 
 Two decisive objections : (1) it is quite unscientific to say that 
 the forces of nature are operative in one class of goods and not 
 in another ; (2) he does not think it necessary to show how 
 certain naturally fruitful goods produce surplus value . 417 
 
 over the value of labour and material consumed in co-operating 
 
 with " vital powers " . . . . .418 
 
 His one attempt at explanation of surplus value that time con- 
 stitutes an independent element in production seems to in- 
 volve that the vegetative forces of nature can be monopolised, 
 this bringing us back to Strasburger's Productivity theory 419-420
 
 ANALYTICAL TABLE OF CONTENTS xlv 
 
 Conclusion 
 
 PAGE 
 
 Looking at all this tangle of theories, can we find the line of 
 development ? Restatement of the problem as obviously a 
 problem of distribution. What is it guides a portion of the 
 stream of wealth into the hands of the capitalists ? There 
 are three distinct answers . . . . .421 
 
 (1) That there are three sources of value, Nature, Labour, 
 
 and Capital, and that from each source flows to its 
 owner the value which comes from that source. 
 This is the Naive Productivity theory, which makes 
 interest a production problem . . . 422 
 
 (2) That the stream of wealth comes from labour alone, 
 
 and is only diverted at its mouth by landlords and 
 capitalists. This is the Exploitation theory, which 
 makes it purely a distribution problem . . 422 
 
 (3) That thej-e are two or three springs, but one stream, 
 
 and under the influences which create value the 
 stream branches, till it empties into three separate 
 kinds of income. This makes it peculiarly a problem 
 of value ...... 423 
 
 As to (1), there is no power in any factor of production to create 
 
 value ; it is not a simple problem of production . . . 423 
 
 As to (2), it is not first in the final distribution that a foreign 
 element intrudes beside labour. The value of one good 
 diverges from that of another according to the time required 
 in production. The explanation of surplus value, then, is 
 to be found in investigating the formation of value. The 
 distribution in which products that require time as well as 
 labour possess surplus value, is not to be explained by a 
 snatch at the spoil, but by previous formations of value 424425 
 In order of merit, then, the Naive Productivity and the Ex- 
 ploitation theories stand lowest . . . . 425 
 
 They do not even see the problem, and they both assume a 
 
 theory of value which bases it on production . . 426 
 
 Next come those theories which use the external machinery of a 
 theory of costs ; this has the disadvantage of explaining 
 surplus value without direct reference to the wants and 
 satisfactions in which value arises . . . .427 
 
 Highest stand those which recognise that interest is a problem 
 of value, as in the higher forms of the Abstinence and Use 
 theories, and particularly in Menger's statement . 427-428 
 
 The future work of interest theorists . . . 428
 
 INTEODUCTION 
 
 THE PROBLEM OF INTEREST 
 
 IT is generally possible for any one who owns capital to obtain 
 from it a permanent net income, called Interest. 1 
 
 This income is distinguished by certain notable character- 
 istics. 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 con- 
 sists : 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. 
 
 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 
 
 1 Many German economists use the word Kapitalrente as well as Kapitalzins. 
 Sanders defines Rente as ' ' Einkiinfte die man als Nutzung von Grundstucken, 
 Kapitalien, und Rechten bezieht." So Littre gives Rente as "Revenu annuel." 
 The word occurs in Chaucer as equivalent of income : 
 
 "For catel (chattels) hadden they ynough and rent." Canterbury Tales, 
 Prologue, 1. 375. In English we still retain the word Rent instead of interest in 
 a few cases outside of its special application to land. "W. S. 
 
 B
 
 2 THE PROBLEM OF INTEREST INTROD. 
 
 remarkable phenomenon appears in economic life with' such 
 perfect regularity that the very conception of capital has not 
 infrequently been based on it. 1 
 
 Whence and why does the capitalist, without personally 
 exerting himself, obtain this endless flow of wealth ? 
 
 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 explana- 
 tion 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 acknow- 
 ledged 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 theo- 
 retical 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 ex- 
 pediency. 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 
 
 1 Thus Hermann in his Staatswirthschaftliche Untersuckungen, p. 211, defines 
 capital as "Vermbgen, das seine Nutzung, wie ein immer neues Gut, fort- 
 dauernd dem Bediirfniss darbietet, ohne an seinem Tauschwerth abzunehmen. "
 
 INTROD. ITS TWO BRANCHES 
 
 interest is just, fair, and useful or not, necessarily remains to 
 a great extent a matter of opinion. The most cogent argu- 
 mentation 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 prob- 
 able 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 sccdes 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. 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. 
 
 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 prob-
 
 4 THE PROBLEM OF INTEREST INTROD. 
 
 lems, 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. In the case, e.g. where the two 
 problems are mixed up, it might easily happen that one who 
 sees that the existence of interest is attended by an increased 
 return in the national production, will be disposed to agree 
 with a theory which finds the cause of interest in a productive 
 power of capital. Or it may happen that one comes to the 
 theoretical conclusion that interest has its origin in the exploit- 
 ation of the labourer, made possible by the relations of com- 
 petition 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 pro- 
 duction of a people, has absolutely nothing to do with the 
 question why interest exists ; and our knowledge of ttie source 
 from which interest springs, in itself gives us no ground what- 
 ever 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 error-, misunderstandings, and prejudices, we can scarcely 
 complain of it, since it is the practical problem of interest 
 that has jrought 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
 
 INTROD. THE THEORETICAL PROBLEM 5 
 
 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 con- 
 viction. 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 ex- 
 hibits 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 in- 
 dicating to the impartial mind what a mass of error they 
 must contain.
 
 6 THE PROBLEM OF INTEREST INTROD. 
 
 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 in- 
 congruous 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 des- 
 tined, 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 mean- 
 time on two grounds of expediency. Firstly, by adopting it a 
 certain harmony will be maintained, so far, at least, as termin- 
 ology 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. The more complete development of the 
 conception of capital I reserve for a future occasion. 1 
 
 Within this general conception of capital, further, there are 
 two well-known shades of difference that require to be noted. 
 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, 
 
 1 A promise now fulfilled by the publication of the Positive Theorie des 
 Kapitalcs, Innsbruck, 13S9. W. S.
 
 INTROD. DEFINITIONS 7 
 
 means of acquisition or means of enjoyment, goods for pro- 
 duction or goods for consumption. Thus, e.g. the books of a 
 circulating library will fall under the individual conception of 
 capital, but not under the national conception. The national 
 conception, if we except those few objects of immediate con- 
 sumption 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. 1 
 
 Interest makes its appearance in many different forms. 
 
 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 ascer- 
 tain 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. 
 
 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 produc- 
 
 1 Kapitdlzins. The word ' ' Interest " in English does not require any 
 addition. W. S.
 
 8 THE PROBLEM OF INTEREST INTROD. 
 
 tion. 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. 1 All these kinds of compensation, however, may be 
 appropriately grouped under the name of Contract interest or 
 Loan interest. 
 
 While, however, the conception of Loan interest is ex- 
 ceedingly 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 pro- 
 duction should be put to the account of his capital. 2 Un- 
 doubtedly it should not be so where the undertaker has at 
 the same time occupied the position of a worker in his own 
 undertaking. 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 super- 
 intendence say, in planning the business, or, at the least, 
 in the act of will by which he devotes his means of pro- 
 duction to a definite undertaking. The question now is whether, 
 
 1 "Es heisst Mieth-oder Pachtzins, wenn das liberlassene Kapital aus 
 dauerbaren Giitern bestand. Es heisst Zinsen oder Interessen, wenn das Kapital 
 aus verbrauchlichen oder vertretbaren Giitern bestand." I have translated the 
 passage to suit our English usage of the words. The adjective " vertretbar " (for 
 which the legal "fungible" is the only equivalent) indicates that the thing lent 
 is not itself given back, but another of the same kind. Grain and money are the 
 typical fungibles. W. S. 
 
 8 I think it advisable to translate Untcrnehmer and Uitiernelimung throughout 
 by Undertaker and Undertaking. Rowland Hill, when he adapted Greensleaves 
 to a psalm, said he did not see why the devil should have all the good tunes. 
 Neither, in my opinion, should our science any longer deny itself these useful 
 words, introduced by Adam Smith himself, simply because they are usually con- 
 fined with us to one special branch of industry. W. S.
 
 INTROD. DEFINITIONS 9 
 
 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 under- 
 taking, 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. 
 For instance, if an undertaking in which a capital of 100, 000 
 is invested yields an annual profit of 9000, and if the cus- 
 tomary rate of interest is 5 per cent, then 5000 will be 
 considered as profit on capital, and the remaining 4000 as 
 undertaker's profit. 
 
 On the other hand, there are many, especially among the 
 younger economists, who hold that such a division is inadmis- 
 sible, and that the so-called undertaker's profit is homogeneous 
 with the profit on capital. 1 
 
 This discussion forms the subject of an independent 
 problem of no little difficulty the problem of Undertaker's 
 Profit. 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 
 
 1 On the whole question see Pierstorff, Die Lchrc vom Untcrnchmergeunnn 
 Berlin, 1875.
 
 10 THE PROBLEM OF INTEREST INTROD. 
 
 everybody recognises to be interest that is to say, the whole 
 of contract interest, 1 and, of the " natural " profit of under- 
 taking 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 investiga- 
 tion ; 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 requir- 
 ing 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. 
 
 1 Of course only so far as it is net interest.
 
 BOOK I 
 
 THE DEVELOPMENT OF THE PKOBLEM
 
 CHAPTER I 
 
 THE OPPOSITION TO INTEREST IN CLASSICAL AND 
 MEDLEVAL TIMES 
 
 IT has often been remarked that not only does our knowledge 
 of interesting subjects gradually develop, but also our curiosity 
 regarding these subjects. It is very rarely indeed that, when 
 a phenomenon first attracts attention, it is seen in its full ex- 
 tent, 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. 
 
 This has been the case with the phenomenon of interest, i 
 It first became the object of question only in the form of I 
 Loan interest, and for full two thousand years the nature of I 
 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
 
 14 THE OPPOSITION TO INTEREST BOOK i 
 
 through the labour, is certainly obtained under co-operation with 
 the labour of the capitalist-undertaker ; and to superficial con- 
 sideration 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." 
 
 The history of the interest problem, therefore, begins with 
 a very long period in which loan interest, or usury, alone is the 
 subject of investigation. 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 civil- 
 isation ; it is deeply interesting in itself, and has besides had 
 an influence of the deepest importance. on the practical develop- 
 ment of economic and legal life, of which we may see many 
 traces even in our own day. But as regards the development 
 of the theoretical interest problem, the whole period, notwith- 
 standing ij:s length, and notwithstanding the great number of 
 writers who flourished during it, is rather barren. Men were 
 fighting, as we shall see, not for the centre of the problem, but 
 for an outpost of it which, from a theoretical standpoint, was of 
 comparatively subordinate importance. Theory was too much 
 the bond servant of practice. People were concerned less to 
 investigate the nature of loan interest for its own sake than 
 to find in theory something that would help them to an opinion 
 on the good or evil of interest, and would give that opinion a 
 firm root in religious, moral, or economical grounds. Since, 
 moreover, the most active time of the controversy coincided
 
 CHAP, i DISLIKE OF LOAN INTEREST 15 
 
 with the active time of scholasticism, it may be guessed that 
 the knowledge of the nature of the subject by no means ran 
 parallel with the number of the arguments and counter-argu- 
 ments that were urged. 
 
 I shall therefore not waste many words in describing these 
 earliest phases in the development of our problem, and this 
 all the more readily that there are already several treatises, and 
 some of them excellent ones, relating to that period. In them 
 the reader will find much more detail than need be introduced 
 for our purpose, or would even be appropriate here. 1 We 
 begin, then, with some account of the hostility to loan 
 interest. 
 
 Eoscher has well remarked that on the lower stages of 
 economical development there regularly appears a lively dis- 
 like to the taking of interest. Credit has still little place in 
 production. Almost all loans are loans for consumption, and 
 are, as a rule, loans to people in distress. The creditor is 
 usually rich, the debtor poor ; and the former appears in the 
 hateful light of a man who squeezes something from the little 
 of the poor, in the shape of interest, to add it to his own 
 superfluous wealth. It is not to be wondered at, then, that 
 both the ancient world and the Christian Middle Ages were 
 exceedingly unfavourable to usury ; for the ancient world, in 
 spite of some few economical flights, had never developed very 
 much of a credit system, and the Middle Ages, after the decay 
 of the Eoman culture, found themselves, in industry as in so 
 
 1 From the abundant literature that treats of interest and usury in ancient 
 times, may be specially mentioned the following : 
 
 Bbhmer, Jus Ecclesiasticum Protestantium, Halle, 1736, vol. v. tit. 19. 
 
 Rizy, Ueber Zinstaxen und Wuchergesetze, Vienna, 1859. 
 
 "Wiskemann, Darstcllung der in Deutschland zur Zcit der Reformation herr- 
 schenden national -okonomischcn Ansichten (Prize Essays of the Fiirstliche 
 Jablonowski'sche Gesellschaft, vol. x. Leipzig, 1861). 
 
 Laspeyres, Geschichte der volkioirthschaftlichen Ansichten der Niederldnder 
 (vol. xi. of same Prize Essays, Leipzig, 1863). 
 
 Neumann, Geschichte des Wvdiers in Dewtschland, Halle, 1865. 
 
 Funk, Zins und Wucher, Tubingen, 1868. 
 
 Knies, Der Kredit, part i., Berlin, 1876, p. 328, etc. 
 
 Above all, the works of Endemann on the canon doctrine of economics, Die 
 national -okonomischen Grunds'dtze der kanonistischen Lchre, Jena, 1863, and his 
 Stvdien in der romanisch- kanonistischen Wirthschafts-und Rechtslehre, vol. i. 
 Berlin, 1874 ; voL ii. 1883.
 
 16 THE OPPOSITION TO INTEREST BOOK i 
 
 many other things, thrown back to the circumstances of primi- 
 tive times. 
 
 In both periods this dislike has left documentary record. 
 
 The hostile expressions of the ancient world are not few 
 in number, but they are of trifling importance as regards 
 development of theory. They consist partly of a number of 
 legislative acts forbidding the taking of interest, some of them 
 reaching back to a very early date, 1 partly of more or less 
 incidental utterances of philosophic or philosophising writers. 
 
 The legal prohibitions of interest may, of course, be taken 
 as evidence of a strong and widespread conviction of the evils 
 connected with its practice. But it can scarcely be said that 
 they were founded on any distinct theory ; at any rate no such 
 theory has been handed down to us. The philosophic writers, 
 again like Plato, Aristotle, the two Catos, Cicero, Seneca, 
 Plautus, and others usually touch on the subject too cursorily 
 to give any foundation in theory for their unfavourable judgment. 
 Moreover, the context often makes it doubtful whether they 
 object to interest as such, or only to an excess of it ; and, in 
 the former case, whether their objection is on the ground of a 
 peculiar blot inherent in interest itself, or only because it 
 usually favours the riches they despise. 2 
 
 1 E.g. the prohibition of interest by the Mosaic Code, which, however, only 
 forbade lending at interest between Jews, not lending by Jews to strangers, 
 Exodus xxii. 25 ; Leviticus xxv. 35-37 ; Deuteronomy xxiii. 19, 20. In Rome, 
 after the Twelve Tables had permitted an Unciarum Foenus, the taking of 
 interest between Roman citizens was entirely forbidden by the Lex Genucia, 
 B.C. 322. Later, by the Lex Sempronia and the Lex Gabinia, the prohibition 
 was extended to Socii and to those doing business with provincials. See also 
 Knies, Der Kredit, part i. p. 328, etc., and the writers quoted there. 
 
 2 I may append some of the passages oftenest referred to. Plato in the Laws, 
 p. 742, says : " No one shall deposit money with another whom he does not 
 trust as a friend, nor shall he lend money upon interest." Aristotle, Nicho- 
 machean Ethics, iv. 1 : " Such are all they who ply illiberal trades ; as those, for 
 instance, who keep houses of ill-fame, and all persons of that class ; and usurers 
 who lend out small sums at exorbitant rates : for all these take from improper 
 sources, and take more than they ought." Cicero, De Officiis, ii. at end: 
 " Ex quo genere comparationis illud est Catonis senis : a quo cum quaereretur, 
 quid maxime in re familiari expediret, respondit, bene pascere. Quid secundum ? 
 Satis bene pascere. Quid tertium ? Male pascere. Quid quartum ? Arare. . . . 
 Et, cum ille, qui quaesierat, dixisset^ quid foenerari ? Turn Cato, quid hominem, 
 inquit, occidere?" Cato, De Re Rustica : "Majores nostri sic habuerunt et 
 ita in legibus posuerunt, furem dupli condemnare, foeneratorem quadrupli. 
 Quanto pejorem civem existimarunt foeneratorem quam furem, hinc licet
 
 CHAP. I 
 
 ARISTOTLE 
 
 17 
 
 One passage in ancient literature has, in my opinion, 
 a direct value for the history of theory, inasmuch as it 
 allows us to infer what really was the opinion of its author 
 on the economic nature of interest ; that is, the often quoted 
 passage in the first book of Aristotle's Politics. He there 
 says : " Of the two sorts of money-making one, as I have just 
 said, is a part of household management, the other is retail 
 trade : the former necessary and honourable, the latter a kind of 
 exchange which is justly censured ; for it is unnatural, and a / 
 mode by which men gain from one another. The most hated 
 sort, and with the greatest reason, is usury, which makes a gain 
 out of money itself, and not from the natural use of it. For 
 money was intended to be used in exchange, but not to increase 
 at interest. And this term Usury (TOKO?), which means the 
 birth of money from money, is applied to the breeding of money, 
 because the offspring resembles the parent. W T herefore of all 
 modes of making money this is the most unnatural " (Jowett's 
 Translation, p. 19). 
 
 What this positively amounts to may be summed up thus : 
 money is by nature incapable of bearing fruit ; the lender's I 
 gain therefore cannot come from the peculiar power of the / 
 money ; it can only come from a defrauding of the borrower \ 
 (err' d\\q\a)v eVru>). Interest is therefore a gain got by ; 
 abuse and injustice. 
 
 That the writers of old pagan times did not go more 
 deeply into the question admits of a very simple explanation. 
 The question was no longer a practical one. In course of 
 time the authority of the state had become reconciled to the 
 taking of interest. In Attica interest had for long been free 
 from legal restriction. The universal empire of Rome, without 
 formally rescinding those severe laws which entirely forbade 
 the taking of interest, had first condoned, then formally sanc- 
 tioned it by the institution of legal rates. 1 The fact was that 
 
 existimarL" Plautus, Jlostellaria, Act iii scene 1 : "Videturne obsecro hercle 
 idoneus, Danista qui sit? genus quod improbissimum est. . . . Nullnm edepol hodie 
 genus est hominum tetrius, nee minus bono cum jure quam Danisticum." Seneca, 
 De Benefidis, vii. 10 : "Quid enim ista sunt, quid foenus et calendarium et usura, 
 nisi humanae cupiditatis extra naturam quaesita nomina ? . . . quid sunt istae 
 tabellae, quid computationes, et venale tempus et sanguinolentae ceutesimae ? 
 voluntaria mala ex constitution nostra pendentia, in quibus nihil est, quod 
 snbici ocnlis, quod teneri manu possit, mania avaritiae somnia." 
 1 See also Knies, Der Kredit, L p. 330, etc. 
 
 C 
 
 vV 
 
 <4>-
 
 THE OPPOSITION TO INTEREST BOOK i 
 
 economical relations had become too complicated to find suffi- 
 cient scope under a system naturally so limited as that of 
 gratuitous credit. Merchants and practical men were, without 
 exception, steadily on the side of interest. In such circum- 
 stances, to write in favour of it was superfluous, to write 
 against it was hopeless ; and it is a most significant indication 
 of this state of matters that almost the only quarter in which 
 interest was still censured and that in a resigned kind of 
 way was in the works of the philosophical writers. 
 
 The writers of the Christian Middle Ages had more 
 occasion to treat the subject thoroughly. 
 
 The dark days which preceded and followed the break up 
 of the Roman Empire had brought a reaction in economical 
 matters, which, in its turn, had the natural result of 
 strengthening the old hostile feeling against interest. The 
 peculiar spirit of Christianity worked in the same direction. 
 The exploitation of poor debtors by rich creditors must have 
 appeared in a peculiarly hateful light to one whose religion 
 taught him to look upon gentleness and charity as among the 
 greatest virtues, and to think littlf of the goods of this world. 
 l>ut what had most influence was that, in the sacred writings 
 of the New Testament, were found certain passages which, as 
 usually interpreted, seemed to contain a direct divine prohibi- 
 tion of the taking of interest. This was particularly true of 
 the famous passage in Luke : " Lend, hoping for nothing 
 again." l The powerful support which the spirit of the time, 
 already hostile to interest, thus found in the express utterance 
 of divine authority, gave it the po\ver once more to draw 
 legislation to its side. The Christian Church lent its arm. 
 Step by step it managed to introduce the prohibition into 
 legislation. First the taking of interest was forbidden by the 
 Church, and to the clergy only. Then it was forbidden the 
 laity also, but still the prohibition only came from the Church. 
 At last even the temporal legislation succumbed to the Church's 
 influence, and gave its severe statutes the sanction of Roman 
 law. 2 
 
 1 Luke vi. 35. On the true sense of this passage see Knies as before, p. 
 333, etc. 
 
 - On the spn-ad of the prohibition of interest see Endemaun, National- 
 i-/.-iniontl:}ic (rmiuhatee, p. 3, etc. ; Sfwtifti in der romanisch-kanonistischcn 
 W irthsclutfts-und llr.chtsh-ln-c, p. 10, etc.
 
 CHAP, i REACTION FROM AUTHORITY 19 
 
 For fifteen hundred years this turn of affairs gave abundant 
 support to those writers who were hostile to interest. The old 
 pagan philosophers could fling their denunciations on the world 
 without much proving, because they were neither inclined nor 
 able to give them practical effect. As a " Platonic " utterance 
 of the idealists their criticism had not sufficient weight in the 
 world of practice to be either seriously opposed or seriously 
 defended. But now the matter had again become practical. Once 
 the Word of God was made victorious on earth, a hostility im- 
 mediately showed itself, against which the righteousness of 
 the new laws had to be defended. This task naturally fell to 
 the theological and legal literature of the Church, and thus 
 began a literary movement on the subject of loan interest 
 which accompanied the canonist prohibition from its earliest 
 rise far into the eighteenth century. 
 
 About the twelfth century of our era is observable a note- 
 worthy departure in the character of this literature. Before 
 that century the controversy is mainly confined to the theo- 
 logians, and even the way in which it is treated is essentially 
 theological To prove the unrighteousness of loan interest 
 appeal is made to God and His revelation, to passages of 
 Holy Writ, to the commandments concerning charity, righteous- 
 ness, and so on ; only rarely, and then in the most general 
 terms, to legal and economical considerations. It is the fathers 
 of the Church who express themselves most thoroughly on the 
 subject, although even their treatment can scarcely be called 
 thorough. 1 
 
 After the twelfth century, however, the discussion is con- 
 ducted on a gradually broadening economic basis. To proofs 
 from Eevelation are added appeals to the authority of revered 
 fathers of the Church, to canonists and philosophers even 
 pagan philosophers, to old and new laws, to deductions from 
 the jus divinum, the jus humanum, and what is particularly 
 important for us as touching the economic side of the matter 
 to deductions from the jus naturcd.e. And now the lawyers 
 begin to take a more active part in the movement alongside 
 the theologians first the canon lawyers and then the legists. 
 
 The very ample and careful attention which these writers 
 gave to the subject is chiefly due to the fact that the prohi- 
 
 1 See below.
 
 20 THE OPPOSITION TO INTEREST BOOK i 
 
 bition of interest pressed more hardly as time went on, and 
 required to be more strongly defended against the reaction of 
 the trade it oppressed. The prohibition had originally been 
 imposed in economical circumstances of such a nature that it 
 was easily borne. Moreover, during its first hundred years the 
 prohibition had so little command of external force, that where 
 practical life felt itself hampered by the restraint it could 
 disregard it without much danger. But later, as industiy and 
 commerce grew, their increasing necessity for credit must have 
 made the hampering effects of the prohibition increasingly 
 vexatious. At the same time the prohibition became more felt 
 as it extended to wider circles, and as its transgression was 
 punished more severely. Thus it was inevitable that its 
 collisions with the economical world should become much 
 more numerous and much more serious. Its most natural ally, 
 public opinion, which had originally given it the fullest support, 
 began to withdraw from it. There was urgent need of assist- 
 ance from theory, and this assistance was readily obtained from 
 the growing science. 1 
 
 Of the two phases of the canonist writings on this subject, 
 the first is almost without value for the history of theory. 
 Its theologising and moralising do little more than simply 
 express abhorrence of the taking of interest and appeal to 
 authorities. 2 
 
 Of greater importance is the second phase, although 
 neither as regards the number of its writers nor the very 
 
 1 See Endemann, Studien, pp. 11-13, 15, etc. 
 
 2 To give the reader some idea of the tone which the fathers of the Church 
 adopted in dealing with the subject I append some of their most quoted passages. 
 Lactantius, book vi. Divin. Inst. chap, xviii. says of a just man : " Pecuniae, 
 si quam crediderit, non accipiet usuram : ut et beneficium sit incolume quod 
 succurat necessitati, et abstineat se prorsus alieno in hoc enim genere officii 
 debet suo esse contentus, quam oporteat alias ne proprio quidem parcere, ut 
 bonum faciat. Plus autem accipere, quam dederit, injustum est. Quod qui 
 facit, insidiatur quodam modo, ut ex alterius necessitate praedetur. " Ambrosius, 
 De Bono Mortis, chap. xii. : "Si quis usuram acciperit, rapinam facit, vita non 
 vivit." The same De Tobia, chap. iii. : "Taliasunt vestra, divites ! beneficia. 
 Minus datis, il plus exigitis. Talis humanitas, ut spolietis etiam dum subvenitis. 
 Foecundus vobis etiam pauper est ad quaestum. Usurarius est egenus, 
 cogentibus nobis, habet quod reddat : quod impendat non habet. " So also 
 chap. xiv. : "Ideo audiant quid lex dicat : Neque usuram, inquit, escarum 
 accipies, neque omnium rerum." Chrysostom on Matthew xvii. Homily 56 : 
 " Noli mihi dicere, quaeso, quid gaudet et gratiam habet, quod sibi foenore 
 pecuniam colloces : id enim crudelitate tua coactus fecit. " Augustine on Psalm
 
 CHAP, i REACTION FROM AUTHORITY 21 
 
 imposing array of arguments they introduced. 1 For what 
 originally emanated from the few was soon slavishly repeated 
 by the many, and the stock of arguments collected by the 
 earlier writers soon passed to the later as an heirloom that 
 was above argument. But the greater number of these argu- 
 ments are merely appeals to authority, or they are of a moral- 
 ising character, or they are of no force whatever. Only a 
 comparatively small number of them mostly deductions from 
 the jus naturale can lay claim to any theoretical interest. 
 If, even of these arguments, many should appear to a reader 
 of to-day little calculated to convince anybody, it should not 
 be forgotten that at that time it was not their office to con- 
 vince. What man had to believe already stood fixed and fast. 
 The all-efficient ground of conviction was the Word of God, 
 which, as they understood it, had condemned interest. The 
 rational arguments which were found to agree with the divine 
 prohibition were scarcely more than a kind of flying buttress, 
 which could afford to be the slighter that it had not to carry 
 the main burden of proof. 2 
 
 I shall very shortly state those rational arguments that 
 have an interest for us, and verify them by one or two 
 quotations from such writers as have given them clear and 
 practical expression. 
 
 First of all, we meet with Aristotle's argument of the 
 barrenness of money ; only that the theoretically important 
 point of interest being ? parasite on the produce of other 
 people's industry, is more sharply brought out by the canonists. 
 Thus Gonzalez Tellez 3 : " So then, as money breeds no money, it 
 is contrary to nature to take anything beyond the sum lent, and 
 it may with more propriety be said that it is taken from industry 
 than from money, for money certainly does not breed, as Aristotle 
 
 cxxviii. : "Audent etiam foeneratores dicere, non habeo aliud nnde vivam. 
 Hoc mihi et latro diceret, deprehensus in fauce : hoc et effractor diceret . . . et 
 leno . . . et maleficus." The same (quoted in the Dccret. Grat. chap. i. Causa 
 xiv. quaest. 3) : "Si plus quam dedisti expectas accipere foeneratores, et in hoc 
 improbandus, non laudandus." 
 
 1 Moliuaeus, in a work that appeared in 1546, mentions a writer who had 
 shortly before collected no less than twenty -five arguments against interest 
 (Tract. Contract. No. 528). 
 
 " See Endemann, Grundsdtze, pp. 12, 18. 
 
 3 Gommentaria perpetua in singulos textits quinque librorum Decretalium 
 Grcgorii IX. v. chap. iii. ; De Usuris, v. chap. xix. No. 7.
 
 22 THE OPPOSITION TO INTEREST BOOK i 
 
 has related." And in still plainer terms Covarruvias l : " The 
 fourth ground is that money brings forth no fruit from itself, 
 nor gives birth to anything. On this account it- is inadmissible 
 and unfair to take anything over and above the lent sum for 
 the use of the same, since this is not so much taken from money, 
 which brings forth no fruit, as from the industry of another." 
 
 The consumption of money and of other kinds of lent 
 goods furnished a second " natural right " argument. This is 
 very clearly and fully put by Thomas Aquinas. He contends 
 that there are certain things the use of which consists in the 
 consumption of the articles themselves, such as grain and 
 wine. On that account the use of these things cannot be sep- 
 arated from the articles themselves, and if the use be transferred 
 to any one the article itself must necessarily be transferred with 
 it. When an article of this sort then is lent the property in 
 it will always be transferred. Now it would evidently be 
 unjust if a man should sell wine, and yet separate therefrom 
 the use of the wine. In so doing he would either sell the 
 same article twice, or he would sell something which did not 
 exist. Exactly in the same way is it unjust for a man to lend 
 things of this sort at interest. Here also he asks two prices 
 for one article; he asks for replacement of a similar article 
 and he asks a price for the use of the article, which we call 
 interest or usury. Now as the use of money lies in its con- 
 sumption or in its spending, it is inadmissible in itself, on the 
 same grounds, to ask a price for the use of money. 2 According 
 to this reasoning interest appears as a price filched or extorted 
 for a thing that does not really exist, the separate and in- 
 dependent " use " of consumable goods. 
 
 A similar conclusion is arrived at by a third argument 
 that recurs over and over again in stereotyped form. The 
 goods lent pass over into the property of the debtor. There- 
 fore the use of the goods for which the lender is paid interest 
 is the use of another person's goods, and from that the lender 
 
 1 Variorum Rcsolutionum, Hi. chap. i. No. 5. 
 
 2 Summa totius Theologiae, ii. chap. ii. quaest. 78, art. 1. Similarly Covar- 
 ruvias : " Accipere lucrum aliquod pro usu ipsius rei, et demum rem ipsam, 
 iniquum est et prava commutatio, cum id quod non est pretio vendatur . . . aut 
 enim creditor capit lucrum istud pro sorte, ergo bis capit ejus aestimationem, 
 vel capit injustum sortis valorem. Si pro usu rei, is non potent seorsum a sorte 
 aestimari, et sic bis sors ipsa venditur."
 
 CHAP. I 
 
 THE FOUR CANON ARGUMENTS 
 
 23 
 
 cannot draw a profit without injustice. Thus Gonzalez Tellez : 
 " For the creditor who makes a profit out of a thing belonging 
 to another person enriches himself at the hurt of another." And 
 still more sharply Vaconius Vacuna l : " Therefore he who gets 
 fruit from that money, whether it be pieces of money or anything 
 else, gets it from a thing which does not belong to him, and it 
 is accordingly all the same as if he were to steal it." 
 
 Lastly, in a very strange argument, first, I believe, incor- 
 porated by Thomas Aquinas in the canonists' repertoire, interest 
 is looked upon as the hypocritical and underhand price asked 
 for a good common to all -namely, time. The usurers who 
 receive more, by the amount of their interest, than they have 
 given, seek a pretext to make the prohibited business appear 
 a fair one. This pretext is offered them by time. They would 
 have time recognised as the equivalent for which they receive 
 the surplus income formed by the interest. That this is their 
 intention is -evident from the fact that they raise or reduce 
 their claim of interest according as the time for which a loan 
 is given is long or short. But time is a common good that 
 belongs to no one in particular, but is given to all equally 
 by God. When, therefore, the usurer would charge a price 
 for time, as though it were a good received from him, he 
 defrauds his neighbour, to whom the time he sells already 
 belongs as much as it does to him, the seller, and he defrauds 
 God, for whose free gift he demands a price. 2 
 
 To sum up. In the eyes of the canonists loan interest is 
 simply an income which the lender draws by fraud or force 
 from the resources of the borrower. The lender is paid in 
 interest for fruits which barren money cannot bear. He sells 
 a " use " which does not exist, or a use which already belongs 
 to the borrower. And finally, he sells time, which belongs to 
 the borrower just as much as it does to the lender and to all 
 men. In short, regard it as we may, interest always appears 
 as a parasitic profit, extorted or filched from the defrauded 
 borrower. 
 
 This judgment was not applied to the interest that accrues 
 from the lending of durable goods, such as houses, furniture, 
 
 1 Lib. i. Nov. Dcclar. Jus. Civ. chap. xiv. quoted in Bbhmer's Jus Eccles. 
 Prot. Halle, 1736, p. 340. 
 
 a Thomas Aquiuas, De Usuris, i. chap. iv.
 
 24 THE OPPOSITION TO INTEREST BOOK i 
 
 etc. Just as little did it affect the natural profit acquired by 
 personal exertions. That this natural profit might be an 
 income distinct from that due to the undertaker for his labour, 
 was but little noticed, especially at the beginning of the period ; 
 and, so far as it was noticed, little thought was given to it. 
 At any rate the principle of this kind of profit was not chal- 
 lenged. Thus, e.g. the canonist Zabarella l deplores the existence 
 of loan interest on this ground among others, that the agri- 
 culturists, looking for a " more certain " profit, would be tempted 
 to put their money out at interest rather than employ it in 
 production, and thus the food of the people would suffer, a 
 line of thought which evidently sees nothing objectionable in 
 the investment of capital in agriculture, and the profit drawn 
 from that It was not even considered necessary that the 
 owner of capital should employ it personally, if only he did 
 not let the ownership of it out of his hands. Thus profit 
 made from a sleeping partnership was, at least, not forbidden. 2 
 And the case where one entrusts another with a sum of money, 
 but retains the ownership of it, is decided by the stern Thomas 
 Aquinas in the words : that such an one may unhesitatingly 
 appropriate the profit resulting from the sum of money. He need 
 not want for a just title to it, " for he, as it were, receives the 
 fruit of his own estate" not, as the holy Thomas carefully 
 adds, a fruit that springs directly from the coins, but a fruit 
 that springs from those things that have been obtained in 
 just exchange for the coins. 3 
 
 Where, as not seldom occurs notwithstanding this, exception 
 is taken to profit obtained by personal exertions, the exception 
 is not so much to the profit as such, as to some concrete and 
 objectionable manner of getting it : as, e.g. by business conducted 
 in an avaricious or quite fraudulent way, or by forbidden traffic 
 in money, and such like. 
 
 1 Secundo (usura est prohibits) ex fame, nam laborantes rustic! praedia colentes 
 libentius ponerent pecuniam ad usuras, quam in laboratione, cum sit tutius 
 lucrum, et sic non curarent homines seminare seu metere." See Endemann, Na- 
 tional'Skonomische Grundsdize, p. 20. 
 
 2 Endemann, Studien, i. p. 361. * De Usuris, ii. chap. iv. qn. 1.
 
 CHAPTER II 
 
 THE DEFENCE OF INTEREST FROM THE SIXTEENTH TILL THE 
 EIGHTEENTH CENTURY 
 
 THE canon doctrine of interest had to all appearance reached 
 its zenith sometime during the thirteenth century. Its prin- 
 ciples held almost undisputed sway in legislation, temporal as 
 well as spiritual Pope Clement V, at the Council of Vienna 
 in 1311, could go so far as to threaten with excommuni- 
 cation those secular magistrates who passed laws favourable 
 to interest, or who did not repeal such laws, where already 
 passed, within three months. 1 Nor were the laws inspired 
 by the canon doctrine content with opposing interest in its 
 naked and undisguised form ; by the aid of much ingenious 
 casuistry they had even taken measures to prosecute it 
 under many of the disguises by which the prohibition had 
 been evaded. 2 Finally, literature no less than legislation fell 
 under the sway of the canon doctrine, and for centuries not 
 a trace of opposition to the principle of the prohibition dared 
 show itself. 
 
 There was only one opponent that the canon doctrine had 
 never been entirely able to subdue, the economic practice of 
 the people. In face of all the threatened penalties of earth 
 and heaven, interest continued to be offered and taken ; parlly 
 without disguise, partly under the manifold forms which the 
 inventive spirit of the business classes had devised, and by which 
 they slipped through the meshes of the prohibitionist la >vs in spite 
 of all their casuistry. And the more flourishing the economical 
 
 1 Clem. c. un. de Jsuris, 6. 5. 
 * See Endemann, Gr^ndsatzc, pp. 9, 21.
 
 26 THE DEFENCE OF INTEREST BOOK i 
 
 condition of a country the stronger was the reaction of practice 
 against the dominant theory. 
 
 In this battle victory remained with the more stubborn 
 party, and that party was the one whose very existence was 
 endangered by the prohibition. 
 
 One of its first results, not marked by much outward 
 circumstance, but actually of great importance, was obtained 
 even when the canon doctrine was still, to all appearance, at 
 the height of its authority. Too weak to hazard open war 
 against the principle of prohibition, the business world yet 
 managed to prevent its strict and complete legal enforcement, 
 and to establish a number of exceptions some direct and some 
 indirect. 
 
 The following, among others, may be regarded as direct 
 exceptions : the privileges of the Mons de Piete, the tolera- 
 tion of other kinds of banks, and the very extensive indulgence 
 shown to the usury practices of the Jews an indulgence which, 
 here and there, was extended, at least by secular legislation, 
 into a formal legal permission. 1 
 
 Of indirect exceptions there were : the buying of annuities, 
 the taking of land in mortgage for lent money, the use of bills 
 of exchange, partnership arrangements, and above all, the possi- 
 bility of getting compensation from the borrower in the shape 
 of intcresse on the deferred payment (damnum etnergetis ct 
 hicrum cessans). Independent of this, the lender had had a 
 claim to compensation in the shape of interessc, but only in 
 the case of a culpable neglect (technically called mora) on 
 the part of the borrower to fulfil his contract obligations ; and 
 the existence and amount of the interesse had to be authen- 
 ticated in each case. But now a step farther in this direction 
 was taken, although under protest of the strict canonists, by 
 the introduction of two contract clauses. Under one clause 
 the borrower agreed beforehand that the lender should be 
 released from the obligation of authenticating the borrower's 
 mora ; and under the other a definite rate of interessc was 
 agreed on in advance. Practically it came to this, that the 
 loan was given nominally without interest, but that the creditor 
 
 1 The opinion very commonly held that the Jews were generally exempted 
 from the Church's prohibition of interest is pronounced erroneous by the late 
 and very complete work of Endemann (Studien, ii. p. 383, etc.)
 
 CHAP, ii COMPROMISE 27 
 
 actually received, under the name of interessc, a regular per- 
 centage for the whole period of the loan, the borrower by a 
 fiction being put in mora for that period. 1 
 
 Practical results like these had in the long run their effect 
 on principles. 
 
 To the observer of men and things it must in time have 
 become questionable whether the obstinate and always increasing 
 resistance of practical life really had its root, as the canonists 
 affirmed, only in human wickedness and hardness of heart. 
 Those who took the trouble to go more deeply into the techni- 
 calities of business life must have seen that practice not only 
 would not, but could not dispense with interest ; that interest 
 being the soul of credit, where credit exists to any considerable 
 extent interest cannot be prevented ; and that to suppress it 
 would be to suppress nine-tenths of credit transactions. They 
 must have seen, in a word, that, even in a half-developed 
 system of economy, interest is an organic necessity. It was 
 inevitable that the recognition of such facts that had for long 
 been commonplaces among practical men, should in the end 
 force its way into literary circles. 
 
 The effects which it there exerted were various. 
 
 One party remained unshaken in their theoretical convic- 
 tion that loan interest was a parasitic profit, admitting of no 
 defence before any strict tribunal; but they consented to a 
 practical compromise with the imperfection of man, on which they 
 laid the blame of its obstinate vitality. From the standpoint 
 of an ideal order of society, interest could not be permitted, but 
 men being so imperfect, it cannot conveniently be eradicated, 
 and so it were better to allow it within certain limits. This 
 was the view taken, among others, by several of the great 
 reformers, e.g. as Zwingli, 2 by Luther in his later days (although 
 earlier he had been a relentless enemy of usury), 3 and, with 
 still greater reserve, by Melanchthon. 4 
 
 It had naturally a great effect on public opinion, and 
 indirectly also on the later development of law, that such 
 
 1 Endemann, Stitdien, ii. pp. 243, 366. 
 
 2 Wiskemann, Darstellung dcr in Deutschland zur Zeit dcr Reformation 
 hcrrschendcn national -bkonomischen Ansichten (Prize Essays of the Jablonow- 
 ski'sche Society, vol. x. p. 71). 
 
 3 Wiskemann, p. 54. Neumann, Ocschichtc des Wuclwrs, p. 480, etc. 
 
 4 Wiskemann, p. 65.
 
 28 THE DEFENCE OF INTEREST BOOK i 
 
 influential men as these declared for tolerance in the matter. 
 However, as they were guided in their conduct not by prin- 
 ciples, but altogether by motives of expediency, their views 
 have no deeper importance in the history of theory, and 
 we need not pursue them farther. 
 
 Another party of thinking and observing men went farther. 
 Convinced by experience of the necessity of loan interest, they 
 began to re-examine the theoretical foundations of the prohibi- 
 tion, and finding that these would not bear investigation, they 
 commenced to write in opposition to the canon doctrine, basing 
 their opposition on principles. This movement becomes observ- 
 able about the middle of the sixteenth century, gathers impetus 
 and power in the course of the seventeenth, and towards its 
 end obtains so distinct an ascendency that during the next 
 hundred years it has only to do battle with a few isolated 
 writers who still represent the canon doctrine. And towards 
 the end of the eighteenth century if any one had professed to 
 defend that doctrine with the old specific arguments, he would 
 have been thought too eccentric to be taken seriously. 
 
 The first combatants of the new schdol were the reformer 
 Calvin and the French jurist Dumoulin (Carolus Molinaeus). 
 
 Calvin has defined his attitude towards our question in a 
 letter to his friend Oekolampadius. 1 In this letter he does not 
 treat it comprehensively, but he is very decided. At the outset 
 he rejects the usual authoritative foundation for the prohibition, 
 and tries to show that, of the writings adduced in its support, 
 some are to be understood in a different sense, and some have 
 lost their validity through entire change of circumstances. 2 
 
 The proof from authority being thus disposed of, Calvin 
 turns to the rational arguments usually given for the prohi- 
 bition. Its strongest argument, that of the barrenness of money 
 (pecunia non parit pecuniani), he finds of " little weight." It 
 is with money as it is with a house or a field. The roof and 
 walls of a house cannot, properly speaking, beget money, but 
 when the use of the house is exchanged for money a legitimate 
 
 1 Ep. 383, in the collection of his letters and answers, Hanover, 1597. 
 
 2 "Ac primum nullo testimonio Scripturae mihi constat usuras omnino dam- 
 natas esse. Ilia enim Christ! sententia qr,ae maxime obvia et aperta haberi solet : 
 Mutuum dato uihil inde sperantes, male hue detorta est. . . . Lex vero Mosis 
 politica cum sit, non tenemvir ilia ultra quam aequitas ferat atque humanitas. 
 Nostra conjunctio hodie per omnia non respondet. ..."
 
 CHAP, ii CALVIN 29 
 
 money gain may be drawn from the house In the same way 
 money can be made fruitful. When land is purchased for 
 money, it is quite correct to think of the money as producing 
 other sums of money in the shape of the yearly revenues from 
 the land. Unemployed money is certainly barren, but the 
 borrower does not let it lie unemployed. The borrower there- 
 fore is not defrauded in having to pay interest. He pays it 
 ex proventu, out of the gain that he makes with the money. 
 
 But Calvin would have the whole question judged in a 
 reasonable spirit, and he shows, by the following example, how 
 the lender's claim of interest may, from this point of view, 
 be well grounded. 
 
 A rich man who has plenty of landed property and general 
 income, but little ready money, applies for a money loan to 
 one who is not so wealthy, but happens to have a great 
 command over ready money. The lender could with the 
 money purchase land for himself, or he could request that the 
 land bought with his money be hypothecated to him till the 
 debt is wiped out. If, instead of doing so, he contents himself 
 with the interest, the fruit of the money, how should this be 
 blameworthy when the much harder bargain is regarded as 
 fair ? As Calvin vigorously expresses it, that were a childish 
 game to play with God, " Et quid aliud est quam puerorum instar 
 ludere cum Deo, cum de rebus ex verbis nudis, ac non ex eo quod 
 inest in re ipsa judicatur." 
 
 He concludes then that the taking of interest cannot be 
 universally condemned. But neither is it to be universally 
 permitted, but only so far as it does not run counter to fairness 
 and charity. In carrying out this principle he lays down a 
 number of exceptions in which interest is not to be allowed. 
 The most noteworthy of these are : that no interest should be 
 asked from men who are in urgent need ; that due considera- 
 tion should be paid to the "poor brethren"; that the "welfare 
 of the state " should be considered ; and that the maximum 
 rate of interest established by the laws should in no case be 
 exceeded. 
 
 As Calvin is the first theologian, so Molinaeus is the first 
 jurist to oppose the canon prohibition on theoretical grounds. 
 Both writers agree in their principles, but the way in which 
 they state them differs as widely as do their callings. Calvin
 
 30 THE DEFENCE OF INTEREST BOOK i 
 
 goes shortly and directly at what to him is the heart of the 
 matter, without troubling himself to refute secondary objections. 
 Thus he gets his convictions more from impressions he receives 
 than from logical argument. Molinaeus, on the other hand, is 
 inexhaustible in distinctions and casuistry. He is indefati- 
 gable in pursuing his opponents in all their scholastic turnings 
 and twistings, and takes the most elaborate pains to confute 
 them formally and point by point. Moreover, although more 
 cautious in expression than the impetuous Calvin, he is quite 
 as frank, pithy, and straightforward. 
 
 The principal deliverance of Molinaeus on the subject is 
 the Tractatus Contraduum et Usurarutn redituumque pecunia 
 Constitutorum, 1 published in 1546. The first part of it has 
 a great resemblance, perhaps accidental, to Calvin's line of 
 argument. After a few introductory definitions, he turns to the 
 examination of the jus divinum, and finds that the relevant pas- 
 sages of Holy Writ are misinterpreted. They are not intended to 
 forbid the taking of interest in general, but only such interest 
 as violates the laws of charity and brotherly lova And then 
 he also introduces the effective illustration used by Calvin of 
 the rich man who purchases land with borrowed money. 2 
 
 But further on the reasoning is much fuller than that of 
 Calvin. He points out conclusively (No. 75) that in almost 
 every loan there is an " interesse " of the creditor some injury 
 caused or some use foregone, the compensation for which is 
 just and economically necessary. This compensation is interest 
 or usura, in the right and proper sense of the word. The laws 
 of Justinian which allow interest, and only limit its amount, 
 are consequently not to be considered unjust, but actually in 
 the interest of the borrower, inasmuch as the payment of a 
 moderate interest gives him the chance of making a greater 
 profit (No. 76). 
 
 Later (No. 528) Molinaeus passes under review the chief 
 arguments of the canonists against interest, and completely 
 refutes them by a running commentary. 
 
 To the old objection of Thomas Aquinas, that the lender 
 who takes interest either sells the same thing twice, or sells 
 
 1 Previous to this, in the same year, was published the Extricatio Labyrinihi 
 dc co qiuxl Intei-cst, in which the question of interesse was freely handled, but 
 no definite side taken on the interest question. See Endemann, Studicn, i. p. 63. 
 
 a Tractatus, No. 10.
 
 CHAP, n MOLINAEUS 31 
 
 something that has no existence at all (vide p. 22), Molinaeus 
 answers that the use of money is a thing independent of the 
 capital sum, and consequently may be sold independently. 
 We must not regard the first immediate spending of the money 
 as its use : the use that follows the use of those goods that 
 a man has acquired by means of the loaned money, or has got 
 command over is also its use (Nos. 510, 530). If, further, 
 it be maintained that, along with the money itself, its use also 
 has passed over into the legal property of the borrower, and 
 that lie therefore is paying in interest for his own property, 
 Molinaeus answers (No. 530) that one is quite justified in 
 selling another man's property if it be a debt due him, and 
 that this is exactly the case with loans : " Usus pecuniae mi hi 
 pure a te debitae est mihi pure a te debitus, ergo vel tibi vendere 
 possum." 
 
 Finally, to the argument of the natural barrenness of money 
 Moliuaeus replies (No. 530) that the everyday experience of 
 business life shows that the use of any considerable sum of 
 money yields a service of no trifling importance, and that this 
 service, even in legal language, is designated as the " fruit " of 
 v money. To argue that money of itself can bring forth no fruit 
 is not to the point, for even land brings forth nothing of itself 
 without expense, exertion, and human industry. And quite 
 in the same way does money when assisted by human effort 
 bring forth notable fruits. The rest of the polemic against the 
 canonists has little theoretical interest. 
 
 On the basis of this comprehensive consideration of the sub- 
 ject, Molinaeus ends by formulating his thesis (No. 535) : First 
 of all, it is necessary and useful that a certain practice of taking 
 interest be retained and permitted. The contrary opinion, that 
 interest in itself is absolutely objectionable, is foolish, pernicious, 
 and superstitious (Stulta ilia ct non minus perniciosa quam supcr- 
 stitiosa opinio de usura dc se absoluta mala} (No. 534). 
 
 In these words Molinaeus sets himself in the most direct 
 opposition to the Church's doctrine. To modify them in some 
 degree as a Catholic might be compelled to do from other 
 considerations he makes certain practical concessions, without, 
 however, yielding anything in principle. The most important 
 of these is that, on grounds of expediency, and on account of 
 prevailing abuses, he acquiesces for the present in the Church's
 
 32 THE DEFENCE OF INTEREST BOOK i 
 
 prohibition of interest pure and simple in the shape of un- 
 disguised usury, wishing to retain only the milder and more 
 humane form of annuities, which, however, he rightly looks 
 on as a " true species of usury business." 1 
 
 The deliverances of Calvin and Molinaeus remained for 
 a long time quite by themselves, and the reason of this is 
 easily understood. To pronounce that to be right which the 
 Church, the law, and the learned world had condemned with 
 one voice, and opposed with arguments drawn from all sources, 
 required not only a rare independence of intellect, but a rare 
 strength of character which did not shrink from suspicion and 
 persecution. The fate of the leaders in this movement showed 
 clearly enough that there was cause for fear. Not to mention 
 Calvin, who, indeed, had given the Catholic world quite other 
 causes of offence, Molinaeus had much to suffer; he himself 
 was exiled, and his book, carefully and moderately as it was 
 written, was put on the Index. Nevertheless the book made its 
 way, was read, repeated, and published again and again, and so 
 scattered a seed destined to bear fruit in the end. 2 
 
 Passing over the immediate disciples of Calvin, who 
 naturally agreed with the views of their master, there were 
 few writers in the sixteenth century who ventured to argue in 
 favour of interest on economical grounds. Among them may be 
 specially mentioned the humanist Camerarius, 3 Bornitz, 4 and 
 above all, Besold. 
 
 Besold argues fully and ably against the canon doctrine 
 in the dissertations entitled Questiones Aliquot de Usuris, 
 (1598), the work with which he began his very prolific career 
 
 1 " Ea taxatio " (the fixing of a maximum rate which was attached to the 
 principle of the permission of interest in Justinian's Code) "nunquam in se fuit 
 iniqua. Sed ut tempore suo summa et absoluta, ita processu temporis propter 
 abusum hominum nimis in quibusdam dissoluta et vaga inventa est, et omnino 
 super foenore negociativo forma juris civilis incommoda et perniciosa debitoribus 
 apparuit. Unde merito abrogata fuit, et alia tutior et commodior forma inventa, 
 videlicet per abalienationem sortis, servata debitori libera facilitate luendi. Et 
 haec forma nova, ut mitior et civilior, ita minus habet de ratione foenoris, propter 
 alienationem sortis, quam forma juris civilis. Est tamen foenus large sumptum, 
 et vera species negociationis foenoratoriae. . . ." (No. 536) 
 
 2 Endemann, Studien, i. p. 64, etc. Endemann, however, underrates the 
 influence that Molinaeus had on the later development. See below. 
 
 3 In his notes on Aristotle's Politics ; see Roscher, Geschichte der National- 
 Oekonomik in Deutschland, p. 54. 
 
 4 Roscher, ibid. p. 188.
 
 CHAP, ii BESOLD 33 
 
 as a writer. 1 He finds the origin of interest in the institutions 
 of trade and commerce, in which money ceases to be barren. 
 And as every man must be allowed to pursue his own 
 advantage, so far as that is possible without injury to 
 others, natural justice is not opposed to the taking of interest. 
 Like Molinaeus, whom he often quotes with approval, he 
 adduces on its behalf the analogy between the loan against 
 interest and the hire against payment. The loan at interest 
 stands to the loan not at interest in the same relation as the 
 hire against payment which is perfectly allowable to the 
 Leihe, where no payment is required (commodatum). He 
 points out very well that the height of loan interest must at 
 all times correspond with the height of natural interest, the 
 latter indeed being the ground and source of the former ; and 
 he maintains that, where, owing to the use of money, the 
 current rate of profit is higher, a higher limit, of loan interest 
 should be allowed (p. 32). Finally, he is as little impressed 
 by the passages in Holy Writ which have been interpreted as 
 forbidding interest (p. 38, etc.) as by the arguments of the 
 " philosophers," considering these arguments very weak if one 
 looks at the matter from the proper standpoint (p. 32). 
 
 From this short abstract it will be seen that Betfold is a 
 frank and able follower of Molinaeus. From Molinaeus indeed, 
 as the numerous quotations show, he has taken the better part 
 of his doctrine. 2 But it would be difficult to find in his writ- 
 ings any advance on that author. 3 
 
 This is still more true of the great English philosopher 
 Bacon, who wrote on the subject almost contemporaneously 
 with Besold, He is not misled by the old ideas of the 
 " unnaturalness " of interest. He has enough intellectual 
 
 1 Besold resumed the discussion later, in an enlarged and improved form, as 
 he says, in another work, Vitae et Mortis Consideratio Politico, (1623), in which 
 it occupies the fifth chapter of the first book. I had only this latter work at 
 my disposal, and the quotations in the text are taken from it. 
 
 2 There is a long quotation even in the first chapter of the first book (p. 6). 
 In the fifth chapter the quotations are numerous. 
 
 3 I think Roscher (Geschichte der National -Oekonomik, p. 201) does Besold 
 too much honour when, in comparing him with Salmasius and Hugo Grotius, 
 he gives him the honourable position of a forerunner on whom Salmasius has 
 scarcely improved, and to whom Grotius is even inferior. Instead of Besold, 
 who drew at second hand, Reseller should have named Molinaeus. Besold is not 
 more original than Salmasius, and certainly less adroit and ingenious. 
 
 D
 
 34 THE DEFENCE OF INTEREST BOOK i 
 
 freedom and apprehension of the needs of economic life to 
 weigh impartially its advantages and disadvantages, and to 
 pronounce interest an economical necessity. But nevertheless 
 he gives it sufferance only on the ground of expediency. 
 " Since of necessity men must give and take money on loan, 
 and since they are so hard of heart (sintque tarn duro corde) 
 that they will n r t *end it otherwise, there is nothing for it but 
 that interest should be permitted." l 
 
 In the course of the seventeenth century the new doctrine 
 made great strides, particularly in the Netherlands. There 
 the conditions were peculiarly favourable to its further 
 development. During the political and religious troubles 
 among which the young free state was born, men had learned 
 to emancipate themselves from the shackles of a slavish 
 following of authority. It happened too that the decaying 
 theory of the fathers of the Church and of the scholastics 
 nowhere came into sharper conflict with the needs of actual 
 life than in the Netherlands, where a highly developed 
 economy had created for itself a complete system of credit 
 and banking ; where, consequently, transactions involving 
 interest were common and regular; and where, moreover, 
 temporal legislation, yielding to the pressure of practice, had 
 long allowed the taking of interest. 2 In such circumstances 
 a theory which pronounced interest to be a godless defrauding 
 of the debtor was unnatural, and its continuance for any length 
 of time was an impossibility. 
 
 Hugo Grotius may be regarded as forerunner of the change. 
 
 His attitude towards our subject is peculiarly nondescript. 
 On the one hand, he clearly recognises that it is not possible to 
 base the prohibition theoretically in natural right, as the canonists 
 had done. He sees no force in the argument of the barrenness 
 of money, for " houses also, and other things barren by nature, 
 the skill of man has made productive." To the argument that 
 the use of money, consisting as it does in being spent, cannot 
 be separated from money itself, and therefore cannot be paid 
 for independently, he finds an apt rejoinder ; and, speaking 
 generally, the arguments which represent interest as contrary 
 to natural right appear to him "not of a kind to compel 
 
 1 Sermones Fideles, cap. xxxix. (1597) 
 
 - See Grotius, DC Jure Pacis ac Belli, book ii. chap. xii. p. 22.
 
 CHAP, ii GROTIUS, SALMASIUS 35 
 
 assent" (non talia ut a-ssensum cxtorqucanf). But, on the 
 other hand, he considers the passages in Holy Writ forbidding 
 interest to be undoubtedly binding. So that in his con- 
 clusions he remains in principle at least on the side of 
 the canonists. Practically he does resile from the principle of 
 prohibition by allowing and approving of many kinds of com- 
 pensation for loss, for renunciation of profit, for lender's trouble 
 and risk, describing these as " of the nature of interest." l 
 
 Thus Grotius takes a hesitating middle course between the 
 old and the new doctrine. 2 
 
 Undecided views like these were speedily left behind. In 
 a few years more others openly threw overboard not only the 
 rational basis of the prohibition as he had done, but the 
 prohibition itself. The decisive point was reached shortly 
 before the year 1640. As if the barriers of long restraint 
 had all been torn down in one day, a perfect flood of 
 writings broke out in which interest was defended with 
 the utmost vigour, and the flood did not fall till the prin- 
 ciple of interest, in the Netherlands at least, had con- 
 quered. In this abundant literature the first place, both in 
 time and rank, was taken by the celebrated Claudius 
 Salmasius. Of his writings, which from 1638 followed 
 each other at short intervals, the most important are : 
 De Usuris, 1638; De Modo Usurarum, 1639; De Foenore 
 Trapezitico, 1640. To these may be added some shorter 
 controversial writings that appeared under the pseudonym 
 of Alexius a Massalia : Diatriba de Mutuo : mutuum 
 esse alienationem, 1640. 3 These writings almost by 
 
 1 De Jure Pacis ac Belli, book ii. cap. xii. pp. 20, 21. 
 
 2 Thus it is not possible to regard Grotius as a pioneer of the new theory. 
 This view, held among others by Neumann, Geschichtc dcs IVuchcrs in 
 Deutschland, p. 499, and by Laspeyres, Geschichtc, pp. 10 and 257, is authorita- 
 tively corrected by Endemann, Studien, I. p. 66, etc. 
 
 3 The list of writings in which our extremely prolific author expatiates on 
 the subject of interest is by no means exhausted by the works mentioned in the 
 text. There is, e.g. a Disquisitio de Mutuo, qua probatur non esse aliena- 
 tioucm, of the year 1645, whose author signs with the initials S. D. B., a 
 signature which points, as does the whole style of writing, to Salmasius (Dijonicus 
 Burgundus). There is besides in the same year an anonymous writing, 
 also undoubtedly traceable to Salmasius, Confutatio Diairibae de Mutuo tribus 
 disputationibus xcittilatae, auctorc et preside Jo. Jacobo Visscmbachio, etc. Those 
 named in the text, however, were the first to break ground.
 
 36 THE DEFENCE OF INTEREST BOOK i 
 
 themselves determined the direction and substance of the 
 theory of interest for more than a hundred years, and even 
 in the doctrine of to-day, as we shall see, we may recognise 
 many of their after-effects. His doctrine therefore deserves a 
 thorough consideration. 
 
 The views of Salmasius on interest are put together most 
 concisely and suggestively in the eighth chapter of his book 
 De Usuris. He begins by giving his own theory. Interest is 
 a payment for the use of sums of money lent. Lending 
 belongs to that class of legal transactions in which the use of 
 a thing is made over by its owner to another person. In the 
 case where the article in question is not perishable, if the use 
 that is transferred is not to be paid for, the legal transaction 
 is a Commodatum : if it is to be paid for, the transaction is a 
 Locatio or Conductio. In the case where the article in 
 question is a perishable or a fungible thing, if the use is not to 
 be paid for, it is a loan bearing no interest (mutuum) : if 
 to be paid for, it is a loan at interest (foenus). The interest- 
 bearing loan accordingly stands to the loan which bears no 
 interest in exactly the same relation as the Locatio to the 
 Commodatum, and is just as legitimate as it. 1 
 
 The only conceivable ground for judging differently about 
 the allowableness of payment in the case of the Commodatum 
 (where a non-perishable good, as a book or a slave, is 
 lent) as compared with the Mutuum (where a fungible good, 
 like corn or money, is lent) might be the different nature 
 of the " use " in the two cases. In the circumstances 
 of the latter where a perishable or fungible good is trans- 
 ferred the use consists in one complete consumption ; and 
 it might be objected that, in such a case the use of a thing 
 could not be separated from the thing itself. But to this 
 Salmasius answers : (1) Such an argument would lead as 
 well to the condemning and abolition of the loan bearing 
 no interest, inasmuch as it is impossible, in the case of a 
 perishable thing, to transfer a " use," whose existence is denied, 
 
 1 "Quae res facit ex commodato locatum, eadem praestat, ut pro mutuo sit 
 foenus, nempe merces. Qui earn in commodato probant, cur in mutuo improbent, 
 nescio, nee ullam hujus diversitatis rationem video. Locatio aedium, vestis 
 animalis, servi, agri, operae, opens, licita erit ; non erit foeneratio quae proprie 
 locatio est pecuniae, tritici, hordei, vini, et aliarum hujusmodi specierum 
 frugumque tarn arentium quam humidarum ? "
 
 CHAP, ii S ALMAS f US 37 
 
 even if no interest is asked for it. (2) On the contrary, the 
 perishableness of loaned goods constitutes another reason why 
 the loan should be paid. For in the case of the hire (locatio) 
 the lender can take back his property at any moment, because 
 he remains the owner of it. In the case of the loan he cannot 
 do so, because his property is destroyed in the consumption. 
 Consequently the lender of money suffers delays, anxieties, 
 and losses, and by reason of these the claim of the loan to 
 payment is even more consistent with fairness than that of 
 the Commodatum. 
 
 After thus stating his own position Salmasius devotes 
 himself to refuting the arguments of his opponents point by 
 point. As we read these refutations we begin to understand 
 how Salmasius so brilliantly succeeded where Molinaeus a 
 hundred years before had failed, in convincing his contem- 
 poraries. They are extremely effective pieces of writing, 
 indeed gems of sparkling polemic. The materials for them 
 were, of course, in great part provided by his predecessors, 
 principally by Molinaeus ; l but the happy manner in 
 which Salmasius employs these materials, and the many pithy 
 sallies with which he enriches them, places his polemic far 
 above anything that had gone before. 
 
 It may not be unwelcome to some of my readers to have 
 
 1 To prove the relation in which Salmasius stands to Molinaeus, it may not 
 be superfluous, considering the explicit statement of Endemann (Studien, 
 i. p. 65) that Salmasius does not quote Molinaeus, to establish the fact 
 that such quotations do exist in considerable number. The list of authors 
 appended to the works of Salmasius shows three quotations from Molinaeus for 
 the book De Usuris, twelve for the De Mode Usurarum, and one for the DC 
 Foenore Trapezitico. These quotations are principally taken from Molinaeus's chief 
 work on the subject, the Contractus Contractuum et Usurarum. One of them (De 
 Usuris, p. 21) refers directly to a passage which stands in the middle of the most 
 pertinent of his writings ( Tractatus, No. 529. Nos. 528, etc., contain the statement 
 and refutation of the arguments of the ancient philosophy and of the canonists 
 against interest). There can, therefore, be no doubt that Salmasius accurately knew 
 the writings of Molinaeus, and it is just as much beyond doubt as indeed his sub- 
 stantial agreement would lead us to suspect that he has drawn from them. In 
 the Confutatio Diatribae mentioned above (p. 36) it is said in one place (p. 290) 
 that Salmasius at the time when, under the pseudonym of Alexis a Massalia, he 
 wrote the Diatriba de Mutuo, was not acquainted with the similar writings of 
 Molinaeus in his Tractatus de Usuris. But this expression must only relate to 
 his ignorance of those quite special passages in which Molinaeus denies the nature 
 of the loan as an alienation, or else, if what I have said be true, it is simple 
 incorrect.
 
 33 THE DEFENCE OF INTEREST BOOK i 
 
 a few complete examples of Salmasius's style. They will 
 serve to give a more accurate idea of the spirit in which people 
 were accustomed to deal with our problem in the seventeenth 
 century, and far into the eighteenth, and to make the reader 
 better acquainted with a writer whom nowadays many quote, 
 but few read. I therefore give below in his own words one or 
 two passages from the polemic. 1 
 
 What follows has less bearing on the history of theory. 
 First comes a long-winded, and, it must be confessed, for all 
 its subtlety a very lame attempt to prove that in the loan there 
 is no alienation of the thing lent a subject to which also the 
 whole Diatriba de Mutuo is devoted. Then follows the reply 
 to some of the arguments based by the canonists on fairness 
 and expediency ; such as, that it is unfair to the borrower, 
 who assumes the risk of the principal sum lent him, to burden 
 
 1 Salmasius begins with the argument of the improper double claim for one 
 commodity. His opponents had contended that whatever was taken over and 
 above the principal sum lent could only be taken either for the use of a thing 
 which was already consumed that is for nothing at all or for the principal sum 
 itself, in which case the same thing was sold twice. To this replies Salmasius : 
 "Quae ridicula sunt, et nul'o negotio difflari possunt. Non enim pro sorte 
 usnra exigitur, sed pro usu s <rtis. Usus autem ille non est nihilum, nee pro 
 nihilo datur. Quod haberet rationem, si alicui pecuniam mutuam darem, ea lege 
 ut statim in flumen earn projiceret aut alio modo perderet sibi non profuturam. 
 Sed qui pecuniam ab alio mutuam desiderat, ad necessaries sibi usus illam ex- 
 petit. Aut enim aedes hide comparat, quas ipse habitet, ne in conducto diutius 
 maneat, vel quas alii cum ft actu et compendio locet : aut fundum ex ea pecunia 
 emit salubri pretio, unde fructus et reditus magnos percipiat : aut servum, ex 
 cujus operis locatis multum quaestus faciat : aut ut denique alias merces praes- 
 tinet, quas vili emptas pluris vendat " (p. 195). 
 
 And after showing that $ne who lends money to an undertaking is not 
 under any obligation to inquire whether it is usefully employed by the borrower, 
 any more than the hirer of a house need make similar inquiry, he continues : " Hoc 
 non est sortem bis vendere, nee pro nihilo aliquid percipere. An pro nihilo compu- 
 tandum, quod tu dum meis nummis uteris, sive ad ea quae tuae postulant necessi- 
 tates, sive ad tua compendia, ego interim his careo cum meo interdum damno et 
 jactura ? Et cum mutuum non in sola sit pecunia numerata, sed etiani in aliis 
 rebus quae pondere et mensura continentur, ut in frugibus humidis vel aridis, an, 
 qui indigenti mutuum vinum aut triticum dederit, quod usurae nomine pro usu 
 eorum consequetur, pro nihilo id capere existimabitur ? Qui fruges meas hi 
 egestate sua consumpserit, quas care emere ad victum coactus esset, aut qui eas 
 aliis care vendiderit, praeter ipsam mensuram quam accepit, si aliquid vice 
 raercedis propter usum admensus fuerit, an id injustum habebitur ?, Atqui poteram, 
 si eas servassem, carius fortasse in foro vendere, et plus lucri ex illis venditis 
 efficere, quam quantum possim percipere ex usuris quas mihi reddent" (p. 196, etc.) 
 Particularly biting is his reply to the argument of the unfruitfulness of money : 
 ' ' Facilis responsio. Nihil non sterile est, quod tibi sterile esse volueris. Ut contra
 
 CHAP, it SALMASIUS 39 
 
 him with interest in addition, and to make him hand over 
 the fruit of the money to another who takes no risk ; that 
 usury would lead to the neglect of agriculture, commerce, 
 and the other bonae artes, to the injury of the common weal, 
 and so on. In replying to this latter argument Salmasius gets 
 an opportunity of commending the use of competition. The 
 more usurers there are the better ; their emulation will press 
 down the rate of interest Then, from the ninth chapter 
 onwards, with extraordinary display of force and erudition, 
 with many passages full of striking eloquence, but, it must be 
 said, with endless prolixity, comes the disproof of the argu- 
 ment that interest is "unnatural." Quite at the end (De 
 Usuris, chap, xx.;, the question is finally put whether interest, 
 thus sanctioned by the jus iiaturale, also expresses the jus 
 divinum, and this naturally is answered in the affirmative. 
 
 nihil non fructaosum, quod cultura exercere, lit fructum ferat, institueris. Nee 
 de agrorum fertilitate regeram, qui non essent feraces nisi humana industria red- 
 deret tales. . . . Magis minim de acre, et hunc quaestuosum imperio factum. 
 Qui aepixfo imposuerunt vectigal singulis domibus Constantiuopolitani imperatores, 
 aerem sterilem esse pati non potuerunt. Sed haec minus cum foenore conveniunt. 
 Nee mare hie sollicitandum, quod piscatoribus, urinatoribns, ac nautis ad qnaes- 
 tum patet, ceteris sterilitate occlusum est. Quid sterilius aegroto ? Nee ferre se, 
 nee movere interdum potest. Hunc tamen in redditu habet medicus. Una res 
 est aegroto sterilior, nempe mortuus. . . . Hie tamen sterilis non est pollinctor- 
 ibus, neque sardapilouibus, neque vespillonibus, neque fossariis. Immo nee 
 praeticis olim, nee nunc sacerdotibus, qui eum ad sepulcrum cantando deducunt. 
 Quae corpus alit corpore, etiamsi liberos non pariat, non tamen sibi infecunda est. 
 Nee artem hie cogites ; natura potius victum quaerit. Meretricem me dicere 
 nemo non sen tit. . . . De pecunia quod ajuut, nihil ex se producere natura, cur 
 non idem de ceteris rebus, et frugibus omne genus, quae mutuo dantur, asserunt ? 
 Sed triticum dupliei modo frugiferum est, et cum in terrain jacitur, et cum in 
 foenus locatur. Utrobique foenus est. Nam et terra id reddit cum foenore. 
 Cur natura aedium, quas mercede pacta locavero, magis potest videri foecunda, 
 quam nummorum quos foenore dedero ? Si gratis eas commodavero, aeque ac si 
 hos gratis mutuo dedero, turn steriles tarn hi quam illae mihi evadent. Vis scire 
 igitur, quae pecunia proprie sterilis sit dicenda, immo et dicta sit ? Ilia certe, 
 quae foenore non erit occupata, quaeque nihil mihi pariet usnraram, quas et prop- 
 terea Graeci rixov nomine appellarunt" (p. 198). The third argument of his 
 opponents, that the loan should not bear interest because the things lent are a 
 property of the debtor, Salmasius finds "ridiculous" : "At injustum est, ajunt, 
 me tibi vendere quod tuum est, videlicet usum aeris tuae. Potens sane argumen- 
 tum. Atqui non fit tuum, nisi hac lege, ut pro eo, quod accepisti utendum, 
 certam mihi praestes mercedem, usurae nomine, absque qua frustra tuum id esse 
 cuperes. Non igitur tibi, quod tuum est, vendo, sed, quod meum est, ea con- 
 ditione ad te transfero, ut pro usu ejus, quamdiu te uti patiar, milii, quod pactum 
 inter nos est, persolvas."
 
 40 THE DEFENCE OF INTEREST BOOK i 
 
 These are the essential features of Salmasius's doctrine. 
 Not only does it indicate an advance, but it long indicates the 
 high-water mark of the advance. For more than a hundred 
 years any development there was consisted in nothing more 
 than the adoption of it in wider circles, the repetition of it 
 with more or less skilful variations, and the adapting of its 
 arguments to the fashion of the time. But there was no 
 essential advance on Salmasius till the time of Smith and Turgot. 
 
 As the number of those who accepted the doctrine repre- 
 sented by Salmasius increased, so did the number of those 
 who adhered to the canon doctrine diminish. This defection, 
 as may be easily understood, went on more rapidly in the 
 Reformation countries and in those speaking the German 
 language, more slowly in countries purely Catholic and in those 
 speaking the Romance tongues. 
 
 In the Netherlands, as I have already said, the works of 
 Salmasius were almost immediately followed by a whole series of 
 writings of similar tenor. As early as the year 1640 we meet 
 with the works of Kloppenburg, Boxhorn, Maresius, Graswinckel. 1 
 A little later, about 1644, the Tafelhalterstreit 2 gave occa- 
 sion to a fiery literary feud between the two parties, and in 
 1658 this practically ended in a victory for the supporters 
 of interest. Within the next few years, among the ever- 
 increasing adherents of the new theory, stands out prominently 
 the renowned and influential lawyer Gerhard Noodt, who in his 
 three books, De Foenore et Usuris, discusses the whole interest 
 question very thoroughly, and with great knowledge of facts 
 and literature. 3 After that there are fewer and fewer 
 expressions of hostility to interest, especially from professional 
 men ; still they do occur occasionally up till the second half of 
 the eighteenth century. 4 
 
 In Germany, whose political economy during the seven- 
 teenth and even during the eighteenth century is not of much 
 
 1 Laspeyres, p. 257. 2 Very fully described by Laspeyres, p. 258, etc. 
 
 8 Noodt is very much quoted as an authority in the learned literature of 
 the eighteenth century; e.y. by Bohmer, Protest. Kirchenrecht, vol. v. p. 19 passim. 
 Barbeyrac, the editor of several editions of Hugo Grotius, says that, on the 
 matter of interest, there is an "opus absolutissimum et plenissimum summi juris- 
 consulti et non minus judicio quam enulitione insinis, Clariss. Noodtii" (De 
 Jure Belli ac Pacis : edition of Amsterdam, 1720, p. 384). 
 
 4 Laspeyres, p. 269.
 
 CHAP, ii FOLLOWERS OF SALMASIUS 41 
 
 account, the Salmasian doctrine made its way slowly and un- 
 sensationally, gaining nothing in development. On German soil 
 the power of practical life was very clearly shown. It was to its 
 pressure that the revolution in opinion was due, theory mean- 
 while halting clumsily behind the reform in public opinion 
 and legislation. Half a century before the first German 
 lawyer, in the person of Besold, had given his approval to it, 
 the taking of interest, or at least the claim to a fixed interesse 
 arranged in advance (which practically came to the same 
 thing), was allowed in much of the German local law; 1 and 
 when in 1654 the German imperial legislation followed this 
 example, 2 few theorists sided with Besold and Salmasius. So 
 late as 1629 it was possible for one Adam Contzen to 
 demand that lenders at interest should be punished by crim- 
 inal law like thieves, and that all Jews should be hunted out 
 of the country like venenatae bestiae-. 3 Not till the end of the 
 seventeenth century does the conviction of the legitimacy of 
 interest become firmly established in theory. The secession 
 of such prominent men as Pufendorf 4 and Leibnitz 5 to the 
 new doctrine hastened its victory, and in the course of the 
 eighteenth century it is at last gradually taken out of the 
 region of controversy. 
 
 In this position we find it in the two great cameralists 
 who flourish at the end of our period, Justi and Sonnenfels. 
 Justi's Staatswirthschaft 6 does not contain a single line relat- 
 ing to the great question on which in former times so many 
 bulky volumes had been written, certainly none that could be 
 taken as a theory of interest. He tacitly assumes it as a fact 
 requiring no explanation that interest is paid for a loan ; and 
 if in one or two short notes (vol. i. 268) he speaks against 
 usury, he understands by that but still tacitly only an 
 excessive interest. 
 
 1 Neumann, Geschichte des IVuchcrs in Deutschland, p. 546, mentions per- 
 missions by local law of contract interest about the years 1520-30. Endemann, 
 it is true (Studien, ii. pp. 316 and 365, etc.) would interpret these permissions 
 as applying only to stipulated interesse, which, theoretically at least, was 
 different from interest proper (usura). In any case the taking of interest had 
 thus practically received toleration from the state. 
 
 2 In the last Reichsabschicd. On the disputed interpretation of the passages 
 referred to, see Neumann, p. 559, etc. 
 
 3 Roscher, Geschichte, p. 205. * Ibid. p. 312, etc. 
 
 6 Ibid. p. 338, etc. 6 Second edition, 1758.
 
 42 THE DEFENCE OF INTEREST BOOK i 
 
 Sonnenfels is not so silent on the subject as Justi. But 
 even he, in the earlier editions of his Handlungswissensclutft 1 
 never once touches on the controversy as to the theoretic legit- 
 imacy of interest. In the fifth edition (published 1787) he 
 refers to it, indeed, but in the kind of tone which one usually 
 adopts towards a foregone conclusion. In a simple note on 
 p. 496, he dismisses with a few decided words the prohibition 
 of the canonists, ridicules their absurd way of writing, and 
 finds it preposterous to forbid 6 per cent interest for money 
 when 100 per cent can be got when money is changed into 
 commodities. 
 
 Sonnenfels's contempt for the canon doctrine carries all the 
 more weight that he has nothing good to say of interest in 
 other respects. Influenced by Forbonnais he finds its origin 
 in an interception of the circulation of money by the capitalists, 
 out of whose hands it can only be attracted by a tribute in the 
 shape of interest. 2 He ascribes to it many injurious effects ; 
 such as, that it makes commodities dear, reduces the profits of 
 industry, and allows the owner of money to share in these 
 profits. 3 Indeed in one place he speaks of the capitalists as 
 the class of those "who do no work, and are nourished on the 
 sweat of the working classes." 4 
 
 But alongside of expressions like these we find the ac- 
 cepted Salmasian doctrine. In one place, quite in the spirit 
 of Salmasius, Sonnenfels adduces as arguments for the capi- 
 talists' claim, the want of their money, their risk, and the uses 
 they might have got by the purchase of things that produced 
 fruit. 5 In another place he recognises that a lowering of the 
 legal rate is not the best means to repress the evils of high 
 interest. 6 At another time he finds that, since the above 
 mentioned conditions that determine interest are variable, a 
 fixed legal rate is generally unsuitable as being either super- 
 fluous or hurtful. 7 
 
 The deep silence which Justi maintains, if considered 
 along with the inconsistent eloquence expended by Sonnenfels, 
 seems to me to be a very characteristic proof of two things ; 
 (1) that, when these men wrote, the Salmasian doctrine had 
 
 1 Second edition, Vienna, 1771. 2 Ibid. pp. 419, 425, etc. 
 
 3 Ibid. p. 427. 4 Ibid. p. 430. 5 Ibid. p. 426, etc. 
 
 6 Ibid. p. 432, etc. 7 Fifth edition, p. 497.
 
 CHAP, ii JUSTl, SONNENFELS 43 
 
 already secured so firm a footing in Germany, that even writers 
 who felt most hostile towards interest could not think of 
 going back to the strict canonist standpoint, but (2) that up till 
 now the acceptance of the Salmasian doctrine had not been 
 accompanied by any kind of further development in it. 
 
 England appears to have been the country where the throw- 
 ing off of the canon doctrine was attended with the least amount 
 of literary excitement. Through the rapid rise of its com- 
 merce and industry, interest transactions had early entered 
 into its economy, and its legislation had early given way to the 
 wants of industrial life. Henry VIII had by 1545 removed 
 the prohibition of interest, and replaced it by a simple legal 
 rate. For a little, indeed, the prohibition was reimposed under 
 Edward VI, but in 1571 it was once more taken off by Queen 
 Elizabeth, and this time for ever. 1 Thus the theoretical 
 question whether loan interest was justifiable or not was 
 practically answered before there was any theoretic economic 
 doctrine, and when an economic literature at last emerged, 
 the prohibition, now removed, had but little interest for it. 
 All the more strongly was its attention drawn to a new 
 controverted question raised by the change in legislation 
 the question whether there should be a legal rate, and what 
 should be the height of it. 
 
 These circumstances have left their stamp on the interest 
 literature of England during the seventeenth and eighteenth 
 centuries. We find numerous and. eager discussions as to 
 the height of interest, as to its advantages and disadvantages, 
 and as to the advisability, or otherwise, of limiting it by law 
 But they now touch only rarely, and then, as a rule, quite casu- 
 ally, on the question of its economic nature, of its origin, and 
 of its legitimacy. One or two short proofs of this stage in the 
 development of the problem will suffice. 
 
 Of Bacon, who flourished very shortly after the age of 
 the prohibition, and had avowed himself, on very shallow prac- 
 tical grounds, in favour of interest, we have already spoken. 2 
 Some twenty years later, Sir Thomas Culpepper, himself a 
 violent opponent of interest, does not venture to put forward 
 the canon arguments under his own name, but characteristic- 
 
 1 See Schanz, Englische Handdspolitik, Leipzig, 1881, vol. i. p. 552, etc. 
 
 2 See above, p. 34.
 
 44 THE DEFENCE OF INTEREST BOOK i 
 
 ally passes over the subject with the remark that he leaves 
 it to the theologians to prove the unlawfulness of interest, 
 while he will limit himself to showing how much evil 
 is done by it. 1 In doing so, however, he directs his attacks 
 not so much against interest in general as against high 
 interest. 2 
 
 In the same way another writer, very unfavourably dis- 
 posed towards interest, Josiah Child, will no longer meddle 
 with the question of its lawfulness, but simply refers 8 the 
 reader who wishes to go deeper into the matter to an older and 
 apparently anonymous work, which appeared in 1634 under 
 the title of " The English Usurer." Further, he frequently calls 
 interest the " price of money," an expression which certainly 
 betrays no deep insight into its nature ; expresses his opinion 
 in passing that through it the creditor enriches himself at the 
 expense of the debtor ; but all the same contents himself with 
 pleading for the limitation of the legal rate, not for entire 
 abolition. 4 
 
 His opponent, again, North, who takes the side of interest, 
 conceives of it quite in the manner of Salmasius, as a " rent 
 for stock," similar to land-rent ; but cannot say anything more, 
 in explanation of either of them, than that owners hire out their 
 superfluous land and capital to such as are in want of them. 5 
 
 Only one writer of the seventeenth century forms any 
 exception to this superficial treatment of the problem, the 
 philosopher John Locke. 
 
 Locke has left a very remarkable tract on the origin of 
 loan interest, entitled " Some Considerations of the Conse- 
 quences of lowering the Interest and raising the Value of 
 
 1 Tract against the high rate of usury, 1621. 
 
 2 E.g. in "A Small Treatise against Usury," annexed to Child's Discourses, 
 1690, p. 229: "It is agreed by all the Divines that ever were, without ex- 
 ception of any ; yea, and by the Usurers themselves, that biting Usury is 
 unlawful : Now since it hath been proved that ten in the hundred doth bite the 
 Landed men, doth bite the Poor, doth bite Trade, doth bite the King in his 
 Customs, doth bite the Fruits of the Land, and most of all the Land itself : doth 
 bite all works of Piety, of Vertue, and Glory to the State ; no man can deny but 
 ten in the hundred is absolutely unlawful, howsoever happily a lesser rate may 
 be otherwise." 
 
 3 In his introduction to Brief Observations concerning Trade, 1668. 
 
 4 " New Discourse of Trade," 1690. See Roscher, p. 59, etc. 
 
 5 Roscher, p. 89.
 
 CHAP, ii CULPEPPER, CHILD, LOCKE 45 
 
 Money," 1691. He begins with a few propositions that remind 
 one very much of the canonists' standpoint. " Money," 1 he says, 
 "is a barren thing, and produces nothing; but by compact 
 transfers that profit, that was the reward of one man's labour, 
 into another man's pocket." Nevertheless Locke finds that 
 loan interest is justified. To prove this, and to bridge over 
 his own paradox, he uses the complete analogy that, in his 
 opinion, exists between loan interest and land-rent. The proxi- 
 mate cause of both is unequal distribution. One has more 
 money than he uses, and another has less, and so the former 
 finds a tenant for his money 2 for the very same reason as the 
 landlord finds a tenant for his land, namely, that the one has 
 too much land, while the other has too little. 
 
 But why does the borrower consent to pay interest for 
 the money lent ? Again, on the same ground as the tenant 
 consents to pay rent for the use of land. For money of 
 course only through the industry of the borrower, as Locke 
 expressly adds is able when employed in trade to "produce" 
 more than 6 per cent to the borrower, just in the same way 
 as land, " through the labour of the tenant," is able to produce 
 more fruit than the amount of its rent. If, then, the interest 
 which the capitalist draws from the loan is to be looked on 
 as the fruit of another man's labour, this is only true of it 
 as it is true of rent. Indeed, it is not so true. For the 
 payment of land-rent usually leaves the tenant a much smaller 
 proportion of the fruit of his industry than the borrower of 
 money can save, after paying the interest, out of the profit 
 made with the money. And so Locke comes to the con- 
 clusion : " Borrowing money upon use is not only, by the 
 necessity of affairs and the constitution of human society, 
 unavoidable to some men ; but to receive profit from the loan 
 of money is as equitable and lawful as receiving rent for land, 
 and more tolerable to the borrower, notwithstanding the opinion 
 of some over-scrupulous men" (p. 37). 
 
 It will scarcely be maintained that this theory is par- 
 ticularly happy. There is too marked a contrast between its 
 
 1 I quote from the collected edition of Locke's works, London, 1777, vol. ii. 
 p. 24. "Some Considerations," p. 36. 
 
 2 In other places (e.g. p. 4) Locke calls interest a price for the "hire of 
 money."
 
 46 THE DEFENCE OF INTEREST BOOK i 
 
 starting-point and its conclusion. If it be true that loan 
 interest transfers the hard-earned wage of the man who works 
 into the pocket of another man who does nothing, and whose 
 money besides is a " barren thing," it is absolutely inconsist- 
 ent to say that loan interest is nevertheless " equitable and 
 lawful." That there 1 is undoubtedly an analogy between 
 interest and the profit from land rent, was very likely to 
 lead logically to a conclusion involving land rent in the same 
 condemnation as interest. To this Locke's theory would have 
 presented sufficient support, since he expressly declares rent 
 also to be the fruit of another man's industry. But with 
 Locke the legitimacy of rent appears to have been beyond 
 question. 
 
 But, however unsatisfactory Locke's theory of interest may 
 be, there is one circumstance at any rate that confers on it an 
 important interest for us ; in the background of it stands the 
 proposition that human labour produces all wealth. In the 
 present case Locke has not expressed the proposition so much 
 as made use of it, and has not, indeed, made a very happy 
 use of it. But in another place he has given it clear utterance 
 where he says : " For it is labour indeed that put the differ- 
 ence of value on everything." x We shall soon see how great a 
 place this proposition is to have in the later development of 
 the interest problem. 
 
 A certain affinity to Locke's conception of loan interest is 
 shown somewhat later by Sir James Steuart. "The interest," 
 he writes, " they pay for the money borrowed is inconsiderable 
 when compared with the value created (as it were) by the 
 proper employment of their time and talents." " If it be said 
 that this is a vague assertion, supported by no proof, I answer, 
 that the value of a man's work may be estimated by the propor- 
 tion between the manufacture when brought to market and the 
 first matter" 2 
 
 The words I have emphasised indicate that Steuart, like 
 Locke, looks upon the whole increment of value got by pro- 
 duction as the product of the borrower's labour, and on loan 
 interest, therefore, as a fruit of that labour. 
 
 1 Of Civil Government, vol. ii. chap. v. 40. See also Roscher, p. 95, etc. 
 - Inquiry into the Principles of Political Economy, 1767, vol. ii. book iv. part 
 i. chap. viii. p. 137.
 
 CHAP, ii LOCKE, STEUART, HUME 47 
 
 If, however, both Locke and Steuart were quite uncertain 
 as to the nature of that which we now call the borrower's 
 natural profit, they were far from making any mistake about 
 the fact that loan interest has its origin and its foundation 
 in this profit. Thus Steuart in one place writes : " In propor- 
 tion, therefore, to the advantages to be reaped from borrowed 
 money, the borrowers offer more or less for the use of it." l 
 
 Generally speaking, in England the literature on the sub- 
 ject took great pains to discuss the connection between loan 
 interest and profit. In doing so it certainly did not surpass 
 the Salmasian doctrine in clearness as to principles, but it 
 enriched it by extending its knowledge of details. The favourite 
 inquiry was, whether a high loan interest is the cause or 
 the effect of a high profit. Hume passes judgment on the 
 controversy by saying that they are alternately cause and 
 effect " It is needless," he says, " to inquire which of these 
 circumstances, to wit, low interest or low profits, is the cause 
 and which the effect. They both arise from an extensive 
 commerce, and mutually forward each other. No man will 
 accept of low profits where he can have high interest ; and 
 no man will accept of low interest where he can have high 
 profits." 2 
 
 Of more value than this somewhat superficial opinion is 
 another discovery associated with the name of Hume. It was 
 he who first clearly distinguished the conception of money 
 from that of capital, and showed that the height of the 
 interest rate in a country does not depend on the amount of 
 currency that the country possesses, but on the amount of its 
 riches or stocks. 3 But it was not till a later period that this 
 important discovery was applied to the investigation of the 
 source of interest. 
 
 How strange in the meantime the once widespread doc- 
 trine of the canonists had become to the busy England of 
 the eighteenth century may be seen by the manner in which 
 Bentham could treat the subject, towards the end of that 
 century, in his Defence of Usury, 1787. He no longer thinks 
 of seriously attempting to justify the taking of interest. The 
 
 1 Inquiry into the Principles of Political Economy, 1767, vol. ii. book iv. part 
 L chap. iv. p. 117. 2 "Of Interest," Essays, part. ii. chap. iv. 
 
 3 Ibid, passim.
 
 48 THE DEFENCE OF INTEREST BOOK i 
 
 arguments of the ancient writers and of the canonists are only 
 mentioned to afford welcome matter for witty remarks, and 
 Aristotle, as the discoverer of the argument of the sterility of 
 money, is bantered in the words : " As fate would have it, that 
 great philosopher, with all his industry and all his penetration, 
 notwithstanding the great number of pieces of money that had 
 passed through his hands (more perhaps than ever passed 
 through the hands of philosopher before or since), and notwith- 
 standing the enormous pains he had bestowed on the subject 
 of generation, had never been able to discover in any piece of 
 money any orgats for generating any other such piece." 
 
 Italy stood immediately under the eye of the Eoman 
 Church. But Italy was the country in Europe that earliest 
 attained a great position in trade and commerce ; and on that 
 account it was bound to be the first to find the pressure of the 
 canon prohibition unbearable. The general attitude towards 
 it may be explained by two considerations ; that nowhere in 
 Europe did the prohibition of interest remain in fact more 
 inoperative, and that nowhere in Europe was it so late before 
 the theorists ventured to oppose the Church's statute. 
 
 Everything that could be done to evade the formally valid 
 prohibition was done ; and it seems that these attempts were 
 sufficiently successful for all the requirements of practical life. 
 The most convenient forms of evasion were offered by the traffic 
 in bills, which had its home in Italy, and by the stipulation of 
 interesse for " indemnification." The temporal legislation offered 
 ready and willing assistance to such evasion from a very early 
 period by allowing the interest to be arranged beforehand, at a 
 fixed rate of percentage on the capital lent. It only fixed 
 a maximum which could not be exceeded. 1 
 
 On the other hand, no Italian writer appears to have 
 made any open theoretic attack on the canon doctrine before 
 the eighteenth century. Galiani in 1750 mentions Salmasius 
 as the first who had given a complete statement of the doctrine 
 of interest from the new point of view; and, in Italian litera- 
 ture previous to that time, the only mention he can find of 
 the subject is the quarrel which had flared up a little before 
 between the Marchese Maffei and the preaching monk Fra 
 
 1 See the historical works of Vasco, L' Usura Libera (Scrittori Classici Italiani 
 Parte Moderna, vol. xxxiv. p. 182, etc. ; particularly pp. 195, 198, etc., 210, etc.)
 
 CHAP, ii BENTHAMGALIANI 49 
 
 Danielle Concina. 1 Other prominant writers of the same period 
 usually quote among their predecessors Salmasius as most im- 
 portant, and after him some other foreigners, as Locke, Hume, 
 and Forbonnais ; but the first name that occurs among native 
 writers is the Marchese Maffei. 2 Here again, in Italy also, 
 we find Salmasius accepted as the pioneer of the new views. 
 
 The tardy acceptance which his doctrine met in that coun- 
 try does not appear to have been attended by any special im- 
 provement on it. There is only one writer who can be excepted 
 from this criticism, Galiani. But he deals with the question 
 of the nature and legitimacy of loan interest in a way that 
 is altogether peculiar. 
 
 If interest, he says, 3 really were what it is usually taken 
 to be, a profit or an advantage which the lender makes with 
 his money, then indeed it would be objectionable, for " whatever 
 profit, be it grea*t or small, that is yielded by naturally barren 
 money, is objectionable ; nor can any one call such a profit the 
 fruit of exertion, when the one who puts forth the exertion is 
 the one who takes the loan, not the one who gives it " (p. 244). 
 
 But interest is not a true profit at all ; it is only a supple- 
 menting of that which is needed to equalise service and 
 counter-service. Proper] y speaking, service and counter-service 
 should be of equal value. Since value is the relation in 
 which things stand to our needs, we should be quite mistaken 
 were we to seek for such an equivalence in an equality of 
 weight, lor in number of pieces, or in ; :.iernal form. What is 
 required is simply an equality of use. Now in this respect 
 present and future sums of money of equal amount are not 
 of equal value, just as in bill transactions equally large sums 
 of money are not of equal value at different places. And 
 just as the profit of exchange (cambio), notwithstanding that 
 it seems to be an additional sum (soprappiii), is in truth an 
 equalisation, which, when added sometimes to the money on 
 the spot, sometimes to the foreign money, establishes the 
 equality of real value between the two, so is loan interest 
 nothing else than the equalisation of the difference there is 
 
 1 Galiani, Delia Moneta (Scritt. Class. Ital. Parte Moderna, vol. iv. p. 
 240, etc.) 
 
 2 Impiego del Danaro. Unfortunately I have not seen the book. 
 
 3 Delia Moneta, book v. chap. i. 
 
 E
 
 50 THE DEFENCE OF INTEREST BOOK i 
 
 between the value of present and future sums of money (p. 
 243, etc.) 
 
 In this interesting idea Galiani has hit on a new method 
 of justifying loan interest, and one which relieves him from 
 a certain doubtful line of argument that his predecessors were 
 obliged to take. Salmasius and his followers, to avoid the 
 reproach of destroying the equality between service and counter- 
 service, were obliged to attempt to prove that in perishable as 
 well as in durable things, and even in articles actually con- 
 sumed at the beginning of the loan period, there is an enduring 
 use which may be separately transferred, and for which a 
 separate remuneration, namely, interest, is rightly claimed. 
 This line of reasoning, always somewhat fatal, was rendered 
 superfluous by the aspect which Galiani now gave to the 
 argument. 
 
 But unfortunately the inference which Galiani draws from 
 this idea is very unsatisfactory. The reason that present sums 
 of money are, as a rule, more valuable than future sums he 
 finds exclusively in the different degree of their security. A 
 claim to future payment of a sum of money is exposed to 
 many dangers, and on that account is less valued than an 
 equally large present sum. In so far as interest is paid to 
 balance these dangers, it appears in the light of an insurance 
 premium. Galiani gives this conception very strong expression 
 by speaking in one place of the " so-called fruit of money " as 
 a price of heart-beats (prezzo del batticuore), p. 247 ; and at 
 another time he uses the very words that that thing which 
 is called the fruit of money might be more properly called the 
 price of insurance (p. 252). This was of course thoroughly 
 to misunderstand the nature of loan interest. 
 
 The way in which la'er Italian authors of the eighteenth 
 century treated the interest problem is less worthy of notice. 
 Even the more prominent men among them, such as Genovesi 1 
 and Beccaria, 2 as also those who wrote monographs on the 
 subject, like Vasco, 3 follow for the most part in the tracks of 
 the Salmasian doctrine, now become traditional. 
 
 1 Lczioni di Economia Civile, 1769 (Scritt. Class. Ital. Parte Moderna, vol. 
 ix. part ii. chap. xiii. } 
 
 - Eleincnti di Economia Pubblica, written 1769-71 ; first printed, 1804, in the 
 collection of the Scrittori, vols. xi. and xii., particularly part iv. chaps, vi. and vii. 
 
 3 L'Usura Libera, vol. xxxiv. of above collection.
 
 CHAP, a GALIANI BECCARIA 51 
 
 The most worthy of mention among those is Beccaria. 
 He draws a sharp distinction between interesse and usura. 
 The former is the immediate use of a thing, the latter is the 
 use of a use (Futilitd dell' utilita). An immediate use (interesse) 
 is rendered by all goods. The special interesse of money con- 
 sists of the use which the goods represented by it may render, 
 for money is the common measure and representative of the 
 value of all other goods. Since, in particular, every sum of 
 money represents, or may represent, a definite piece of land, it 
 follows that the interesse of the money is represented by the 
 annual return of that land. Consequently it varies with the 
 amount of this return, and the average rate of money-interesse 
 is equalised with the average return of land (p. 116). 
 
 In this analysis the word interesse evidently means the 
 same thing as we should call natural profit, and in it accord- 
 ingly we may find an attempt although a primitive one to 
 explain the existence and amount of natural interest by the 
 possibility of a purchase of land. As we shall see later, 
 however, the same thought had already, some years before, 
 received much fuller treatment from another writer. 
 
 In one place Beccaria also touches on the influence of 
 time, first brought forward by Galiani, and speaks of the 
 analogy between exchange interest, which is an interesse of 
 place, and loan interest, which is an interesse of time (p. 122), 
 but he passes over it much more cursorily. 
 
 Catholic France was all this time far behind, both in theory 
 and practice. Its state legislation against interest enjoyed for 
 centuries the reputation of being the severest in Europe. At a 
 time when in other countries it had been agreed either to allow 
 the taking of interest quite openly, or to allow it under the 
 very transparent disguise of previously arranged interesse, Louis 
 XIV thought fit to renew the existing prohibition, and to 
 extend it in such a way that even interest for commercial 
 debts was forbidden, 1 Lyons being the only market exempted. 
 A century later, when in other countries the long obsolete 
 prohibitions of interest were scoffed at in the tone of a Son- 
 uenfels or a Bentham, they remained in force and in baneful 
 activity among the tribunals of France. It was only in the 
 
 1 Yasco, p. 209.
 
 52 THE DEFENCE OF INTEREST BOOK i 
 
 year 1789, when so many institutions that still breathed the 
 spirit of the middle ages were cleared away, that this institution 
 also was got rid of. By a law of 12th October 1789 the pro- 
 hibition of interest was formally rescinded, and its place taken 
 by a maximum rate of 5 per cent. 
 
 French theory, like French legislation, held most religiously 
 by the strictest standpoint of the canon. How little success 
 Molinaeus had in the middle of the sixteenth century we have 
 already seen. At the end of that century a writer so enlight- 
 ened in other respects as Johannes Bodinus finds the prohibi- 
 tion fully justified ; praises the wisdom of those legislators who 
 publish it ; and considers it safest to destroy it root and branch 
 (usurarum non modo radices sed etiam fibras omnes amputare). 1 
 In the seventeenth century, it is true, the French Salmasius 
 wrote brilliantly on the side of interest, but that was outside 
 of France. In the eighteenth century the number of writers 
 who take this side increases. Law already contends for the 
 entire freeing of interest transactions, even from the fixed rate. 2 
 Melon pronounces interest a social necessity that cannot be 
 refused, and leaves it to the theologians to reconcile their 
 moral scruples with this necessity. 3 Montesquieu declares 
 that lending a man money without interest is indeed a very 
 good action, but one that can only be a matter of religious 
 consideration, and not of civil law. 4 But notwithstanding, 
 there are always writers who oppose such ideas, and contend 
 for the old strict doctrine. 
 
 Among these late champions of the canon two are par- 
 ticularly prominent : the highly esteemed jurist Pothier and the 
 physiocrat Mirabeau. 
 
 Pothier succeeded in collecting the most tenable arguments 
 from the chaotic repertoire of the canon, and working them 
 up with great skill and acuteness into a doctrine in which 
 they really became very effective. I have added below the 
 characteristic passage which has already attracted the attention 
 of several writers on our subject. 5 
 
 1 DC Ecpublica, second edition, 1591, v. ii. p. 799, etc. 
 
 2 E.g. //* Mlmoiresur Us Banques ; Economistes Financiers du xviii. Sitcle, 
 Edition Dairc, Paris, 1851, p. 571. 
 
 3 Essai Politique sur le Comitiercc, ebenda p. 742. 
 
 4 Esprit des Lois, xxii. 
 
 5 The passage has been quoted by Rizy ; by Turgot, M&noire sur les Frits
 
 CHAP.TI POTHIERMIRABEAU 53 
 
 He was seconded with more zeal than success by 
 the author of the Philosophic Rurale, Mirabeau. 1 Mirabeau's 
 lucubrations on interest are among the most confused that have 
 ever been written on the subject A fanatical opponent of 
 loan interest, he is inexhaustible in his arguments against it. 
 He argues, among other things, that loaned money has no 
 legitimate claim on payment. For, first, money has no 
 natural use, but only represents. " But to obtain a profit 
 from this representative character is to seek in a glass for the 
 figure it represents." It is no argument then for the owners 
 of money to say that they must live from the produce of 
 their money, for to this it may be answered that they could 
 change the money into other goods, and live from the produce 
 obtained by hiring out those goods ! Lastly, there is not the 
 same wear and tear in the case of money as there is in the 
 case of houses, furniture, and such like, and for that reason 
 
 d 1 Argent, 26 ; and also by Knies, Kredit, part i. p. 347. It runs thus : " It is 
 a fair claim that the values given in the case of a contract which is not gratuitous 
 should be equal on either side, and that no party should give more than he has 
 received, or receive more than he has given. Everything, therefore, that the ' 
 lender may demand from the borrower over and above the principal sum, he 
 demands over and above what he has given ; for, if he get repayment of the 
 principal sum, he receives the exact equivalent of what lie gave. For things 
 that can be used without being destroyed a hire may certainly be demanded, 
 because, this use being separable at any moment (in thought at least) from the 
 things themselves, it can be priced ; it has a price distinct from the thing. So 
 that, if I have given a thing of this sort to any one for his use, I am able to 
 demand the hire, which is the price of the use that I have allowed him in it 
 beyond the restitution of the thing itself, the thing having never ceased to be 
 my property. 
 
 " It is not the same, however, with those objects that are known to lawyers as 
 fungible goods things that are consumed in the using. For since, in the using, 
 these are necessarily destroyed, it is impossible in regard to them to imagine a 
 use of the thing as distinct from the thing itself, and as having a price distinct 
 from the thing itself. From this it follows that one cannot make over to another 
 the using of a thing without making over to him wholly and entirely the thing 
 itself, and transferring to him the property in it. If I lend you a sum of money 
 for your use under the condition of paying me back as much again, then you. 
 receive from me simply that sum of money, and nothing more. The use that 
 you will make of this sum of money is included in the right of property that you 
 acquire in this sum. There is nothing that you have received outside of the 
 sum of money. I have given you this sum, and nothing but this sum. I 
 can therefore ask yon to give me back nothing more than this amount lent, 
 without being unjust ; for justice would have it that only that should be claimed 
 'which, was given." 
 
 1 Amsterdam, 1764.
 
 54 THE DEFENCE OF INTEREST BOOK i 
 
 there should not, properly speaking, be any charge made to 
 cover wear and tear. 1 
 
 Probably the reader will think these arguments weak 
 enough. But Mirabeau, in his blind zeal, gets still deeper. 
 He cannot help seeing that the debtor, by employing the 
 money (emploi}, may obtain means to pay interest for the 
 capital borrowed. But even this he turns against interest. 
 He argues from it that the borrower must always suffer injury, 
 because it is impossible to establish an equality between in- 
 terest and emploi. One does not know how much agriculture 
 will yield to the borrowing agriculturist. Unforeseen accidents 
 happen, and on . that account the borrower will always lose ! 2 
 And more than this. In one place, from the very natural 
 fact that any private person is more willing to take interest 
 than to pay it, he deduces, in all seriousness, an argument 
 to prove that the paying of interest must be hurtful to the 
 borrower ! 3 
 
 Fortified by reasoning like this, his condemnation of money 
 interest is not lacking in vigour. " Take it all in all," he says, 4 
 " money interest ruins society by giving incomes into the hands 
 of people who are neither owners of land nor producers, nor 
 industrial workers, and these people can only be looked upon as 
 hornets, who live by robbing the hoards of the bees of society." 
 
 But for all that Mirabeau cannot avoid admitting that 
 interest may be justified in certain cases. Sorely against his 
 inclination, therefore, he is compelled to break through the 
 principle of the prohibition and make some exceptions, the 
 selection of which is based on quite arbitrary and untenable 
 distinctions. 5 
 
 Seldom can there have been a more grateful task than 
 was the refutation of this doctrine in the second half of the 
 eighteenth century. Long ago smitten with internal decay 
 detested by some, despised by others forced to lean on very 
 pitiful scientific props it had long outlived its life, and only 
 raised its head in the present like some old ruin. The task 
 was taken up by Turgot, and performed with ability as remark- 
 able as its results were brilliant. His Memoire sur les PrSts 
 
 1 P. 269, etc. - Pp. 257-262. 
 
 3 F. 267. 4 P. 284. 
 
 s See particularly pp. 276, 290, 292, 298, etc.
 
 CHAP, ii MIRABEAUTURGOT 55 
 
 cC Argent l may be named as companion-piece to Salmasius's writ- 
 ings on Usury. It is true that the student of to-day will find 
 in his reasoning some good arguments, and not a few bad ones. 
 But, good and bad alike, they are given with so much verve 
 and acuteness, with such rhetorical and dialectical skill, and 
 with such striking play of fancy, that we can easily understand 
 how the effect on his times was nothing less than triumphant. 
 
 As the charm of his work lies not so much in the ideas 
 themselves, which for the most part we have already discussed 
 in the arguments of his predecessors, as in the charming way 
 in which they are put, it would only repay us to go thoroughly 
 into the contents of the Mtmoire if a great deal of it were 
 reproduced in his own words, which space forbids. I content 
 myself, therefore, with bringing out some of the more marked 
 features of Turgot's treatment. 
 
 The weightiest justification of interest he finds in the 
 right of property which the creditor has in his own money. 
 In virtue of this he has an " inviolable " right to dispose of the 
 money as he will, and to lay such conditions on its alienation 
 and hire as seem to him good e.g. the condition of interest 
 being duly paid ( 23, etc.) Evidently a crooked argument 
 which might prove the legitimacy and inoffensiveness of a 
 usurious interest of 100 per cent, just as well as the legitimacy 
 of interest in general. 
 
 The argument based on the barrenness . of money Turgpt 
 dismisses on the same grounds as those taken by his prede- 
 cessors ( 25). 
 
 He gives special attention to the reasoning of Pothier 
 just mentioned. Pothier's thesis that, in justice, service and 
 counter-service should be equal to each other, and that this is 
 not the case in the loan, he answers by saying that objects 
 which, freely and without fraud or force, are exchanged against 
 each other always have, in a certain sense, equal value. To 
 the fatal argument that, in the case of a perishable thing, it is 
 not possible to conceive of any use separate from the thing 
 itself, he answers by charging his opponents with legal hair- 
 splitting and metaphysical abstraction, and brings forward the 
 old and favourite analogy between the hiring of money and 
 
 1 Written in 1769 ; published twenty years later, 1789. I quote from the 
 collected edition of Turgot's work, Daire, Paris, 1844, vol. L pp. 106-152.
 
 56 . THE DEFENCE OF INTEREST BOOK i 
 
 the hiring of any durable thing like a diamond. " What ! " he 
 says, "that some one should be able to make me pay for the 
 petty use that I make of a piece of furniture or a trinket, and 
 that it should be a crime to charge me anything for the im- 
 mense advantage that I get from the use of a sum of money 
 for the same time ; and all because the subtle intellect of a 
 lawyer can separate in the one case the use of a thing from 
 the thing itself, and in the other case cannot ! It is realjy 
 too ridiculous!" (p. 128). 
 
 But a moment later Turgot himself does not hesitate at 
 metaphysical abstraction and legal hair-splitting. To refute 
 the argument that the debtor becomes proprietor of the 
 borrowed money, and that its use consequently belongs to 
 him, he makes out a property in the value of the money, and 
 distinguishes it from the property in the piece of metal ; the 
 latter of course passing over to the debtor, the former remain- 
 ing behind with the creditor. 
 
 Very remarkable, finally, are some passages in which 
 Turgot, following Galiani's example, emphasises the influence 
 of time on the valuation of goods. In one place he draws the 
 parallel already familiar to us between exchange and loans. 
 Just as in exchange transactions we give less money in one 
 place to receive a greater sum in another place, so in the loan 
 we give less money at one point of time to receive more 
 money at another point of time. The reason of both pheno- 
 mena is, that the difference of time, like that of place, indicates 
 a real difference in the value of money ( 23). On another 
 occasion he alludes to the notorious difference that exists be- 
 tween the value of a present sum and the value of a sum 
 only obtainable at a future period ( 27); and a little later he 
 exclaims: "If these gentlemen suppose that a sum of 1000 
 francs and a promise of 1000 francs possess exactly the same 
 value, they put forward a still more absurd supposition; for 
 if these two things were of equal value, why should any one 
 borrow at all ? " 
 
 Unfortunately, however, Turgot has not followed out this 
 pregnant idea. It is, I might say, thrown in with his other 
 arguments, without having any organic connection with them ; 
 indeed, properly speaking, it stands in opposition to them. For 
 if interest and the replacement of capital only make up together
 
 CHAP, ii TURGOT 57 
 
 the equivalent of the capital that was lent, the interest is then 
 a part equivalent of the principal sum. How then can it be 
 a payment for a separate use of the principal sum, as Turgot 
 has just taken so much trouble to prove ? 
 
 We may look on Turgot's controversy with Pothier as the 
 closing act of the three hundred years' war which jurisprudence 
 and political economy had waged against the old canon 
 doctrine of interest. After Turgot the doctrine disappeared 
 from the sphere of political economy. Within the sphere of 
 theology it dragged out a kind of life for some twenty years 
 longer, till, finally, in our century this also ended. When 
 the Eoman Penitentiary pronounced the taking of interest to 
 be allowable, even without any peculiar title, the Church itself 
 had confirmed the defeat of its erstwhile doctrine. 1 
 
 Pausing for a moment, let us look back critically over the 
 period we have traversed. What are its results ; what has 
 science gained during it towards the elucidation of the interest 
 problem ? 
 
 The ancient and the canon writers had said, Loan interest 
 is an unjust defrauding of the borrower by the lender, for 
 money is barren, and there is no special "use" of money 
 which the lender may justly sell for a separate remuneration. 
 In opposition to this the new doctrine runs, Loan interest is 
 just; for, first, money is not barren so long as, by proper 
 employment, the lender might make a profit with it, and by 
 lending it gives up the possibility of this profit in favour of. 
 the borrower; and, second, there is a use of capital that is 
 separable from capital itself, and may be sold separately 
 from it. 
 
 If we put aside in the meantime the latter more formal 
 point it will come up again later in another connection 
 the central idea 01 the new doctrine is the suggestion that 
 capital produces fruits to him who employs it After an 
 immense expt iditure of ingenuity, dialectic, polemic, and 
 verbiage, at bottom it is the emergence of the same idea that 
 Adam Smith in his wonderfully simple way expressed shortly 
 
 1 Funk, Zins und Wucher, Tubingen, 1868, p. 116. On the reception that 
 this liberal decision of Rome, 18th August 1830, met from a portion of the Frenc 
 clergy, see Molinari, Cours cTJEconomie Politique, second edition, vol. i. p. 333.
 
 58 THE DEFENCE OF INTEREST BOOK i 
 
 afterwards in the words that contain his solution of the whole 
 question whether interest is justifiable or not : " As something 
 can everywhere be made by the use of money, something ought 
 everywhere to be paid for the use of it." l Translated into 
 our modern terminology, this idea would run, " There is loan 
 interest because there is natural interest." 
 
 Thus the theory of Salmasius and his followers in sub- 
 stance amounts to explaining contract interest or loan interest 
 from the existence of natural interest. 
 
 How much did the elucidation of the interest problem 
 gain by this ? That the gain was not inconsiderable is attested 
 by the fact that the intellectual labour of centuries was needed 
 to secure credence for the new doctrine, in the face of opposing 
 impressions and prejudices. But just as certain is it that, 
 when this explanation was given, much remained still to be 
 done. The problem of loan interest was not solved ; it was 
 only shifted a stage farther back. To the question, Why does 
 the lender get from his loaned capital a permanent income 
 not due to work ? the answer was given, Because he could 
 have obtained it if he had employed the capital himself. But 
 why could he have obtained this income himself ? This last 
 question obviously is the first to point to the true origin of 
 interest; but, in the period of which we have been speaking, 
 not only was this question not answered, it was not even 
 put 
 
 All attempts at explanation got the length of this fact, 
 that the man who has a capital in his hand can make a 
 profit with it. But here they halt. They accept this as a 
 fact without in the least attempting to further explain it. 
 Thus Molinaeus, with his proposition that money, assisted by 
 human exertion, brings forth fruit, and with his appeal to 
 everyday experience. Thus Salmasius himself, with his 
 delightful badinage over the fruitfulness of money, where he 
 simply appeals to the fact without explaining it. And thus 
 too even the later and most advanced economists of the whole 
 period ; such men as Locke, Law, Hume, James Steuart, Justi, 
 Sonnenfels. Now and then they advance extremely clear and 
 thorough statements of how loan interest is bound to emerge 
 from the possibility of making a profit, and in the amount of 
 1 Wealth of Nations, book iL chap. iv.
 
 CHAP, ii RETROSPECT 59 
 
 that profit must find the measure of its own amount. 1 But 
 not one of them ever conies to the question as to the why 
 and wherefore of that profit. 2 
 
 What Salmasius and his time had done for the interest 
 problem cannot be better illustrated than by comparing it 
 with the problem of land-rent. Salmasius of course under 
 accessory circumstances that made it much more difficult 
 did for the interest problem what never required to be done 
 for the land-rent problem, just because it was too self-evident ; 
 he proved that the hirer pays the rent he has agreed to pay 
 because that which is hired produces it. But he failed to 
 do for the interest problem indeed, did not in the least try 
 to do the one thing that required scientific effort in the 
 sphere of land-rent; he did not explain why that which bears 
 a rent when hired out should bear a rent if it remain in the 
 hands of its owner. 
 
 Thus everything that had been done in the period we have 
 just been considering was, as it were, the driving back of an 
 advanced post on the main army. The problem of loan interest 
 is pursued till it falls in with the general problem of interest. 
 But this general problem is neither mastered nor even attacked ; 
 at the end of the period the heart of the interest problem is 
 as good as untouched. 
 
 All the same, the period was not quite barren of results as 
 
 1 E.g. Sonnenfels, Handlung, fifth edition, pp. 488, 497 ; Steuart, book iv. 
 part i. p. 24 ; Hume, as above, p. 60. See above, pp. 42, 47. 
 
 2 Some historians of theory, who are at the same time adherents of the 
 Productivity theory (which we have to examine later), such as Roscher, Funk, 
 and Endemann, ate fond of ascribing to the writers of this period "presentiments " 
 of the " productivity of capital," even "insight" into it ; and of claiming them 
 as forerunners of that theory. I think this is a misunderstanding. These 
 writers do speak of the " fruitfulness " of money, and of all sorts of other things, 
 but this expression with them serves rather to name the fact that certain things 
 bring forth a profit than to explain it. They simply call everything. "fruitful" 
 that yields a profit or a "fruit," and it does not occur to them to give any 
 formal theoretical explanation of the origin of these profits. This is very plain 
 from the writings of Salmasius on the subject. When Salmasius calls air, 
 disease, death, prostitution, "fruitful" (see note to p. 39 above), it is evidently 
 only a strong way of putting the fact that the state which lays taxes on the air, 
 the physician, the gravedigger, the prostitute, all draw a profit from the things 
 just named. But it is just as evident that Salmasius did not in the least seriously 
 think of deriving the sexton's fee from a productive power that resides in death. 
 And the fruitfulness of money, which Salmasius wished to illustrate by com- 
 paring it with these, is not to be taken any more seriously.
 
 60 THE DEFENCE OF INTEREST BOOK I 
 
 regards the solution of the chief problem ; it at least prepared 
 the way for future work by elevating natural interest, the real 
 subject of the problem, out of confused and hesitating state- 
 ments, and bringing it gradually to clear presentation. The 
 fact that every one who works with a capital makes a profit 
 had long been known. But it was a long time before any one 
 clearly distinguished the nature of this profit, and there was a 
 tendency to ascribe the whole of it to the undertaker's activity. 
 Thus Locke himself looks on the interest which the borrower 
 pays to the lender as the " fruit of another man's labour," and, 
 while conceding that the borrowed money employed in business 
 may produce fruit, expressly ascribes the possibility of this to 
 the exertion of the borrower. Now when, in justifying interest, 
 one was led to accent the influence of capital in the emer- 
 gence of such profits, he was bound in the end to come to see 
 clearly that a part of the undertaker's profit was a branch of 
 income sui generis, not to be confounded with the produce of 
 labour was, in fact, a peculiar profit of capital This insight, 
 which is to be found quite clearly in germ in Molinaeus and 
 Salmasius, comes out with perfect distinctness at the end of the 
 period in the writings of Hume and others. But once attention 
 was called to the phenomenon of natural interest, it was in- 
 evitable that, sooner or later, people should begin to ask about 
 the causes of this phenomenon. And with this the history 
 of the problem entered on a new epoch.
 
 CHAPTEE III 
 
 TURGOT'S FRUCTIFICATION THEORY 
 
 So far as my knowledge of economical literature goes, I am 
 bound to consider Turgot as the first who tried to give a scien- 
 tific explanation of Natural Interest on capital, and accordingly 
 as the first economist who showed the full extent of the 
 problem. 
 
 Before Turgot the times had been quite unfavourable to 
 any scientific investigation into natural interest. It was only 
 very recently that people had come to clear consciousness that 
 in this they had to deal with an independent and peculiar 
 branch of income. But besides and this was of still greater 
 moment there had been no outward occasion to draw dis- 
 cussion to the nature of this income. The problem of loan 
 interest had been worked at from very early times, because 
 loan interest had been attacked from the field of practical life ; 
 and it was thus early attacked because there had been from 
 the beginning a hostile tension between the interests of the 
 parties concerned in the loan contract, the creditors and the 
 debtors. It was quite different in this respect with natural 
 interest. People had scarcely learned to distinguish it with 
 certainty from the reward due to the employers personal 
 labour, and in any case they were still indifferent about it. 
 The power of capital was yet insignificant. Between capital 
 and labour, the two parties concerned in natural interest, scarcely 
 any opposition had yet shown itself ; at all events it had 
 not developed into any sharp opposition of classes. So far, 
 therefore, no one was hostile to this form of profit on capital, 
 and consequently no one had any occasion from outside to 
 defend it, or to make any thorough inquiry into its nature.
 
 62 TURGOTS FRUCTIFICATION THEORY BOOK i 
 
 If, under such circumstances, there was any one to whom it 
 occurred to do so, it could only be some systematic thinker 
 with whom theorising was a necessity that took the place of 
 the external impulse. But up till that time there had been 
 no true systematiser of political economy. 
 
 The Physiocrats were the first to bring in a real system. 
 For a long time, however, even they passed over our problem 
 without consideration. Quesnay, the founder of the school, 
 so little comprehends the nature of natural interest that he 
 sees in it replacement costs a kind of reserve fund, out of 
 which the loss, in wearing out of capital and by unforeseen 
 accidents, is to be defrayed rather than a net income of the 
 capitalist. 1 
 
 Mercier de la Riviere, 2 more correctly, recognises that 
 capital produces a net profit ; but he only points out that 
 there must be this profit on the capital that is employed 
 in agriculture, if agriculture is not to be abandoned for other 
 pursuits. He does not go on to ask why capital in general 
 should yield interest. As little does Mirabeau, who, as we 
 saw, has written a great deal on the subject of interest, and 
 has written very badly. 3 
 
 It was Turgot, then, the greatest of the physiocrats, who 
 was also first among them to seek for a fuller explanation of 
 the fact of natural interest. Even his way of treating the 
 problem is modest and naive enough : it is easy to see that 
 it was not the fiery zeal in a great social problem that forced 
 him to take up the pen, but only the need for clear con- 
 sistency in his ideas a need that would, if necessary, be 
 content with an explanation of very moderate depth, provided 
 only it found a plausible formula. 
 
 1 " Les interets des avances de 1'etablissement des cultivateurs doivent done 
 etre compris dans leur reprises annuelles. Us servent a faire face a ces grands 
 accidents et a 1'entretien journalier des richesses d'exploitation, qui demandent a 
 etre repares sans cesse" (Analyse du Tableau Economique, Edition Daire, p. 
 62). See also the more detailed statement that precedes the passage quoted. 
 
 2 L'Ordrc Naturel, Edition Daire, p. 459. 
 
 3 On his attitude towards loan interest see above, p. 53. As regards natural 
 interest, he approves of interest as regards capital invested in agriculture (Philo- 
 sophic Rurale, p. 83, and then p. 295) without going any deeper in explanation ; 
 but he speaks of what is gained in commerce and industry in hesitating terms, 
 looking on it rather as a fruit of activity, de la profession, than of capital 
 (p. 278).
 
 CHAP, in STATEMENT OF THE THEORY 63 
 
 In the Memoire sur les Prtits d' Argent, already known to 
 us, Turgot simply deals with the question of loan interest. 
 His more comprehensive interest theory is developed in his 
 chief work, Reflexions sur la Formation et la Distribution des 
 Eichesses. 1 To be correct, it is not so much developed as 
 contained in it ; for Turgot does not put the question as to 
 the origin of interest formally, nor is the consideration he 
 devotes to it a very connected one. What we find is a number 
 of separate paragraphs ( 57, 58, 59, 61, 63, 68, and 71), 
 containing a series of observations, out of which we have 
 to put together his theory on the origin of interest for 
 ourselves. 2 
 
 Seeing that this theory bases the entire interest of capital 
 on the possibility always open to the owner of capital to 
 find for it an ulterior fructification through the purchase of 
 rent-bearing land, I propose to call it shortly the Fructification 
 theory. 
 
 The argument is as follows. The possession of land guar- 
 antees the obtaining of a permanent income without labour, 
 in the shape of land -rent. But since movable goods, inde- 
 pendently of land, also permit of being used, and on that 
 account obtain an independent value, we may compare the 
 value of both classes of goods ; we may price land in movable 
 goods, and exchange it for them. The exchange price, as in 
 the case of all goods, depends on the relation of supply and 
 demand ( 85). At any time it forms a multiple of the 
 yearly income that may be drawn from the land, and it very 
 often gets its designation from this circumstance. A piece of 
 land, we say, is sold for twenty or thirty or forty years' 
 purchase, if the price amounts to twenty or thirty or forty 
 times the annual rent of the land. The amount of the 
 multiple, again, depends on the relation of supply and demand ; 
 that is, whether more or fewer people wish to buy or sell 
 land ( 88). 
 
 1 First published in 1776. I quote from Daire's collected edition of Turgot's 
 works, Paris, 1844, vol. i. 
 
 2 The outward want of form in Turgot's explanation of interest has led a 
 usually exact investigator of his works to maintain that Turgot does not explain 
 interest (Sivers, Turgots Stellung, etc., Hildebrand's Jahrbucher, vol. xxii. pp. 
 175, 183, etc.) This is a mistake. It is, however true, as we shall see, that his ex- 
 planation does not go particularly deep.
 
 64 TURGOT S FRUCTIFICATION THEORY BOOK i 
 
 In virtue of these circumstances every sum of money, and, 
 generally speaking, every capital, is the equivalent of a piece 
 of land yielding an income equal to a certain percentage on 
 capital ( 59). 
 
 Since in this way the owner of a capital, by buying land, 
 is able to obtain from it a permanent yearly income, he will 
 not be inclined to put his capital in an industrial ( 61), agri- 
 cultural ( 63), or commercial ( 68) undertaking, if he cannot 
 leaving out of account compensation for all ordinary kinds of 
 costs and trouble expect just as large a profit from his capital 
 thus employed as he could obtain through the purchase of 
 land. On that account capital, in all these branches of em- 
 ployment, must yield a profit. 
 
 Thus, then, is the economical necessity of natural interest 
 on capital first explained. Loan interest is deduced from it 
 simply in this way : the undertaker without capital finds him- 
 self willing, and economically too may find himself willing, to 
 give up to him who trusts him with a capital a part of the 
 profit which the capital brings in (71). So in the end all 
 forms of interest are explained as the necessary result of the 
 circumstance, that any one who has a capital may exchange 
 it for a piece of land bearing a rent. 
 
 It will be noticed that in this line of thought Turgot takes 
 for his foundation a circumstance which had been appealed to 
 for some centuries by the defenders of loan interest, from 
 Calvin downward. But Turgot makes an essentially different 
 and much more thorough-going use of this circumstance. His 
 predecessors availed themselves of it occasionally, and by way 
 of illustration. Turgot makes it the centre of his system. 
 They did not see in it the sole ground of loan interest, but 
 co-ordinated with it the possibility of making a profit from 
 capital engaged in commerce, industry, etc. Turgot puts it 
 by itself at the head of everything. Finally, they had only 
 used it to explain loan interest. Turgot explains the entire 
 phenomenon of interest by it. Thus was built up a new doctrine, 
 although out of old materials, the first general theory of 
 interest. 
 
 AS regards the scientific value of this theory, the fate which 
 has befallen it is very significant. I cannot recollect ever read- 
 ing a formal refutation of it : people have tacitly declared it
 
 CHAP, in CRITICISM 65 
 
 unsatisfactory, and passed on to seek for other explanations. 
 It seems too plausible to be refuted ; too slight to base any- 
 thing on. We leave it with the feeling that it has not got 
 down to the last root of interest, even if we cannot give any 
 very accurate account of why and where it fails. 
 
 To supply such an account seems to me at the present 
 time by no means a work of superfluity. In doing so I shall 
 not be merely fulfilling a formal duty which I imposed on 
 myself when I undertook to write a critical history of theory. 
 In pointing out where and how Turgot failed I hope to make 
 perfectly clear what the heart of the problem is, and what it is 
 that every earnest attempt at solution must reckon with, and 
 thus to prepare the way for the profitable pursuit of our future 
 task. The example of a very lively writer of our own day 
 shows that we are not yet so far past Turgot's line of thought 
 as we might perhaps think 1 
 
 Turgot's explanation of interest is unsatisfactory, because 
 it is an explanation in a circle. The circle is only concealed 
 by the fact that Turgot breaks off his explanation at' that very 
 point where the next step would inevitably have brought him 
 back to the point from which he started. 
 
 The case stands thus. Turgot says : A definite capital 
 must yield a definite interest, because it may buy a piece of 
 land bearing a definite rent. To take a concrete example. 
 A capital of 10,000 must yield 500 interest, because with 
 10,000 a man can buy a piece of land bearing a rent of 500. 2 
 
 But the possibility of such a purchase is not in itself an 
 ultimate fact, nor is it a fact that carries its explanation on its 
 face. Thus we are forced to inquire further : Why can a person 
 with a capital of 10,000 buy a rent-bearing piece of land 
 in general and a piece of land bearing 500 rent in particular ? 
 Even Turgot feels that this question may be put, and must be 
 put, for he attempts to give an answer to it He appeals to the 
 relation of demand and supply, as at any moment famishing the 
 ground for a definite relation of price between capital and land. 8 
 
 But is this a full and satisfactory answer to our ques- 
 
 1 See the chapter on Henry George's Later Fructification theory. 
 
 2 Usually the rent of land is somewhat less than interest on the price paid. 
 But this circumstance, fully explained by Turgot (Reflexions, 84), has no in- 
 fluence at all on the principle, and may here be simply neglected. 
 
 3 " If four bushels of wheat, the net product of an arpent of land, be worth 
 
 F
 
 66 TURGOTS FRUCTIFICATION THEORY BOOK i 
 
 tion ? Certainly not. The man who, when asked what deter- 
 mines a certain price, answers, " Demand and supply, " offers 
 a husk for a kernel. The answer may be allowable in a 
 hundred cases, where it can be assumed that the one who asks 
 the question knows sufficiently well what the kernel is, and can 
 himself supply it. But it is not sufficient when what is wanted 
 is an explanation of a problem of which we do not yet know 
 the nature. If it were sufficient, we might be quite content 
 to settle the whole problem of interest simply by the formula ; 
 demand and supply regulate the prices of all goods in such a 
 way that a profit always remains over to the capitalist. For 
 the interest problem throughout relates to phenomena of price ; 
 e.g. to the fact that the borrower pays a price for the " use of 
 capital " ; or to the fact that the price of the finished product 
 is higher than the price of its costs, in virtue of which a profit 
 remains over to the undertaker. But certainly no one would 
 find this a satisfactory explanation. 
 
 We must therefore ask further, What deeper causes lie 
 behind demand and supply, and govern their movements in 
 such a way that a capital of 10,000 can regularly be 
 exchanged for a rent-bearing piece of land in general, and a 
 piece of land bearing 500 rent in particular? To this ques- 
 tion Turgot gives no answer, unless we care to look on the 
 somewhat vague words at the beginning of 5 7 as such ; and 
 if so the answer cannot in any way be thought satisfactory : 
 " Those who had much movable wealth could employ it not 
 only in the cultivation of land, but also in the different depart- 
 ments of industry. The facility of accumulating this movable 
 wealth, and of making a use of it quite independent of land, 
 had the effect that one could value the pieces of land, and 
 compare their value with that of movable wealth." 
 
 But if we take up the explanation at the point where 
 Turgot broke off, and carry it a little farther, we shall dis- 
 
 six sheep, the arpent which produced them might have been given for a certain 
 value a greater value of course, but always easy to determine in the same 
 manner as the price of all other commodities, i.e. first by discussion between the 
 two contracting parties, and afterwards by the price current established by the 
 competition of those who wish to exchange lands against cattle, and of those who 
 wish to give cattle to get lands ( 57). It is evident, again, that this price, or this 
 number of years' purchase, ought to vary according as there are more or less 
 people who wish to sell or buy lands, just as the price of all other commodities 
 varies by reason of the different proportion between supply and demand " ( 58).
 
 CHAP, in CRITICISM 67 
 
 cover that this interest, which Turgot thought to explain as the 
 result of the exchange relation between land and capital, is in 
 reality the cause of this exchange relation. That is to say, 
 whether it is twenty or thirty or forty times the annual rent 
 that is asked or offered for a piece of land, depends chiefly on 
 the percentage which the capital that buys it would obtain 
 if otherwise employed. That piece of land which yields 500 
 rent will be worth 10,000 if and because the rate of interest 
 on capital amounts to 5 per cent. It will be worth 5000 
 if and because the interest rate is 10 per cent. It will be 
 worth '20,000 if and because capital bears only 2^ per cent 
 interest. Thus, instead of the existence and height of interest 
 being explained by the exchange relation between land and 
 capital, this exchange relation itself must be explained by the 
 existence and height of interest. Nothing has been done, there- 
 fore, to explain interest, and the whole argument moves in a 
 circle. 
 
 I should have confidence in finishing my criticism of 
 Turgot's doctrine at this point, if I did not feel myself bound 
 to be more than usually careful in all cases where the nature 
 of reciprocal action between economic phenomena is concerned. 
 For I know that, in the complexity of economical phenomena, 
 it is exceedingly difficult to determine with certainty the 
 starting-point of a chain of reciprocal causes and effects, and I 
 am aware that, in deciding on such points,' we are particularly 
 exposed to the danger of being misled by dialectic. I should 
 not like, therefore, to force on the reader the opinion that 
 Turgot here made a mistake, without having removed every 
 suspicion on the point by going over the proof again; par- 
 ticularly as this will give us a good opportunity of putting the 
 character of our problem in a clearer light. 
 
 Accidents apart, a piece of land will yield its rent for a 
 practically infinite series of years. The possession of it 
 assures the owner and his heirs the amount of the yearly use, 
 not for twenty or forty times only, but for many hundred 
 times almost for an infinite number of times. But as a 
 matter of common experience this infinite series of uses, which, 
 added together, represent a colossal sum of income, is regularly 
 sold for a fraction of this sum for twenty up to forty times 
 the year's use and this is the fact we wish explained.
 
 68 TURGOTS FRUCTIFICATION THEORY BOOK i 
 
 In explanation it cannot be enough to point in a superficial 
 way to the state of demand and supply. For if demand and 
 supply are at all times in such a position that this remarkable 
 result takes place, the regular recurrence must rest on deeper 
 grounds, and these deeper grounds demand investigation. 
 
 In passing I may dismiss the hypothesis, which may have 
 occurred to the reader, that the reason of the low purchase 
 price is that the owner only takes into consideration those uses 
 which he himself may hope to obtain from the land, and 
 neglects all that lie outside and beyond these. If this hypo- 
 thesis were correct, then, seeing that the average life of man, 
 and therefore of landowners, has not varied very much in 
 historical times, the proportion of the value of land to the 
 rent of land must have remained tolerably constant. But this 
 is by no means the case. Indeed we see that proportion 
 varying from ten to fifty fold, in visible sympathy with the 
 rate of interest at the time. 
 
 There must, therefore, be another reason for this striking 
 phenomenon. 
 
 I think we should all agree in pointing to the following as 
 the true reason ; in valuing a piece of land, we make a dis- 
 counting calculation. Thus we value the many hundred years' 
 use of a piece of land at only twenty times the annual use 
 when the rate of interest is 5 per cent, and at only twenty- 
 five times the annual use when the rate is 4 per cent, 
 because we discount the value of the future uses ; that is, we 
 estimate them in to-day's value at a smaller amount, pro rota 
 temporis et usurarum, exactly on the same principle as we 
 estimate the present capital value of a limited or perpetual 
 claim on rent. 
 
 If this is so, and I do not think it will be doubted, 
 then the capital valuation of land to which Turgot appealed in 
 explanation of the phenomenon of interest, is itself nothing more 
 than one of the many forms in which that phenomenon meets 
 us in economic life. For that phenomenon is protean. It 
 meets us sometimes as the explicit payment of a loan interest ; 
 sometimes as payment of a hire which leaves a " net use " to 
 the owner after deduction of a quota for wear and tear ; some- 
 times as the difference in price between product and costs, 
 which falls to the undertaker as profit; sometimes as the prior
 
 CHAP, in CRITICISM 69 
 
 deduction by the creditor from the amount of the loan granted 
 to the debtor ; sometimes as the raising of the purchase money 
 in cases of postponed payment ; sometimes as the limitation of 
 the purchase money for claims, prerogatives, and privileges 
 not yet due; sometimes, finally to mention an instance 
 closely related, indeed essentially the same as the lowering 
 of the purchase money paid for uses inseparable from a piece 
 of land, but only available at a later date. 
 
 To trace the profit that capital obtains in commerce and 
 industry to the possibility of acquiring land in exchange for 
 definite sums of capital, is, therefore, nothing else than to 
 refer from one phenomenal form of interest to another which 
 is as much in need of explanation as the first. Why do -we 
 obtain interest on capital ? why do we discount the value of 
 future rates of payment or rates of use ? These are evidently 
 only two different forms of the question which puts the same 
 riddle. And the solution of it gains nothing from a kind of 
 explanation that begins with the former question, only to come 
 to a stand before the latter one.
 
 CHAPTER IV 
 
 ADAM SMITH AND THE DEVELOPMENT OF THE PROBLEM 
 
 IT has never, I think, been the good fortune of any founder 
 of a scientific system to think out to the very end even the 
 more important ideas that constitute his system. The strength 
 and lifetime of no single man are sufficient for that. It is 
 enough if some few of the ideas which have to play the 
 chief part in the system are put on a perfectly safe founda- 
 tion, and analysed in all their ramifications and complexities. 
 It is a great deal if, over and above that, an equal carefulness 
 falls to the lot of a few other favoured members of the system. 
 But in all cases the most ambitious spirit must be content to 
 build up a great deal that is. insecure, and to fit into his 
 system, on cursory examination, ideas which it was not permitted 
 him to work out. 
 
 We must keep these considerations before us if we would 
 rightly rppreciate Adam Smith's attitude towards our problem. 
 
 Adam Smith has not overlooked the problem of interest ; 
 neither has he worked it out. He deals with it as a great 
 thinker may deal with an important subject which he often 
 comes across, but has not time or opportunity to go very 
 deeply into. He has adopted a certain proximate but still 
 vague explanation. The more indefinite this explanation is, 
 the less does it bind him to strict conclusions ; and a many- 
 sided rnind like Adam Smith's, seeing all the many different 
 ways in which the problem can be put, but lacking the 
 control which the possession of a distinct theory gives, could 
 scarcely fail to fall into all sorts of wavering and -contradictory 
 expressions. Thus we have the peculiar phenomenon that, 
 while Adam Smith has not laid down any distinct theory of
 
 CHAP, iv NO DEFINITE THEORY 71 
 
 interest, the germs of almost all the later and conflicting 
 theories are to be found, with more or less distinctness, in 
 his scattered observations. We find the same phenomenon ( 
 in Adam Smith as regards many other questions. 
 
 The line of thought which seems to commend itself 
 1 principally to him as explaining natural interest occurs in very 
 1 similar language in the sixth and eighth chapters of book i. of 
 the Wealth of Nations. It amounts to this, that there must be a 
 profit from capital, because otherwise the capitalist would have 
 no interest in spending his capital in the productive employ- 
 ment of labourers. 1 
 
 General expressions like these have of course no claim to 
 stand for a complete theory. 2 There is no reasoned attempt in 
 them to show what we are to represent as the actual connect- 
 ing links between the psychological motive of the capitalist's 
 self-interest and the final fixing of market prices which leave 
 a difference between costs and proceeds that we call interest. 
 But yet, if we take those expressions in connection with a 
 later passage, 3 where Smith sharply opposes the " future profit " 
 that rewards the resolution of the capitalist to the "present 
 enjoyment " of immediate consumption, we may recognise the 
 first germs of that theory which Senior worked out later on 
 under the name of the Abstinence theory. 
 
 In the same way as Adam Smith asserts the necessity of 
 interest, and leaves it without going any deeper in the way 
 of proof, so does he avoid making any systematic investigation 
 of the important question of the source of undertaker's profit. 
 He contents himself with making a few passing observa- 
 
 1 " In exchanging the complete manufacture either for money, for labour, or 
 for other goods, over and above what may be sufficient to pay the price of the 
 materials and the wages of the workmen, something must be given for the profits 
 of the undertaker of the work, who hazards his stock in the adventure. . . . He 
 could have no interest to employ them unless he expected from the sale of their 
 work something more than what was sufficient to replace his stock to him ; and 
 he could have no interest to employ a great stock rather than a small one unless 
 his profits were to bear some proportion to the extent of his stock " (M'Culloch's 
 edition of 1863, p. 22). f he second passage runs : " And who would have no 
 interest to employ him unless he was to share in the produce of his labour, or 
 unless his stock was to be replaced to him with a profit " (p. 30). 
 
 2 See also Pierstorff, Lehre vom Unternehmergewinn, Berlin, 1875, p. 6 ; and 
 Platter, " Der Kapitalgewinn bei Adam Smith " (Hildebrand's Jalirbiidwr, vol. 
 xxv. p. 317, etc.) 
 
 3 Book ii. chap. i. p. 123, in M'Culloch's edition.
 
 72 ADAM SMITH BOOK i 
 
 tions on the subject. Indeed in different places he gives 
 two contradictory accounts of this profit. According to one 
 account, the profit of capital arises from the circumstance, 
 that, to meet the capitalist's claim to profit, buyers have to 
 submit to pay something more for their goods than the value 
 which these goods would get from the labour expended on 
 them. According to this explanation, the source of interest is 
 an increased value given to the product over that value which 
 labour creates ; but no explanation of this increase in value is 
 given. According to the second account, interest is a deduc- 
 tion which the capitalist makes in his own favour from the 
 return to labour, so that the workers do not receive the full 
 value created by them, but are obliged to share it with the 
 capitalist. According to this account, profit is a part of the 
 value created by labour and kept back by capital. 
 
 Both accounts are to be found in a great number of 
 passages ; and these passages, oddly enough, sometimes stand 
 quite close to each other, as, e.g. in the sixth chapter of the 
 first book. 
 
 Adam Smith has been speaking in that chapter of a past 
 time, of course a mythical time, when the land was not yet 
 appropriated, and when an accumulation of capital had not yet 
 begun, and has made the remark that, at that time, the quantity 
 of labour required for the production of goods would be the 
 sole determinant of their price. He continues : " As soon 
 as stock has accumulated in the hands of particular persons, 
 some of them will naturally employ it in setting to work 
 industrious people, whom they will supply with materials 
 and subsistence, in order to make a profit by the sale of their 
 work, or by what their labour adds to the value of the 
 materials. In exchanging the complete manufacture either 
 for money, for labour, or for other goods, over and above 
 what may be sufficient to pay the price of the materials 
 and the wages of the workmen, something must be given for 
 the profits of the undertaker of the work, who hazards his stock 
 in this adventure." 
 
 This sentence, when taken with the opposite remark of 
 the previous paragraph (that, in primitive conditions, labour 
 is the sole determinant of price), very clearly expresses the 
 opinion that the capitalist's claim of interest causes a rise in
 
 CHAP, iv CONTRADICTIONS 73 
 
 the price of the product, and is met from this raised price. 
 But Adam Smith immediately goes on to say : " The value which 
 the workman adds to the material, therefore, resolves itself in 
 this case into two parts, of which the one pays the wages, 
 the other the profits of the employer upon the whole stock of 
 materials and wages which he advanced." Here again the price 
 of the product is looked upon as exclusively determined by the 
 quantity of labour expended, and the claim of interest is said to 
 be met by a part of the return which the worker has produced. 
 
 We meet the same contradiction, put even more strikingly, 
 a page farther on. 
 
 " In this state of things," says Adam Smith, " the whole 
 produce of labour does not always belong to the labourer. He 
 must in most cases share it with the owner of the stock which 
 employs him." This is an evident paraphrase of the second 
 account. But immediately after that come the words : " Neither 
 is the quantity of labour commonly employed in acquiring or 
 producing any commodity, the only circumstance which can 
 regulate the quantity winch it ought commonly to purchase, 
 command, or exchange for. An additional quantity, it is 
 evident, must be due for the profits of the stock which 
 advanced the wages and furnished the materials of that labour." 
 He could scarcely have said more plainly that the effect of a 
 claim of interest is to raise prices without curtailing the wages 
 of labour. 
 
 Later on he says alternately : " As in a civilised community 
 there are but few commodities of which the exchangeable value 
 arises from labour only, rent and profit contributing largely to 
 that of the far greater part of them, so the annual produce of 
 its labour will always be sufficient to purchase or command a 
 much greater quantity of labour than was employed in raising, 
 preparing, and bringing that produce to market " (first account, 
 chap, vi) " The produce of almost all other labour is liable to 
 the like deduction of profit. In all arts and manufactures the 
 greater part of the workmen stand in need of a master to 
 advance them the materials of their work, and their wages and 
 maintenance till it be completed. He shares in the produce 
 of their labour, or iu the value which it adds to the materials 
 upon which it is bestowed ; and in this consists his profit " 
 (second account, chap, viii.)
 
 74 ADAM SMITH BOOK i 
 
 " High or low wages and profit are the causes of high or 
 low price ; high or low rent is the effect of it " (first account, 
 chap, xi.) 
 
 Contradictions like these on the part of such an eminent 
 thinker admit, I think, of only one explanation; that Adam 
 Smith had not thoroughly thought out the interest problem ; 
 and as is usual with those who have only imperfectly 
 mastered a subject was not very particular in his choice of 
 expressions, but allowed himself to be swayed very much by 
 the changing impressions which the subject may have made 
 on him from time to time. 
 
 Adam Smith, then, has no perfected theory of interest. 1 
 But the suggestions he threw out were all destined to fall 
 on fruitful soil. His casual remark on the necessity of 
 interest was developed later into the Abstinence theory. In 
 the same way the two accounts he gave of the source of 
 interest were taken up by his followers, logically carried out, 
 and raised into principles of independent theories. Witli 
 the first account that interest is paid out of an additional 
 value which the employment of capital calls into existence 
 are connected the later Productivity theories. With the second 
 account that interest is paid out of the return to labour are 
 connected the Socialist theories of interest. Thus the most 
 important of later theories trace their pedigree back to Adam 
 Smith. 
 
 The position taken by Adam Smith towards the question 
 may be called that of a complete neutrality. He is neutral 
 in his theoretical exposition, for he takes the germs of 
 distinct theories and puts them beside each other, without 
 giving any one of them a distinct prominence over the others. 
 And he is neutral in his practical judgment, for he maintains 
 the same reserve, or rather the same contradictory hesitancy, 
 both in praise and blame of interest. Sometimes he com- 
 mends the capitalists as benefactors of the human race, and as 
 authors of enduring blessing ; 2 sometimes he represents them 
 
 1 When Platter in the essay above mentioned (p. 71) comes to the conclusion 
 that, "if Smith's system be taken strictly, profit on capital appears unjustifiable," 
 it could only be by laying all the weight on the one half of Smith's expressions, 
 and leaving the other out of account as contradictory to his other principles. 
 
 - Book ii. chap. iii.
 
 CHAP, iv GROWTH OF CAPITAL 75 
 
 as a class who live on deductions from the produce of other 
 people's labour, and compares them significantly with people 
 " who love to reap where they never sowed." ] 
 
 In Adam Smith's time the relations of theory and practice 
 still permitted such a neutrality, but it was not long allowed 
 to his followers. Changed circumstances compelled them to 
 show their colours on the interest question, and the compulsion 
 was certainly not to the disadvantage of the science. 
 
 The special requirements of economic theory could not any 
 longer put up with uncertain makeshifts. Adam Smith* had 
 spent his life in laying down the foundations of his system. 
 His followers, finding the foundations laid, had now time to take 
 up those questions that had been passed over. The develop- 
 ment now reached by the related problems of land -rent and 
 wages gave a strong inducement to pursue the interest problem. 
 There was a very complete theory of land -rent; there was a 
 theory of wages scarcely less complete. Nothing was more 
 natural than that systematic thinkers should now begin to 
 ask in earnest about the third great branch of income the 
 whence and wherefore of the income that comes from the 
 possession of capital. 
 
 But in the end practical life also began to put this 
 question. Capital had gradually become a power. Machinery 
 had appeared on the scene and won its great triumphs ; and 
 machinery everywhere helped to extend business on a great 
 scale, and to give production more and more of a capitalist 
 character. But this very introduction of machinery had begun 
 to reveal an opposition which was forced on economic life with 
 the development of capital, and daily grew in importance, 
 the opposition between capital and labour. 
 
 In the old handicrafts undertaker and wage-earner, master 
 and apprentice, belonged not so much to different social classes 
 as simply to different generations. What the one was the other 
 might be, and would be. If their interests for a time did diverge, 
 yet in the long run the feeling prevailed that they belonged 
 to one station of life. It is quite different in great capitalist in- 
 dustry. The undertaker who contributes the capital has seldom 
 
 1 Book i. chap. vi. The sentence was written primarily about landowners, 
 but in the whole chapter interest on capital and rent of land are treated as parallel 
 as against wages of labour.
 
 76 DEVELOPMENT OF THE PROBLEM BOOK i 
 
 or never been a workman ; the workman who contributes his 
 thews and sinews will seldom or never become an undertaker. 
 They work at one trade like master and apprentice ; but not 
 only are they of two different ranks, they are even of different 
 species. They belong to classes whose interests diverge as 
 widely as their persons, Now machinery had shown how sharp 
 could be the collision of interest between capital and labour. 
 Those machines which bore golden fruit to the capitalist 
 undertaker had, on their introduction, deprived thousands of 
 workers of their bread. Even now that the first hardships 
 are over there remains antagonism enough and to spare. 
 It is true that capitalist and labourer share in the productive- 
 ness of capitalist undertaking, but they share in this way, that 
 the worker usually receives little indeed very little while 
 the undertaker receives much. The worker's discontent with 
 his small share is not lessened, as it used to be in the case of 
 the handicraft assistant, by the expectation of himself in time 
 enjoying the lion's share ; for, under large production, the 
 worker has no such expectation. On the contrary, his discon- 
 tent is aggravated by the knowledge that to him, for his scanty 
 wage, falls the harder work ; while to the undertaker, for his 
 ample share in the product, falls the lighter exertion often 
 enough no personal exertion whatever. Looking at all these 
 contrasts of destiny and of interest, if there ever came the 
 thought that, at bottom, it is the workers who bring into 
 existence the products from which the undertaker draws his 
 profit and Adam Smith had come wonderfully near to such 
 a thought in many passages of his widely read book it was 
 inevitable that some pleader for the fourth estate should begin 
 to put the same question with regard to Natural interest as 
 had been put many centuries earlier, by the friends of the 
 debtor, with regard to Loan interest, Is interest on capital just? 
 Is it just that the capitalist-undertaker, even if he never moves 
 a finger, should receive, under the name of profit, a consider- 
 able share of what the workers have produced by their 
 exertions ? Should not the entire product rather fall to the 
 workers ? 
 
 The question has been before the world since the first 
 quarter of our century, at first put modestly, then with in- 
 creasing assertiveness ; and it is this fact that the interest
 
 CHAP, iv THE PROBLEM AFTER ADAM SMITH 77 
 
 theory has to thank for its unusual and lasting vitality. So 
 long as the problem interested theorists alone, and was of im- 
 portance only for purposes of theory, it might have slumbered 
 on undisturbed. But it was now elevated to the rank of a 
 great social problem which the science neither could nor would 
 overlook. Thus the inquiries into the nature of Natural 
 interest were as numerous and solicitous after Adam Smith's 
 day as they had been scanty and inadequate before it. 
 
 It must be admitted that they were as diverse as they were 
 numerous. Up till Adam Smith the scientific opinion of the 
 time had been represented by one single theory. After him 
 opinion was divided into a number of theories conflicting with 
 each other, and remaining so with rare persistence up till our 
 own day. It is usually the case that new theories put them- 
 selves in the place of the old, and the old gradually yield the 
 position. But in the present case each new theory of interest 
 only succeeded in placing itself by the side of the old, while 
 the old managed to hold their place with the utmost stubborn- 
 ness. In these circumstances the course of development since 
 Adam Smith's time presents not so much the picture of a 
 progressive reform as that of a schismatic accumulation of 
 theories. 
 
 The work we have now before us is clearly marked out by 
 the nature of the subject. It will consist in following the 
 development of all the diverging systems from their origin 
 down to the present time, and in trying to form a critical 
 opinion on the value, or want of value, of each individual 
 system. As the development from Adam Smith onwards 
 simultaneously pursues different lines, I think it best to 
 abandon the chronological order of statement , which I have 
 hitherto observed, and to group together our material accord- 
 ing to theories. 
 
 To this end I shall try first of all to make a methodical 
 survey of the whole mass of literature which will occupy our 
 attention. This will be most easily done by putting the 
 characteristic and central question of the problem in the fore- 
 ground. We shall then see at a glance how the theory 
 differentiates itself on that central question like light on the 
 prism. 
 
 What we have to explain is the fact that, I when capital is
 
 78 DEVELOPMENT OF THE PROBLEM BOOK i 
 
 productively employed, there regularly remains over in the 
 hands of the undertaker a surplus proportional to the amount 
 of this capital. This surplus owes its existence to the circum- 
 stance that the value of the goods produced by the assistance 
 of capital is regularly greater than the value of the goods 
 consumed in their production. The question accordingly is, 
 Why is there this constant surplus value ? 
 
 To this question Turgot had answered, There must be a 
 surplus, because otherwise the capitalists would employ their 
 capital in the purchase of land. Adam Smith had answered, 
 There must be a surplus, because otherwise the capitalist would 
 have no interest in spending his capital productively. 
 
 Both answers we have already pronounced insufficient. 
 What then are the answers given by later writers ? 
 
 At the outset they appear to me to follow five different 
 lines. 
 
 One party is content with the answers given by Turgot 
 and Smith, and stands by them. This line of explanation was 
 still a favourite one at the beginning of our century, but has 
 been gradually abandoned since then. I shall group these 
 answers together under the name of the Colourless theories. 
 
 A second party says, Capital produces the surplus. This 
 \ school, amply represented in economic literature, may be con- 
 \ veniently called that of the Productivity theories. I may here 
 note that in their later development we shall find the pro- 
 ductivity theories splitting up into many varieties ; into Pro- 
 ductivity theories in the narrower sense, that assume a direct 
 production of surplus on the part of capital; and into Use 
 theories, which explain the origin of interest in the roundabout 
 way of making the productive use of capital a peculiar element 
 in cost, which, like every other element of cost, demands com- 
 pensation. 
 
 A third party answers, Surplus value is the equivalent of a 
 cost which enters as a constituent into the price, viz. abstinence. 
 For in devoting his capital to production the capitalist must 
 give up the present enjoyment of it. This postponement of 
 I enjoyment, this " abstinence," is a sacrifice, and as such is a 
 ' constituent element in the costs of production which demands 
 compensation. I shall call this the Abstinence theory. 
 
 A fourth party sees in surplus value the wage for work
 
 CHAP, iv THE FIVE ANSWERS 79 
 
 contributed by the capitalist. For this doctrine, which also 
 is amply represented, I shall use the name Labour theory. 
 
 Finally, a fifth party for the most part belonging to the 
 socialist side answers, Surplus value does not correspond to 
 any n.atural surplus whatever, but has its origin simply in the 
 curtailment of the just wage of the workers. I shall call this 
 the Exploitation theory. 
 
 These are the principal lines of explanation. They are 
 certainly numerous enough, yet they are far from exhibiting 
 all the many forms which the interest theory has taken. We 
 shall see rather that many of the principal lines branch off 
 again into a multitude of essentially different types ; that in 
 many cases elements of several theories are bound up in a 
 new and peculiar combination ; and that, finally, within one and 
 the same theoretical type, the different ways in which common 
 fundamental thoughts are formulated, are often so strongly 
 contrasted and so characteristic that there would be some 
 justification in recognising individual shades of difference as 
 separate theories. That our prominent economic writers have 
 exerted themselves in so many different ways for the discovery 
 of the truth is an eloquent witness of its discovery being no 
 less important than it is hard. 
 
 We begin with a survey of the Colourless theories.
 
 CHAPTEK V 
 
 THE COLOURLESS THEORIES 
 
 THE revolution spoken of at the end of last chapter, which 
 was to elevate the long underrated question of interest into a 
 social problem of the first rank, was not sudden enough to 
 prevent a number of writers remaining content with the some- 
 what patriarchal treatment that the subject had received at 
 the hands of Turgot and Adam Smith. It would be a great 
 mistake to suppose that among these stragglers we should only 
 meet with men of no independence, writers of second and third 
 rank. Of course there is the usual crowd of little men who 
 always appear in the wake of a pioneering genius, and find their 
 mission in popularising the new doctrine. But besides these 
 we find many a distinguished thinker who passes over our 
 problem 1 'rom motives yery similar to those of Adam Smith. 
 
 It is easy to see tnat the opinions which those "colour- 
 less" writers, as I shall call them, have expressed on the 
 subject of interest have exerted but little influence on the 
 development of the theory as a whole. This circumstance 
 will justify me in passing rapidly over the majority of them, 
 and giving a complete account only of the few who may attract 
 our interest either by their personality or by the peculiarity 
 of their doctrine. 
 
 Any one familiar with the character of German political 
 economy at the end of the past, and at the beginning of the 
 present century, will not be astonished to meet in it a singularly 
 large number of colourless writers. Their indifference to the 
 subject is not without a certain variety. Some who remain 
 faithful to Adam Smith copy also his vague suggestions about 
 interest almost literally ; in particular his remark that, if there
 
 CHAP, v IN GERMANY 81 
 
 were no interest, the capitalist would have no inducement to 
 spend his capital productively. Thus Sartorius, 1 Lueder, 2 and 
 Kraus. 3 Some take the same fundamental idea, but treat it 
 more freely, as Hufeland 4 and Seuter. 5 Others assume that 
 interest requires no explanation, and say nothing about it, as 
 Politz, 6 and, somewhat later, Murhard. 7 Others, again, give 
 reasons for it that are certainly peculiar, but these so superficial 
 and trifling that they can scarcely lay claim to the honourable 
 name of theories. Thus Schmalz, who argues in a circle and 
 explains the existence of natural interest by the possibility of 
 lending capital to others at interest. 8 
 
 Count Cancrin's explanation of the matter is peculiarly 
 naive. For curiosity's sake, I give the short passage in his 
 own words : " Every one knows,' 5 he says, 9 " that money bears 
 interest, but why? If two owners of real capital wish to 
 exchange their products, each of them is disposed to demand for 
 the labour of storing, and as profit, as much over the intrinsic 
 value of the product as the other will grant him ; necessity, how- 
 ever, makes them meet each other half way. But money 
 represents real capital : with real capital a profit can be made ; 
 and hence interest." 
 
 The words printed in italics are meant to explain the 
 existence of natural interest, the others the existence of loan 
 interest; and the author considers this explanation so 
 satisfactory that in a later passage he refers back to it with 
 
 1 Handbuch der Staatewirthschaft, Berlin, 1796, particularly 8 and 23. Even 
 his later Abhandlungen die Elemente des NationalreicMhums und die Staatswirth- 
 schaft betreffend (Gottingen, 1806) does not take an independent view of our subject. 
 
 2 Ueber Nationalindustrie und Staatsunrthscha/t, 1800-1804 particularly pp. 
 82, 142. 
 
 3 StaatsurirtfischMft, Auerswald's edition, 1808-11, particularly vol. i. pp. 24, 
 150 ; and the very naive expressions, vol. iii. p. 126. 
 
 * Neue Grundlegung, Vienna, 1815, p. 221. 
 
 6 Die National-Ockonomie, Ulm, 1823, p. 145. See also p. 164, where the 
 causal connection is reversed and natural interest deduced from loan interest. 
 
 6 Staatsurisscnschaften im Lichte unserer Zcit, part ii. Leipzig, 1823, p. 90. 
 Here Politz only takes the trouble to show that profit, assumed as already, exist- 
 ing, must fall to the owner of capital. 
 
 7 Theorie des Handels, Gottingen, 1831. 
 
 8 Handbuch der Staatsrwirthschaft, Berlin, 1808, 110 and 120. See also 129, 
 where even contract " rents " are no better explained, but simply spoken of as 
 facts. Schmalz's other -writings are not more instructive. 
 
 9 Die Oekonomie der menschlichen Gesellschaften und das Finanzwesen, Stutt- 
 gart, 1845, p. 19. 
 
 G
 
 82 THE COLOURLESS THEORIES BOOK i 
 
 complacency : " Why capital bears interest, in the form of a. 
 definite rate per cent in the case of money values, in the form 
 of the prices of commodities in the case of real capital, has been 
 already made clear" (p. 103). 
 
 More attention is due to certain authors who give a stronger 
 emphasis to Adam Smith's other suggestion that profit is a share 
 in the product of labour diverted by the capitalist. 
 
 One of these writers, Count Soden, 1 sharply contrasts capital, 
 as simple material on which " productive power " works, with 
 the productive power itself. He traces profit to the fact that 
 the owner of " capital-material " is able to " put the power of 
 others in motion for himself, and therefore to share the profit on 
 this power with the isolated producer, the wage-earner " (vol. i. 
 p. 65). That some such sharing does take place Soden regards 
 as a self-evident result of the relations of competition. With- 
 out giving himself the trouble of a formal explanation, the 
 expression repeatedly escapes him that the small number of 
 the capitalists, as compared with the great numbers of the 
 wage-earners, must always make it possible for the capitalist to 
 buy wage-labour at a price which leaves him a " rent " (pp. 61, 
 138). He thinks this quite fair (e.g. p. 65, onwards), and 
 consequently gives his advice against attempting to raise wages 
 by legal regulation. " For if, in the price thus regulated, the 
 owner of the material comes to find that he gets no profit from 
 the power of others, all material which he cannot himself 
 work up he will leave dead " (p. 140). Soden, however, wishes 
 that the " price " of wages should be brought up to their " true 
 value." What level of wage it is that corresponds to this true 
 value remains very obscure, in spite of the thorough discussion 
 which the author devotes to the question of the value of the 
 productive power (p. 132). The only thing certain is that, 
 in his opinion, even when the productive power is compen- 
 sated at its full value, there must still remain a rent to the 
 capitalist. 
 
 The impression one gets from all this is, that the first part 
 of the argument, where interest is explained to be a profit 
 obtained from the power of others, would lead us to expect a 
 very different conclusion from that come to in the second part; 
 
 1 Die National-Ockonomie, Leipzig, 1805-1808. I quote from a reprint 
 published in Vienna, 1815.
 
 CHAP, v SODENLOTZ 83 
 
 and that the reasons given for this change of front are much 
 too vague to be satisfactory. 
 
 Lotz lays himself open to similar criticism. 
 
 This acute writer, in his Handbuch der Staatswissenschafts- 
 lehre, Erlangen, 1821, goes very exhaustively into the subject 
 of interest. He argues with great vigour against the doctrine 
 which Say had meantime put forward, that capital possesses an 
 independent productive power. " In themselves all capitals are 
 dead," and " there is no truth in the assertion of their independent 
 labour": they are never anything else than tools of human 
 labour (vol. i. p. 65, etc.) In the very notable passage which 
 follows, the "rent" of capital is criticised from this point of view. 
 
 Since capitals are only instruments for furthering labour, 
 and themselves do no labour, Lotz finds that the capitalist 
 " from the return to labour, and from the amount of goods 
 gained or produced by it, has no claim to anything more than 
 the amount of expense which the furnishing of the capital 
 has caused him ; or, more plainly, the amount of the labourer's 
 subsistence, the amount of the raw material given out to him, 
 and the amount of the tools properly so called that are worn 
 out by the worker during his work. This, strictly speaking, 
 would be distinctively the rent appropriate to capital which 
 the capitalist may claim from the labourer who works for 
 him; and further, this is distinctively the appropriate quota 
 of the quantity of goods produced by the labourer, or won 
 from nature, that might belong of right to the capitalist. If 
 this then be the appropriate sense of the term, there is no 
 place for what is usually called profit, viz. a wage obtained 
 by the capitalist for advancing his capital such as guarantees a 
 surplus over the expenses. If labour returns more than the 
 amount of the capitalist's expenditure, this return, and all the 
 income that comes out of it, belongs distinctively to the 
 labourer alone, as wages of his labour. For in point of fact 
 it is not the capitalist who creates the labourer's products ; 
 all that the labourer, with the assistance of capital, may pro- 
 duce or win from nature belongs to himself. Or if the power 
 which manifests its activity in the worker at his work be 
 looked upon as a natural fund belonging to the entire industrial 
 mass of mankind, then all that the labourer produces belongs 
 to humanity as a whole" (p. 487, onwards).
 
 84 THE COLOURLESS THEORIES BOOK i 
 
 In this acute and remarkable passage Lotz comes very near 
 to the later Exploitation theory of the socialists. But all of a 
 sudden he breaks away from this line of argument, and swings 
 back into the old colourless explanation of Adam Smith by 
 going on to say : " If, however, the capitalist were limited to a 
 simple replacement of what he may have furnished, from his 
 accumulated stock of wealth, to the worker during his work, 
 and. for his work if the capitalist were so hardly treated, he 
 would scarcely decide to advance anything from his stock on 
 behalf of the worker and his work. He would perhaps never 
 decide to accumulate capital at all ; for there would not be 
 many capitals accumulated if the accumulator had not the 
 prospect of a wage for the trouble of this accumulating in the 
 shape of the expected interest. If, therefore, the worker, who 
 has none of the requisites and conditions necessary for the 
 exercise of his power, is to hope and expect that owners 
 will consent to furnish their capital, and so make it possible 
 for him to exert the productive power that resides in him, 
 or lighten the exertion for him, then he must of necessity 
 submit to give up to the capitalists something of the return to 
 his labour." 
 
 In what follows Lotz somewhat expands this vague explan- 
 ation by suggesting, as a fair ground for the capitalist's claim, 
 that, without the support of capital, the work which guarantees 
 that there is a return to be divided could never have been 
 done at all by the labourer, or, at any rate, could not have 
 been so well done. This also gives him a standard for the 
 " true and appropriate extent " of rent of capital ; it should 
 be calculated, that is to say, in proportion to the support 
 which the worker has enjoyed at his work by the use of the 
 capital. In explaining this method of calculation by several 
 examples Lotz shows how nearly extremes may meet. A few 
 pages before, he has said that the whole "return to labour, 
 and all the income that comes out of it, belongs peculiarly 
 to the labourer alone, as wages of his labour." He now goes 
 on to show how in certain circumstances the owner of a labour- 
 saving machine may claim for himself, and that rightly, nine- 
 tenths of the return to labour ! 
 
 It is easy to see that the contrast here between the starting- 
 point and the conclusion is even more striking than it is
 
 CHAP, v LOTZ 85 
 
 with Soden, and that the 'argument relied on to explain and 
 connect the two does not carry much more weight At bottom 
 it says nothing else than that the capitalist would like to get 
 interest, and that the workers may consent to its deduction. 
 But how far this " explanation " is from being really a theory 
 of interest is forcibly illustrated if we put a parallel case in 
 regard to the land -rent problem. Lotz's explanation does 
 for the problem of interest exactly what would be done for 
 the problem of rent, if one were to say that landowners must 
 obtain a rent, because otherwise they would prefer to leave 
 their ground uncultivated ; and that it is a fair thing for the 
 agricultural labourers to consent to the deduction of rent, 
 because without the co-operation of the soil they could not get 
 any return to divide, or could not get so good a return. Lotz, 
 however, evidently never suspected that the essence of the 
 problem is not even touched by any such explanation, 1 
 
 A last group of Colourless writers takes a hesitating middle 
 course between Adam Smith's views and the Productivity 
 theory which Say had meantime put forward. They take 
 some features from both, but do not expand any of them into 
 a complete theory. From Say these authors usually take the 
 recognition of capital as an independent factor in production ; 
 and they adopt perhaps one or other of Say's ways of speaking 
 that suggest the " productive power " of capital. From Adam 
 Smith they take the appeal to the motive of the capitalist's 
 self-interest. But one and all of them avoid any precise for- 
 mulation of the interest problem. 
 
 In this group we find Jakob, 2 who at times recognises 
 
 1 In Lotz's former work, the Revision der Qrundbeyriffe, 1811-14, there are 
 some rather interesting remarks on our subject, although they are full of incon- 
 sistency ; among others, an acute refutation of the productivity theories (vol. iii. 
 p. 100, etc.), au explanation of interest as "an arbitrary addition to the necessary 
 costs of production," and as a "tax which the selfishness of the capitalist forces 
 from the consumer " (p. 338). This tax is found, not necessary indeed, but " very 
 fair." At p. 339 and at p. 323 Lotz considers it a direct cheating of the capitalist 
 by the labourer if the former does not receive in interest as much as " he may be 
 justified in claimiug as the effect of those tools used up by the worker on his 
 activity and on its gross return." It is very striking that in the second last of 
 the passages quoted Lotz puts interest to the account of the consumer, and in 
 the last of them to the account of the labourer ; he thus exactly repeats Adam 
 Smith's indecision on the same point. 
 
 a Grundsatze der National-Oekonomie, Halle, 1805 ; third edition, Halle, 1825. 
 I quote from the latter.
 
 86 THE COLOURLESS THEORIES HOOK i 
 
 as the ultimate source of all usefifl things only nature and 
 industrial activity ( 49), and traces the profit of capital to a 
 capability on the part of labour to produce a surplus product 
 ( 275, 280) ; but at other times points to profit as that " which 
 is produced by a capital over its own value" ( 277), designates 
 capital by Say's term of "productive instrument" ( 770), and 
 often speaks of the owners of capital as immediate producers, 
 who are called to take part in the original division of the product 
 in virtue of the direct share which they have taken in the pro- 
 duction of goods by contributing their capital. 1 Then we have 
 Fulda, 2 who looks upon capital as a special though derived source 
 of wealth, and, moreover, likens it to a machine which when 
 properly employed not only pays for its own upkeep, but 
 makes something more in addition ; he does not attempt, 
 however, to give any explanation of this (p. 135). Then 
 comes Eiselen, 3 whose want of clearness at once comes out 
 in his first recognising only two ultimate sources of wealth, 
 nature and labour (p. 11), and then later looking upon nature, 
 labour, and capital as " fundamental powers of production," 
 from the co-operation of which the value of all products pro- 
 ceeds ( 372). Eiselen, moreover, finds that the function of 
 capital is to increase the return to labour and natural powers 
 (497 and other places) ; but in the end he can find nothing 
 better to say in explanation of interest than that interest is 
 necessary as an incentive to the accumulation of capital (491; 
 similarly 517, 555, etc.) 
 
 Besides these we meet in the same group the gallant old 
 master in political economy, Eau. It is singular that Rau, to 
 the very end of his long scientific career, ignored the imposing 
 number of distinct theories on interest which he saw springing 
 up, and held by the simple way of explanation that had been 
 customary in the days of his youth. Even in the eighth and 
 last edition of his Volkswirthschaftslehre, which appeared in 
 1868, lie contented himself with touching on the interest 
 problem in a few cursory remarks, containing in substance the 
 old self-interest motive introduced by Adam Smith. " If he 
 (the capitalist) is to resolve to save wealth, accumulate it, and 
 
 1 211, 711, 765, particularly marked in 769. 
 
 3 Grundsdtze dcr okonomisch-politischen odcr Kamcralwisscnschaften, second 
 edition, Tubingen, 1820. 
 
 3 Die Lchre von der Volkswirthsclutft, Halle, 1843.
 
 CHAP, v RAURICARDO 87 
 
 make it into capital, he must get an advantage of another sort ; 
 viz. a yearly income lasting as long as his capital lasts. In this 
 way the possession of a capital becomes to individuals . . . 
 the source of an income which is called rent of capital, rent 
 of stock, or interest." * 
 
 On Rau's works the rich development which the literature 
 of interest had taken before 1868 has scarcely left a trace. 
 Of Say's Productivity theory he has only adopted this much ; 
 that, like Say, he recognises capital to be an independent source 
 of wealth; but he immediately weakens this concession by 
 rejecting as inappropriate the expression " productive service," 
 which Say used for the co-operation of this source of wealth, 
 and by putting capital among "dead auxiliaries," in contrast to the 
 producing forces of wealth (vol. i. 84). And on one occasion, 
 ' in a note, he quotes Senior's Abstinence theory, but without adding 
 a single word either of agreement or criticism (vol. i. 228). 
 
 When we turn from Germany to England our attention is 
 first claimed by Ricardo. 
 
 In the case of this distinguished thinker we find the same 
 phenomenon we have already noticed in the case of Adam Smith, 
 that, without putting forward any theory of his own, he has had a 
 deep influence on the development of the interest theory. I must 
 classify him among the Colourless writers, for although he takes 
 up the subject of interest at some length, he treats it only as a 
 self-explanatory, or almost self-explanatory phenomenon, and 
 passes over its origin in a few cursory remarks, to take up at 
 .greater length a number of concrete questions of detail And 
 although he treats these questions most thoroughly and intelli- 
 gently, it is in such a way that their investigation throws no 
 light on the primary theoretical question. But, exactly as in 
 the case of Adam Smith, his doctrine contains propositions on 
 which distinct theories could have been built, if only they had 
 been worked out to all their conclusions. In fact, later on, 
 distinct theories were built on them, and not the least part of 
 their support consists in the authority of Ricardo, to whom 
 the advocates of these theories were fond of appealing as their 
 spiritual father. 
 
 The passages in which Ricardo makes reference to interest 
 1 Volkswirthschaftslehre, vol. i. 222. Similarly, but more generally, vol. i. 138.
 
 88 THE COLOURLESS THEORIES BOOK i 
 
 are very numerous. Apart from scattered observations, they 
 are to be found principally in chapters i. vi. vii. and xxi. of his 
 Principles of Political Economy and Taxation. 1 The contents 
 of these passages, so far as they refer to our subject, may best 
 be ascertained if we divide them into three groups. In the 
 first group I shall place Eicardo's direct observations on the 
 origin of interest ; in the second, his views on the causes that 
 determine its amount ; in the third, his views on the connec- 
 tion of interest with the value of goods. It should be pre- 
 mised, however, that Kicardo, like the majority of English 
 writers, makes no distinction between interest on capital and 
 undertaker's profit, but groups both under the word Profit. 
 
 (1) The first group is very thinly represented. It con- 
 tains a few passing remarks to the effect that there must be 
 interest, because otherwise capitalists would have no induce- 
 ment to accumulate capital. 2 These remarks have an evident 
 connection with the analogous expressions of Adam Smith, 
 with which we are familiar, and come under the same criticism. 
 There is some warrant for seeing in them the primary germs 
 from which the Abstinence theory has since been developed, 
 ^\ but in themselves they do not represent a theory. 
 
 The same remark is true of another observation. In 
 chap. i. p, p. 25, he says that, where production demands an 
 employment of capital for a longer period, the value of the 
 goods produced must be greater than the value of goods which 
 have required exactly the same amount of labour, but where the 
 employment of capital has extended over a shorter period ; and 
 concludes : " The difference in value is only a just compensation 
 for the time that the profits were withheld." One might 
 possibly find in these words a still more direct agreement 
 
 1 London, 1817, third edition, 1821. I quote from M'Culloch's edition. 
 John Murray, 1886. 
 
 2 The most complete of these runs thus : ' ' For no one accumulates but with 
 a view to make his accumulation productive, and it is only when so employed 
 that it operates on profits. Without a motive there could be no accumulation, and 
 consequently such a state of prices" (as show no profit to the capitalist) "could 
 never take place. The farmer and manufacturer can no more live without profit 
 than the labourer without wages. Their motive for accumulation will diminish 
 with every diminution of profit, and will cease altogether when their profits are 
 so low as not to afford them an adequate compensation for their trouble, and the 
 risk which they must necessarily encounter in employing their capital produc- 
 tively " (chap. vi. p. 68 ; similarly p. 67 ; chap. xxi. p. 175, and other places).
 
 CHAP, v RICARDO 89 
 
 with the Abstinence theory, but in themselves they do not 
 contain any finished theory. 
 
 (2) On the amount or rate of profit Eicardo's views (prin- 
 cipally contained in chapters VL and XXL) are very interesting 
 both as regards originality and self-consistency. As they arise 
 out of his theory of land -rent, it will be necessary to give 
 some account of that theory. 
 
 According to Ricardo, on the first settling of a country the 
 most fruitful lands are taken into cultivation. So long as 
 there is a superfluity of land of the " first quality " no rent is 
 paid to the owner of the ground, and the whole revenue falls 
 to the cultivators as wages of labour and profit of capital 
 
 Later on, as population increases, the increasing demand 
 for land products demands extended cultivation. This ex- 
 tended cultivation is of two kinds : sometimes the lands of 
 inferior quality, despised up till now, are cultivated ; sometimes 
 the lands of first quality already in cultivation are cultivated 
 with more intensiveness farmed at a greater expenditure of 
 capital and labour. In both cases assuming that the state 
 of agricultural technique remains unchanged the increase in 
 land products is only obtained at increased cost ; and the last 
 employed capital and labour are consequently less productive 
 less productive, that is to say, over the whole field, as the more 
 favourable opportunities of cultivation are successively ex- 
 hausted, and the less favourable must be resorted to. 
 
 The capitals thus employed in circumstances unequally 
 favourable obtain at first unequal results. But these unequal 
 results cannot permanently remain attached to particular 
 capitals. The competition of capitalists will soon bring the rate 
 of profit on all capitals engaged in agriculture to the same 
 level. The standard, indeed, is given by the profit obtainable 
 in the least remunerative employment of capital. All surplus 
 return which the more favourably situated capitals yield in 
 virtue of the better quality of the co-operating powers of the 
 soil, falls into the lap of the landowners as rent 
 
 The extent of profit and wage taken together is thus 
 always determined by the return to the least productive em- 
 ployment of capital; for this return pays no rent, and is 
 divided entirely as profit on capital and wage of labour. 
 
 Now of these two factors one, the wage of labour, follows
 
 90 THE COLOURLESS THEORIES HOOK i 
 
 a hard and fast law. Wages are necessarily at all times equal 
 to the -amount of the necessary cost of subsistence of the 
 worker. They are high if the value of the means of subsist- 
 ence be high ; low if the value of the means of subsistence 
 be low. As then the capitalist receives what remains over, 
 profit finds the line that determines its height in the height of 
 wages at the time. In this connection between interest and 
 wage Bicardo finds the true law of interest. He brings it 
 forward with emphasis in a great many passages, and opposes 
 it to the older view, particularly to that represented by Adam 
 Smith, that the extent of profit is determined by the amount 
 and competition of capitals. 
 
 In virtue of this law, Bicardo now goes on to argue, profit 
 must tend to sink steadily with increasing economic cultiva- 
 tion. For in order to obtain means of subsistence for the 
 increasing population, man must resort to conditions of cultiva- 
 tion that are always more and more unfavourable, and the 
 decreasing product, after deduction of the wages of labour, 
 leaves always less and less for profit. True, although the 
 amount of the product diminishes, its value does not fall. 
 For, according to Bicardo's well-known law, the value of 
 products is at all times regulated by the quantity of labour 
 employed in their production. Therefore if, at a later point 
 of time, the labour of ten men brings forward only 150 quarters 
 of corn, while at an earlier period it had brought forward 180, 
 the 150 quarters will now have exactly the same value as the 
 180 before had, because in both is embodied the same 
 quantity of labour that is, the labour of ten men over a year. 
 But now of course the value of the single quarter of wheat 
 will rise. With it necessarily rises the amount of value which 
 the worker requires for his. subsistence, and, as a further result, 
 his wages must also rise. But if, for the same amount of value 
 which the lessened quantity of product represents, a higher 
 wage must be paid to labour, there naturally remains over a 
 less amount for profit. 
 
 Were man finally to extend cultivation to lands so un- 
 fruitful that the product obtainable was entirely required for 
 the labourers' subsistence, profit would fall to zero. That 
 is, however, impossible, because the expectation of profit is the 
 one motive to the accumulation of capital, and this motive
 
 CHAP, v RICARDO 91 
 
 becomes weakened with the gradual lowering of profit ; so 
 that, before zero is reached, the further accumulation of 
 capital, and with it the advance of wealth and of population, 
 would come to a standstill. 
 
 The competition of capitalists, on which Adam Smith lays 
 so much weight, can, according to Eicardo, only temporarily 
 lower the profit of capital, when (in accordance with the well- 
 known wage fund theory) the increased quantity of capital 
 at first raises wages. But very soon the labouring population 
 increases in proportion to the increased demand for labour, and 
 wages tend to sink to the former level while profit tends to 
 rise. The only thing that will finally reduce profit is when the 
 means of support necessary for the increased population can be 
 obtained only by the cultivation of less productive lands and 
 at increased cost; and when, in consequence, the diminished 
 product leaves a smaller surplus after paying the necessary 
 wages of labour. This will not be in consequence of com- 
 petition, but in consequence of the necessity of having recourse 
 to less fruitful production. Only from time to time does the 
 tendency of profit to sink with progressive economical develop- 
 ment experience a check through improvements in agricultural 
 technique, which allow of equal quantities of product being 
 obtained with less labour than before. 
 
 If we take the substance of this theory we find that 
 Eicardo explains the rate of profit from the rate of wages ; the 
 rate of wages is the cause, the rate of profit the effect. 1 
 
 Criticism may approach this theory from different sides. 
 It has, it need scarcely be said, no validity whatever for those 
 who, like Pierstorff, hold Ricardo's rent theory to be fundament- 
 ally untrue. Further, that portion of the argument which rests 
 on the wage fund theory will be exposed to all the objections 
 raised to that theory. I shall put on one side, however, all 
 those objections which relate to assumptions outside the in- 
 terest theory, and direct my criticism simply to the theory itself. 
 
 1 Ricardo puts the same causal relation very strongly in chap. i. 4, 
 when he gives the height of the "value of labour" as a secondary cause of the 
 value of goods, in addition to the quantity of labour expended in the production, 
 having in his eye the influence exerted on the value of goods by the capitalist's 
 claims to profit. The height of profit is to him only a dependent, secondary 
 cause, in place of which he prefers to put the final cause of the whole relation, 
 and this final cause he finds in the varying height of wages.
 
 92 THE COLOURLESS THEORIES BOOK i 
 
 I ask, therefore, Assuming the correctness of the rent 
 theory and of the wage fund theory, is the rate of profit, or, 
 for that matter, the existence of profit, explained by Eicardo's 
 theory ? 
 
 The answer will be in the negative, and that because 
 Eicardo has mistaken what are simply accompanying circum- 
 stances of the phenomenon for its cause. The matter stands 
 thus. 
 
 It is quite right to say that wage, profit, and return of 
 production do, after deduction of possible land -rent, stand 
 in an iron connection. It is quite right to say that the profit 
 of capital can never amount to more, and never to less, than 
 the difference between return and wage. But it is false to 
 interpret this connection as implying that the amount of the 
 return and the amount of the wage are the determining, and 
 the amount of profit simply the determined. Just as plausibly 
 as Eicardo has explained the rate of profit as a result of the 
 rate of wages might he have explained the rate of wages 
 as a result of the rate of profit. He has not done so because 
 he rightly recognised that the rate of wages rests on inde- 
 pendent grounds, and grounds peculiar to the factor, labour. 
 But what Eicardo recognised in the case of wages he has 
 overlooked in the case of profit. Profit, too, has grounds that 
 determine its amount arising out of circumstances peculiar to 
 itself. Capital does not simply take what remains over ; it 
 knows how to exact its own proper share. Now an efficient 
 explanation of profit would have to bring into prominence 
 just those considerations that appear on the side of the factor 
 " capital," and prevent the absorption of profit by wages just 
 as effectually as, e.g. the labourer's necessary subsistence 
 prevents the absorption of wages by interest. But Eicardo 
 entirely fails to give this prominence to the specific grounds 
 that determine the rate of interest. 
 
 Only once does he notice the existence of any such 
 grounds, when he remarks that profit can never sink to zero, 
 because, if it did so, the motive for the accumulation of capital, 
 and with it the accumulation of capital itself, would come to an 
 end. 1 But this thought, which, logically expanded, might have 
 afforded material for a really original theory of interest, he 
 
 1 Chap. vi. p. 67 and passim.
 
 CHAP, v RICARDO 93 
 
 does not follow up. He continues to look for the circumstances 
 that determine the rate of profit exclusively in the field of the 
 competing factors ; and he assiduously points out, as its decisive 
 causes, sometimes the rate of wages, sometimes the degree of 
 productivity of the most unproductive labour, sometimes even 
 in a way that breathes of the physiocrat, but still is in 
 harmony with the whole doctrine just expounded the natural 
 fruitfulness of the soil. 1 
 
 This criticism of Eicardo appears of course to be itself 
 exposed to a very obvious objection. If, as we have assumed 
 with Eicardo in the whole course of our argument, wage 
 claims for itself an absolutely determined quantity, the amount 
 of the costs of subsistence, it appears as if, at the same time, 
 the amount which remains over for profit is so strictly deter- 
 mined that there is no room for the working of any inde- 
 pendent motives on the side of profit. Say, e.g. that the 
 return to production ready for division is 100 quarters. If 
 the workers occupied in producing these 100 quarters require 
 80 quarters, the share of capital is certainly fixed at 20 
 quarters, and could not be altered by any motive acting from 
 the side of capital. 
 
 This objection, which is conceivable, will not, however, 
 stand examination. 'For, to keep entirely to Eicardo's line of 
 thought, the return which the least productive labour yields 
 is not fixed but elastic, and is capable of being affected by 
 any peremptory claims of capital and of labour. Just as 
 effectually as the claims of the worker may and do prevent 
 cultivation being extended to a point at which labour does not 
 obtain even its own costs of subsistence, may the claims of 
 capital prevent an excessive extension of the limits of culti- 
 vation, and actually do prevent it. For instance, suppose 
 that these motives to which interest, generally speaking, owes 
 its origin, and which Eicardo unfortunately does so little to 
 explain, demand for a capital of definite amount a profit of 
 30 quarters, and that the workers employed by this capital 
 need for their subsistence in all 80 quarters; then cultivation 
 will require to call a halt at that point where the labour of so 
 many men as can live on 80 quarters produces 110 quarters. 
 Were the " motives of accumulation " to demand only a profit 
 
 1 Cbap. vi. towards end, p. 70.
 
 94 THE COLOURLESS THEORIES BOOK i 
 
 of 10 quarters, then cultivation could be extended till such 
 time as the least productive labour would produce 90 quarters. 
 But the cultivation of land less productive than this will 
 always be economically impossible, and at the same time the 
 limit to the further increase of population will be for the 
 moment reached. 1 
 
 That the claims of capital may exert this limiting influence 
 Eicardo himself allows, as we have seen, in the very extreme 
 case where profit threatens to disappear altogether. But 
 naturally those circumstances to which capital owes its ex- 
 istence in general put forth their energies not only in the very 
 extreme cases, but permanently. They do not simply prevent 
 the entire disappearance of profit ; they keep it constantly in 
 competition with the other factors, and help to determine its 
 amount. So that profit no less than wages may be said to 
 rest on independent determining grounds. To have entirely 
 ignored these grounds is the decisive blunder of Ricardo. 
 
 The peculiar nature of this blunder explains also quite 
 naturally the phenomenon that otherwise would be very 
 striking ; that the comprehensive investigations, which so 
 distinguished a thinker as Eicardo devoted to the question of 
 the rate of profit, remain so entirely unfruitful as regards the 
 principal question, the causes of profit. 
 
 (3) Finally, a third group of observations relating to profit 
 is interwoven with Eicardo's views on the value of goods. This 
 is a subject which generally gives its writers opportunity to 
 express themselves directly or indirectly as to the source 
 whence profit comes. Does the capitalist's claim of profit 
 make the exchange value of goods higher than it would other- 
 wise have been, or not ? If it does, profit is paid out of a special 
 " surplus value," without taking anything from those who own 
 the co-operating productive powers; in particular, without 
 taking anything from the wage- worker. If not, it is got at the 
 
 1 The careful reader will easily convince himself that the result remains 
 the same, if we vary the form of the question, and look at the value instead 
 of the amount of the product and wages. In that case, indeed, the value of the 
 return remains fixed (see p. 90), while wages are an elastic quantity, and the 
 proposition expressed in the text, changed only in expression, not in reality, will 
 run thus : cultivation must call a halt at that point where the wages of 
 labour, increased by the increasing costs of cultivation, leaves over to the 
 capitalist from the value of the product no more than enough to satisfy his 
 claims on profit.
 
 CHAP, v RICARDO 95 
 
 expense of the other participants. On this Ricardo also has 
 expressed himself, and his opinion is that an addition is made 
 to the value of goods by the employment of capital ; still he 
 expresses himself in a somewhat cautious way. 
 
 He distinguishes between two different epochs of history. 
 In the first, the primitive epoch when there is very little 
 capital and no private property in land the exchange value 
 of goods is exclusively determined by the quantity of labour 
 expended on them. 1 In the second epoch, to which modern 
 economy belongs, there emerges a modification through the 
 employment of capital. The undertaker -capitalists ask, for 
 the capital employed by them in production, the usual rate of 
 profit, calculated according to the amount of the capital and the 
 length of time during which it is employed. But the amount 
 of capital and the duration of its employment are different in 
 the different branches of production, and the claims of profit 
 differ with them. One branch requires more circulating 
 capital, which quickly reproduces itself in the value of the 
 product ; another requires more fixed capital, and this again of 
 greater or less durability, the rapidity of the reproduction in 
 the value of the products being in inverse ratio to the dura- 
 bility. Now the various claims of profit are equalised by the 
 fact that those goods the production of which has required 
 a comparatively greater share in capital, obtain a relatively 
 higher exchange value. 2 
 
 In this passage one can see that Kicardo decidedly inclines 
 to the view that interest arises out of a special surplus value. 
 But the impression we get that Ricardo held this decided 
 opinion is not a little weakened by certain other passages ; 
 partly by the numerous passages where Ricardo brings profit 
 and wages into connection, and makes the increase of one 
 factor come out of the loss or curtailment of the other ; partly 
 by the previous pure " labour principle " of the primitive 
 epoch of industry, which is inconsistent with that view. It 
 must be said too that he is much more interested and cordial 
 in his exposition of this latter principle than in that of its 
 capitalist modification ; a circumstance which cannot but 
 arouse the suspicion that he considered the original state of 
 things the natural one. In fact, the later socialist writers 
 1 Chap, i 1. a Chap. i. 4, 5.
 
 96 THE COLOURLESS THEORIES BOOK i 
 
 have represented the " labour principle " as Ricardo's real 
 opinion, and the capitalist modification which he conceded 
 as simply an illogical conclusion. 1 
 
 Thus also on the question whence profit comes we see 
 Ricardo take an undecided position ; not hesitating so markedly 
 as his master, Adam Smith, but undecided enough to warrant 
 his retention in the ranks of the Colourless theorists. 
 
 Ricardo's great contemporary, Malthus, has not expressed 
 himself much more distinctly than Ricardo on the subject of 
 interest. Yet there are certain expressions in his writings 
 which allow us to separate him from the entirely Colourless 
 writers, and class him among the Productivity theorists. 
 
 The epithet colourless applies, however, with peculiar 
 appropriateness to Torrens. 2 This diffuse and short -sighted 
 writer brings forward his views on the subject of interest 
 for the most part in the course of an argument against the 
 theory which Malthus had promulgated shortly before, that 
 profit forms a Constituent portion of the costs of production, 
 and therefore of the natural price of goods. In opposition to 
 this Torrens, with perfect correctness, but at intolerable length, 
 points out that profit represents a surplus over costs, not a part 
 of costs. He himself, however, has nothing better to put in 
 place of Malthus's theory. 
 
 He makes a distinction between Market price and Natural 
 price. Natural price is " that which we must give in order to 
 obtain the article we want from the great warehouse of nature, 
 and is the same thing as the cost of production" (p. 50) ; by 
 which expression Torrens means " the amount of capital, or the 
 quantity of accumulated labour expended in production" (p. 34). 
 Market price and natural price in no way tend, as is usually 
 affirmed, to a common leveL For profit never makes any part 
 of the expense of production, and is not therefore an element 
 of natural price. But " market price must always include the 
 customary rate of profit for the time being, otherwise industry' 
 would be suspended. Hence market price, instead of equalising 
 itself with natural price, will exceed it by the customary rate 
 of profit." 
 
 1 So also Bernhardi, Kritik der Griinde, etc., 1849, p. 310, etc. 
 2 An Essay on the Production of Wealth, London, 1821.
 
 CHAP, v TORRENS 97 
 
 Torrens has thus eliminated profit from the determinants 
 of natural price, and put it instead among the determinants of 
 market price. This change, it is easy to see, is purely formal. 
 It rests simply on the use of a different terminology. The 
 economists whom he attacked had meant that profit is a 
 determinant of the height of the average price of goods, 
 and had called this average or permanent price "natural 
 price." Torrens means exactly the same thing ; only he calls 
 the permanent price the "market price," and reserves the 
 name of natural price for what is not a price at all, namely, 
 the capital expended in production. 
 
 As to what really is the chief question Why the actual 
 prices of goods, whether they are called natural or market 
 prices, leave over a profit to capital? Torrens has almost nothing 
 to say. He evidently considers profit to be a thing so self- 
 explanatory that any detailed explanation of it is quite un- 
 necessary. He contents himself with a few unsatisfactory 
 formulas, formulas, moreover, which contradict each other, 
 as they point to lines of thought that are entirely distinct. 
 One of these formulas is the often recurring observation that 
 the capitalist must make a profit, otherwise he would have 
 no inducement to accumulate capital, or lay it out in any 
 productive undertaking (pp. 53, 392). Another, pointing in 
 quite a different direction, is that profit is a " new creation " 
 produced by the employment of capital (pp. 51, 54). But 
 how it is created we are not told ; he gives us a formula, not 
 a theory. 
 
 But no member of the English school has been so un- 
 happy in his treatment of the subject, and has done such ill 
 service to the theory of interest, as M'Culloch. 1 He comes 
 near quite a number of diverging opinions, but only gets deep 
 enough in them to fall into flagrant, self-contradiction ; he does 
 not expand any one of them sufficiently to form a theory that 
 even approaches consistency. We find only one exception to 
 this ; but the theory which is there advanced is the most absurd 
 that could possibly occur to any thinker. Even this, however, 
 in later editions of his work he abandons, although not without 
 allowing traces of it to remain and contrast equally with facts 
 
 1 Principles of Political Economy, first edition, Edinburgh, 1825; fifth edition 
 1864. 
 
 H
 
 98 THE COLOURLESS THEORIES BOOK i 
 
 and with the context. Thus M'Culloch's utterances on the 
 subject are one great collection of incompleteness, irrationality, 
 and inconsistency. 
 
 Since, however, M'Culloch's views have obtained extensive 
 circulation, and command a certain respect, I cannot shirk 
 the somewhat thankless task of justifying these strictures. 
 
 M'Culloch starts with the proposition that labour is the 
 only source of wealth. The value of goods is determined by 
 the quantity of labour required for their production. This he 
 considers true not only of primitive conditions, but also of 
 modern economic life, where capital, as well as direct labour, 
 is employed in production ; for capital itself is nothing else 
 than the product of previous labour. It is only necessary to 
 add to the labour which is embedded in the capital the labour 
 immediately expended, and the sum of these determines the 
 value of all products. 1 Consequently it is labour alone, even 
 in modern economic life, which constitutes the entire cost of 
 production. 2 
 
 But only a few lines before this definition of costs as 
 " identical with the quantity of labour," M'Culloch has in- 
 cluded profit, as well as labour, among the costs ; 3 and almost 
 immediately after he has said that the quantity of labour alone 
 determines value, he shows how a rise in the wages of labour, 
 associated with a fall in profit, alters the exchange value of 
 goods, raising the value of those goods in the production 
 of which capital of less than average durability is employed, 
 and reducing the value of those goods in the production of 
 which capital of more than average durability is employed. 4 
 
 And, again, M'Culloch has no scruple in defining profit as 
 an " excess of produce," as a " surplus," as " the portion of the 
 
 1 Pp. 61, 205, 289 of first edition ; fifth edition, pp. 6, 276. 
 
 - "The cost of producing commodities is, as will be afterwards shown, 
 identical with the quantity of labour required to produce them and bring them to 
 market " (first edition, p. 250). Almost in the same words in fifth edition, p. 
 250 : " The cost or real value of commodities is, as already seen, determined by 
 the quantity of labour," etc. 
 
 3 " But it is quite obvious that if any commodity were brought to market 
 and exchanged for a greater amount, either of other commodities or of money, 
 than was required to defray the cost of its production, including in that cost 
 the common and average rate of net profit at the time," etc. (first edition, p. 
 249 ; fifth edition, p. 250). 
 
 4 First edition, p. 298 ; fifth edition, p. 283.
 
 CHAP, v KTCULLOCH 99 
 
 produce of industry accruing to the capitalists after all the 
 produce expended by them is fully replaced," in short, as a 
 surplus pure and simple, although not long before he had 
 pronounced it a constituent part of the costs. Here are almost 
 as many contradictions as propositions ! 
 
 Nevertheless M'Culloch is at great pains, at least in the 
 first edition of his Principles, to appear logical. To this end 
 he avails himself of a theory by which he traces profit to 
 labour. Profits are, as he emphasises with italics on p. 291 
 of his first edition, " only another name for the wages of ac- 
 cumulated labour." By this explanation he contrives to bring 
 all those cases where profit exerts an influence on value under 
 the law he has just enunciated, that the value of all goods is 
 determined by labour. We shall see how he carries this out. 
 
 " Suppose," he says, " to illustrate the principle, that a cask 
 of new wine, which cost 5 0, is put into a cellar, and that at 
 the end of twelve months it is worth 55, the question is, 
 Whether ought the 5 of additional value, given to the wine, 
 to be considered as a compensation for the time the 5 worth 
 of capital has been locked up, or ought it to be considered as 
 the value of additional labour actually laid out on the wine ? " 
 M'Culloch concludes for the latter view, " for this most satis- 
 factory and conclusive reason," that the additional value only 
 takes place in the case of an immature wine, " on which, there- 
 fore, a change or effect is to be produced," and not in the case of 
 a wine which has already arrived at maturity. This seems 
 to him "to prove incontrovertibly that the additional value 
 acquired by the wine during the period it has been kept in 
 the cellar is not a compensation or return for time, but for the 
 effect or change that has been produced on it Time cannot 
 of itself produce any effect ; it merely affords space for really 
 efficient causes to operate, and it is therefore clear it can have 
 nothing to do with value." l 
 
 In these words M'Culloch, with almost startling naivety, 
 concludes his demonstration. He seems to have no suspicion 
 that, between what he wished to show and what he has shown, 
 there is a very great difference. What he had to show was 
 that the additional value was caused by an addition of labour, 
 of human activity ; what he has shown at most is, that the 
 
 1 First edition, p. 313.
 
 100 THE COLOURLESS THEORIES BOOK i 
 
 additional value was not given by time, but by some kind of 
 " change " in the wine. , But that this change itself was 
 effected by an addition of labour is not only not shown, but 
 by hypothesis could not be shown ; for during the whole inter- 
 vening time the wine lay untouched in the cellar. 
 
 He himself appears, however, to be sensible, to some small 
 extent, of the weakness of this first demonstration ; for, " still 
 better to illustrate this proposition," he adds example to 
 example, although it must be said that, the more clear and 
 exact these are meant to be as demonstrations of his thesis, the 
 more obscure and impossible they actually are. 
 
 In the next illustration he supposes the case of an 
 individual who has two capitals, "one consisting of 1000 
 worth of new wine, and the other consisting of 900 worth of 
 leather, and 100 worth of money. Suppose now that the 
 wine is put into a cellar, and that the 100 is paid to a shoe- 
 maker, who is employed to convert the leather into shoes. At 
 the end of a year this capitalist will have two equivalent values 
 perhaps 1100 worth of wine and 1100 worth of shoes." 
 Therefore, concludes M'Culloch, the two cases are parallel, 
 and " both shoes and wine are the result of equal quantities 
 of labour." l 
 
 Without doubt ! But does this show what M'Culloch 
 meant to show that the additional value of the wine was 
 the result of human labour expended on it ? Not in the 
 lenst The two cases are parallel ; but they are parallel also 
 in this, that each of them includes an increment in value of 
 100, which is not explained by M'Culloch. The leather 
 was worth 900. The 100 of money were exchanged 
 for labour of equals value ; and this labour, one would think, 
 added 100 in value to the raw material. Therefore the 
 total product, the shoes, should be worth 1000. But they 
 are worth 1100. Whence comes the surplus value ? Surely 
 not from the labour of the shoemaker ! For in that case the 
 shoemaker, who was paid 100 in wages, would have added 
 to the leather a surplus value of 200, and the capitalist, in 
 this branch of his business, would have obtained a profit of 
 fully 100 per cent, which is contrary to hypothesis. Whence 
 then comes the surplus value ? M'Culioch gives no explana- 
 
 1 Pp. 313-315.
 
 THAP. v M'CULLOCH 101 
 
 tion in the case of the leather, and still less, therefore, in the 
 case of the wine, which was to have been explained by 
 analogy with the leather. 
 
 But M'Culloch is indefatigable. " The case of timber," 
 he says, " affords a still better example. Let us suppose 
 that a tree which is now worth 25 or 30 was planted 
 a hundred years ago at an expense of one shilling; it may 
 be easily shown that the present value of the tree is owing 
 entirely to the quantity of labour laid out on it. A tree 
 is at once a piece of timber and a machine for manufac- 
 turing timber ; and though the original cost of this machine 
 be but small, yet, as it is not liable to waste or decay, the 
 capital vested in it will, at the end of a distant period, have 
 operated a considerable effect, or, in other words, will have 
 produced a considerable value. If we suppose that a machine, 
 which cost only one shilling, had been invented a hundred 
 years since ; that this machine was indestructible, and con- 
 sequently required no repairs ; and that it had all the while 
 been employed in the weaving of a quantity of yarn, gratuit- 
 ously produced by nature, which was only now finished, this 
 cloth might now be worth 25 or 30. But, whatever value 
 it may be possessed of, it is evident (!) it must have derived 
 it entirely from the continued agency of the machine, or, in 
 other words, from the quantity of labour expended on its 
 production" (p. 317). 
 
 That is to say, a tree has cost a couple of hours' labour, 
 worth a single shilling. At the present moment the same 
 tree, without other human labour being expended on it 
 in the interval, is worth not one shilling, but 25 or 30. 
 And M'Culloch does n-t bring this forward as disproving, but 
 as proving the proposition that the value of goods invariably 
 adapts itself to the quantity of labour which their production 
 has cost ! Any further commentary is superfluous. 1 
 
 1 It would to some extent modify this judgment of M'Culloch if we could 
 assume that, in the above argument, he has used the word Labour in that vague 
 and confused sense in which he uses it later (note 1 to his edition of Adam 
 Smith, Edinburgh, 1863, p. 435) as meaning "every kind of activity," not only 
 that exerted by men, but that of animals, machines, and natural powers. Of 
 course by such a watering down of its fundamental conception his theory of 
 value would be stripped of every peculiar characteristic, and reduced to an idle 
 play upon words ; but at least he might be spared the reproach of logical 
 nonsense. However, he cannot be allowed the benefit even of this small modifi-
 
 102 THE COLOURLESS THEORIES BOOK i 
 
 In later editions of his Principles M'Culloch has dropped 
 all these impossible illustrations of the proposition that profit is 
 wage of labour. In the corresponding passage in the fifth edition 
 (pp. 292-294) he mentions the illustration of the wine, which 
 evidently causes him a certain amount of perplexity ; but he 
 contents himself with the negative statement that the surplus 
 value is not produced by the activity of natural powers, as 
 natural powers work gratuitously. The only positive statement 
 he makes is, that the increment of value is a " result of the 
 profit " which accrues to the capital required for carrying on 
 the process ; but he does not explain the nature of that profit. 
 On p. 277, however, the proposition that profit is only another 
 name for the " wages of anterior labour," remains unaltered. 
 
 I may conclude this criticism by quoting an expression 
 of M'Culloch, which will illustrate his untrustworthiness in 
 matters of theory. 
 
 To add to the chaos of his incoherent opinions, in one 
 place he takes Adam Smith's old self-interest argument, 1 and 
 as if not content with the confusion prevailing in his theory 
 of interest, and anxious to throw his tolerably clear theory of 
 wages into the same confusion, he pronounces the labourer 
 himself to be a capital, a machine, and calls his wages a 
 profit of capital in addition to a sum for wear and tear of the 
 " machine called man ! " 2 
 
 Passing by another set of writers like Whately, Jones, and 
 Chalmers, who contribute nothing of great consequence to our 
 subject, we come to M'Leod. 3 
 
 This eccentric writer is remarkable for the naivety with 
 which he treats the interest problem, not only in his earlier 
 work of 1858, but in his later work of 1872, although in the 
 
 cation. For M'Culloch expresses himself too often, and too decidedly, to the 
 effect that interest is to be traced to the human labour employed in the production 
 of capital. Thus, e.g. in note 1 on p. 22 of his edition of Adam Smith, where he 
 explains interest to be the wage of that labour which has been originally expended 
 in the formation of capital, and where obviously the "labour" of the machine 
 itself cannot possibly be understood ; and, particularly, in the passage (Principles, 
 fifth edition, pp. 292-294) where, in regard to the illustration of the wine, he 
 expressly declares that its surplus value is not produced by the powers of 
 nature as these work gratuitously. 
 
 1 First edition, p. 221, in note ; and similarly fifth edition, p., 240, at end. 
 
 - First edition, p. 319 ; second edition, p. 354 ; fifth edition, pp. 294, 295. 
 
 3 Elements of Political Economy, London, 1858 ; Principles of Economical 
 Philosophy, second edition, London, 1872.
 
 CHAP, v M 1 LEOD 103 
 
 fourteen years that intervened the problem had very greatly 
 developed. For M'Leod there is absolutely no problem. 
 Profit is simply a self-explanatory and necessary fact. The 
 price of commodities sold, the hire of concrete capital lent, 
 the interest on sums of money borrowed, " must," over and 
 above costs, deterioration, and premium on risk, contain the 
 "necessary" profit. 1 Why they should do so is not once 
 asked, even in the most superficial way. 
 
 If on one occasion M'Leod describes the origin of loan 
 interest, the immediate circumstances of the illustration in 
 which he does so are selected in such a way that the obtaining 
 of an " increase " from the capital lent admits of being re- 
 presented as a natural self - intelligible thing, requiring no 
 explanation. He makes the capitalist lend seed and sheep, 2 
 but even where the capital lent is one that does not consist of 
 naturally fruitful objects, he considers the emergence of an 
 increase as equally self-explanatory. That any one should 
 think otherwise that any one should even doubt the justifi- 
 ability of profit, he appears, in spite of the wide dissemination 
 of socialistic ideas in his time, to have no suspicion. To him 
 it is perfectly clear that " when a man employs his own capital 
 in trade he is entitled to retain for his own use all the profit 
 resulting from such operations, whether these profits be 20 per 
 cent, 100 per cent, or 1000 per cent ; and if any one of 
 superior powers of invention were to employ his capital in 
 producing a machine, he might realise immense profits and 
 accumulate a splendid fortune, and no one in the ordinary 
 possession of their senses would grudge it him." J 
 
 At the same time M'Leod plays the severe critic on other 
 interest theories. He rejects the doctrine that profit is a 
 constituent of the costs of production.* He controverts 
 Pdcardo's statement that the height of profit is limited by 
 the height of wages. 5 He condemns alike M'Culloch's strange 
 Labour theory and Senior's acute Abstinence theory. 6 And yet 
 these critical attacks never seem to have suggested to him one 
 single view which might be put in place of the opinions he 
 rejects. 
 
 1 Elements, pp. ~6, 77, 81, 202, 226, etc. - Ibid. p. 62. 
 
 J Ibid. p. 216. 4 Economical Philosophy, i. p. 638. 
 
 , p. 145 6 E m^.niccol Philosophy, i. p. 634 ; ii. p. 62.
 
 104 THE COLOURLESS THEORIES BOOK i 
 
 This appears to me due to two peculiarities of his doctrine. 
 The first of these lies in the extraordinary vagueness of his 
 conception of capital. Capital, in its original and primary 
 sense, he takes to mean " circulating power." It is only in a 
 " secondary and metaphorical sense " that it is applied to 
 commodities. But when so applied it embraces things so 
 incongruous as tools and commodities, skill, capacities, educa- 
 tion, land, and good character, 1 a collection which, we must 
 admit, makes it difficult to class the incomes that flow from all 
 those different kinds of things under one category, and explain 
 them by one definite theory. The second of these peculiarities 
 is the exaggerated opinion he entertains of the theoretical 
 value of the formula of supply and demand to explain the 
 various phenomena of price. When he has succeeded in 
 tracing back any phenomenon of value whatever to the 
 relation of supply and demand, or, as he likes to express it in 
 his own terminology, to the relation between "the intensity 
 of the service performed and the power of the buyer over 
 the seller," he thinks that he has done enough. And thus, 
 perhaps, he really thought it sufficient to say of interest on 
 capital: "All value arises exclusively from demand, and all 
 profit originates in the value of a commodity exceeding its 
 costs of production." 2 
 
 While in Germany and England there were a good many 
 prominent writers who, for some considerable time, took an 
 undecided attitude on the interest problem, we have only a 
 few Colourless writers to record in the literature of France. 
 The principal reason of this difference is that in France J. 
 B. Say, who was one of the first to take up Adam Smith's 
 doctrine, had already propounded a definite theory of interest, 
 and popularised it simultaneously with Adam Smith's doctrine ; 
 while in Germany and England Adam Smith himself, and after 
 him Ricardo, remained for a long time at the head of the 
 general development of economic literature ; and both of these, 
 as we know, neglected the interest problem. 
 
 From French literature of that period there are, then, only 
 three names which need be mentioned, two of them before the 
 date of J. B. Say Germain Gamier, Canard, and Droz. 
 
 1 Elements, pp. 66, 69. 
 
 2 Principles of Economical Philosophy, iL p. 66.
 
 CHAP, v GARNIER, CANARD 105 
 
 Garnier, 1 still half entangled in the doctrine of the physio- 
 crats, like them asserts the earth to be the only source of all 
 wealth, and labour the instrument by which men obtain it from 
 this source (p. 9). Capital he identifies with the "advances" 
 that the undertaker must make, and profit he defines as the 
 indemnification which he receives for these advances (p. 35). 
 In one place he designates it with more significance as the 
 " indemnification for a ' privation and a risk." He nowhere, 
 however, goes any deeper into the matter. 
 
 To indicate Canard's 2 derivation of interest I must shortly 
 refer to the general principles of his doctrine. 
 
 In the labour of man Canard sees the means to his support 
 and development. One portion of human labour must be spent 
 simply in the support of man ; that Canard calls " necessary 
 labour." But happily the whole labour of man is not necessary 
 for this ; the remainder, " superfluous labour," may be employed 
 in the production of goods which go beyond the immediately 
 necessary, and create for their producer a claim to get, by way 
 of exchange, the command of just as much labour as the 
 production of these goods has cost. Labour is thus the source 
 of all exchange value ; goods which have value in exchange 
 are nothing else than accumulation of superfluous labour. 
 
 It is the possibility of accumulating superfluous labour that 
 humanity has to thank for all economic progress. Through 
 such accumulation lands are made fruitful, machines built, and, 
 generally speaking, all the thousand and one means obtained 
 which serve to increase the product of human labour. 
 
 Now the accumulation of superfluous labour is also the 
 source of all rents. It may yield these rents by being 
 employed in any of three ways. First, in manuring and im- 
 proving the land ; the net return arising from this is land- 
 rent (rente fonci&re). Second, in the acquisition of personal 
 skill, learning of an art or a handicraft ; the skilled labour 
 (travail appris) which is the result of such an expenditure 
 must, beyond the wage of " natural " labour, yield a rent to 
 that fund which had to be devoted to the acquisition of the 
 knowledge. Finally, all the products of labour that proceed 
 from these first two " sources of rent " must be divided out, so 
 
 1 Abrtgi EUmentaire des Principes de F Economic PolUique, Paris, 1796. 
 
 2 Principes cC Economic Politique, Paris, 1801.
 
 106 THE COLOURLESS THEORIES BOOK i 
 
 as to be employed by individuals in the satisfaction of their 
 wants. This requires that a third class of owners should 
 invest "superfluous labour" in the institutions of commerce. 
 This accumulated labour also must bear a rent, the rente 
 mobiliere, commonly called money interest. 
 
 But as to why labour accumulated in these three forms 
 should bear rent we are told almost nothing by Canard. Land- 
 rent he accepts as a natural fact not requiring explanation. 1 
 In the same way he treats the rente industrielle, contenting 
 himself with saying that " skilled labour " must produce the 
 rent of the capital that has been devoted to the acquisition 
 of knowledge (p. 10). And for the rente mobiliere, our interest 
 on capital, he lays down a proposition which explains nothing, 
 and embellishes it with details evidently intended to accom- 
 pany an explanation. " Commerce, accordingly, like the other 
 two sources of rent, presupposes an accumulation of superfluous 
 labour which must, in consequence, bear a rent " (qui doit par 
 consequent produire une rente), p. 12. But there is nothing 
 whatever to justify this par consequent, unless Canard, perhaps, 
 considers that the bare fact of labour having been accumulated 
 is sufficient ground for its obtaining a rent; and so far he has 
 not said so. He has certainly said that all rents are traceable 
 to accumulated labour, but he has not said that all accumulated 
 labour must bear a rent a proposition which, in any case, is 
 quite different from the other, and would have been a matter 
 for proof as well as assertion. 
 
 If we take an analysis which follows later (p. 13), to 
 the effect that all three kinds of rent must stand equal in 
 importance, then undoubtedly we can make out a certain 
 foundation for interest, although Canard has not put it into 
 words ; a foundation which would agree in essence with 
 Turgot's Fructification theory. If it is a natural fact that 
 capital invested in land bears rent, then all capitals other- 
 wise invested must bear rent, or else everybody would invest 
 in land. But if this be Canard's explanation and it may 
 at least be read between the lines we have already, when 
 
 1 "The earth has only been cultivated bccai se i ; product was able, not o. Ay 
 to compensate the annual labour of cultivation, but also to recompense the 
 advances of labour which its first and original cultivation cost. This superfluity 
 it is which forms the rent of land " (p. 5).
 
 CHAP, v CANARD, DROZ 107 
 
 speaking of Turgot, shown its insufficiency as the sole ex- 
 planation. 
 
 Droz, who writes some thirty years later (Economie Poli- 
 tique, Paris, 1829), has to choose between the English view, 
 according to which labour is the sole productive power, and 
 the theory of Say, in which capital represents an independent 
 productive power. In each of these views, however, he finds 
 something to object to, and accepts neither of them, but puts 
 forward a third view, in which saving (Vtpargne) takes the 
 place of capital as an elementary productive power. He thus 
 recognises three productive powers : the Labour of Nature, 
 the Labour of Man, and the Saving which accumulates capitals 
 (p. 69, etc.) 
 
 If Droz had followed this line of thought, belonging 
 primarily to the theory of production, into the sphere of dis- 
 tribution, and made use of it to examine accurately the nature 
 of income, he would have arrived at a distinctive theory of 
 interest. But he did not go far enough for that. In his 
 distribution theory he devotes almost all his tttention to 
 contract or loan interest, where there is not much to explain, 
 and in a few words disposes of natural interest, where there is 
 everything to explain. In these few words he gives himself 
 no chance of going any deeper into the nature of interest by 
 treating it as interest on loans which the capitalist pays to 
 himself (p. 267). Thus Droz, in introducing the productive 
 power of " saving," begins well, but all the same he doeb not 
 escape from the category of the Colourless writers.
 
 CHAPTEE I 
 
 THE PRODUCTIVE POWER OF CAPITAL 
 
 SOME of the immediate successors of Adam Smith began to 
 explain interest by the Productive Power of capital. J. B. 
 Say led the way in 1803. A year after Lord Lauderdale fol- 
 lowed, but independently of Say. The new explanation found 
 acceptance. It was taken up> by gradually widening circles of 
 economists, and worked out by them with greater care ; in 
 course of which it became divided into several branches 
 marked by considerable divergence. Although attacked in 
 many ways, chiefly from the socialist side, the Productivity 
 theory has managed to hold its own. Indeed, at the present 
 time the majority of such writers as are not entirely opposed 
 to interest, acquiesce in one or other modification of this theory. 
 The idea that capital produces its own interest, whether 
 true or false, seems at least to be clear and simple. It might 
 be expected, therefore, that the theories built on this funda- 
 mental idea would be marked by a peculiar definiteness and 
 transparency in their arguments. In this expectation, how- 
 ever, we should be completely disappointed. Unhappily the 
 most important conceptions connected with the Productivity 
 theories suffer in an unusual degree from indistinctness and 
 ambiguity; and this has been the abundant source of obscurity, - 
 mistakes, confusion, and fallacious conclusions of every kind. 
 These occur so frequently that it would be unwise to let the 
 reader meet them without some preparation. Once embarked 
 on a sea of individual statements, it would be impossible to 
 find our reckoning. It seems then necessary to mark out 
 distinctly, in a few introductory remarks, the ground we mean 
 to cover in stating and criticising these theories.
 
 112 THE PRODUCTIVE POWER OF CAPITAL BOOK n 
 
 Two things here seem to stand particularly in need of 
 clear statement. First, the meaning, or, more properly, the 
 complex of meanings of the expression Productivity or Produc- 
 tive Power of capital ; and second, the nature of the theoretic 
 task assigned by these theories to this productivity. 
 
 First, What is meant by saying, Capital is productive ? 
 
 In its most common and weakest sense the expression 
 may be taken to mean no more than this, that capital serves 
 towards the production of goods, in opposition to the im- 
 mediate satisfaction of needs. The predicate "productive," 
 then, would only be applied to capital in the same sense as, 
 in the usual classification of goods, we speak of " productive 
 goods," in opposition to "goods for immediate consumption" 
 (Genussgiiter). Indeed the smallest degree of productive 
 effect would warrant the conferring of that predicate, even 
 if the product should not attain to the value of the capital 
 expended in making it. It is clear from the first that a pro- 
 ductive power in this sense cannot possibly be the sufficient 
 cause of interest. 
 
 The adherents of those theories, then, must ascribe a 
 stronger meaning to the term. Expressly or tacitly they 
 understand it as meaning that, by the aid of capital, more is 
 produced ; that capital is the cause of a particular productive 
 surplus result. 
 
 But this meaning also is subdivided. The words "to 
 produce more" or "a productive surplus result" may mean 
 one of two things. They may either mean that capital pro- 
 duces more goods or more value, and these are in no way 
 identical. To keep the two as distinct in name as they are 
 in fact, I shall designate the capacity of capital to produce 
 more goods as its " Physical Productivity " ; its capacity to pro- 
 duce more value as its " Value Productivity." It is perhaps 
 not unnecessary to say that, at the present stage, I leave it 
 q\iite an open question whether capital actually possesses such 
 capacities or not. I only mention the different meanings 
 which may be given, and have been given, to the proposition 
 " capital is productive." 
 
 Physical productivity manifests itself in an increased 
 quantity of products, or, it may be, in an improved quality of 
 products. We may illustrate it by the well-known example
 
 CHAP, i CAPITAL IS PRODUCTIVE 113 
 
 given by Roscher: "Suppose a nation of fisher-folk, with, no 
 private ownership in land and no capital, dweDing naked in 
 caves, and living on fish caught by the hand in pools left by 
 the ebbing tide. All the workers here may be supposed 
 equal, and each man catches and eats three fish per day. But 
 now one prudent man limits his consumption to two fish per 
 day for 100 days, lays up in this way a stock of 100 
 fish, and makes use of this stock to enable him to apply 
 his whole labour-power to the making of a boat and net. By 
 the aid of this capital he catches from the first perhaps thirty 
 fish a day." l 
 
 Here the Physical Productivity of capital is manifested 
 in the fact that the fisher, by the aid of capital, catches more 
 fish than he would otherwise have caught thirty instead of 
 three. Or, to put it quite correctly, a number somewhat 
 under thirty. For the thirty fish which are now caught in a 
 day are the result of more than one day's work. To calculate 
 properly, we must add to the labour of catching fish a quota 
 of the labour that was given to the making of boat and net. 
 If, e.g. fifty days of labour have been required to make the 
 boat and net, and the boat and net last for 100 days, then 
 the 3000 fish which are caught in the 100 days appear 
 as the result of 150 days' labour. The surplus of products, 
 then, due to the employment of capital is represented for the 
 whole period by 3000 -(150x3) = 3000 450 = 2550 fish, 
 and for each single day by ^f^f 3 = 17 fish. In this 
 surplus of products is manifested the physical productivity of 
 capital. 
 
 Now how would the Value Productivity of capital be 
 manifested ? The expression " to produce more value," in its 
 turn, is ambiguous, because the " more " may be measured by 
 various standards. It may mean that, by the aid of capital, 
 an amount of value is produced which is greater than the 
 amount of value that could be produced without the aid of 
 capital. To use our illustration : it may mean that the 
 twenty fish caught in a day's labour by the aid of capital 
 are of more value than the three fish which were got when no 
 capital was employed. But the expression may also mean 
 that, by the aid of capital, an amount of value is produced 
 
 1 Grundlagen der National- Oekonomie, tenth edition, 189. 
 I
 
 114 THE PRODU'CTIVE POWER OF CAPITAL BOOK n 
 
 which is greater than the value of the capital itself ; in other 
 words, that the capital gives a productive return greater 
 than its own value, so that there remains a. surplus value 
 over and above the value of the capital consumed in the 
 production. To put it in terms of our illustration : the fisher 
 equipped with boat and net in 100 days catches 2700 fish 
 more than he would have caught without boat and net. 
 These 2700 fish, consequently, are shown to be the (gross) 
 return to the employment of capital. And, according to the 
 present reading of the expression, these 2700 fish are of more 
 value than the boat and net themselves ; so that after boat and 
 net are worn out there still remains a surplus of value. 
 
 Of these two possible meanings those writers who ascribe 
 value productivity to capital have usually the latter in their 
 mind. When, therefore, I use the expression "value produc- 
 tivity" without any qualification, I shall mean by it the 
 capacity of capital to produce a surplus of value over its own 
 value. 
 
 Thus for the apparently simple proposition that " capital 
 is productive" we have found no less than four meanings 
 clearly distinguishable from each other. To get a satisfactory 
 conspectus let me place them once more in order. 
 
 The proposition may signify four things : 
 
 1. Capital has the capacity of serving towards the pro- 
 duction of goods. 
 
 2. Capital has the power of serving towards the production 
 of more goods than could be produced without it. 
 
 3. Capital has the power of serving towards the production 
 of more value than could be produced without it. 
 
 4. Capital has the power of producing more value than it 
 has in itself. 1 
 
 1 It would be very easy to extend the above list. Thus physical produc- 
 tivity might be shown to contain two varieties. The first, the only one con- 
 sidered in the text, is where the capitalist process of production on the whole 
 (that is, the preparatory production of the capital itself, and the production 
 by the aid of the capital when made) has led to the production of more goods. 
 But it may also happen that the first phase of the total process, the formation of 
 capital, shows so large a deficit that the total capitalist production ends by 
 showing no surplus ; while, all the same, the second phase taken by itself, the 
 production by aid of the capital, produces a surplus in goods. Suppose, c. g. that 
 the boat and net which last 100 days had required 2000 days for their production, 
 then the fisher would receive for the use of boat and net which have cost in all
 
 CHAP, i CAPITAL IS PRODUCTIVE 115 
 
 It does not require to be said in so many words that ideas 
 so different, even if they should chance to be called by the 
 same name, should not be identified, still less substituted for 
 one another in the course of argument. It should be self- 
 evident, e.g. that, if one has proved that, speaking generally, 
 capital has a capacity to serve towards the production of goods, 
 or towards the production of more goods, he is not on that 
 account warranted in holding it as proved that there is a 
 power in capital to produce more value than could have been 
 produced otherwise, or to .produce more value than the 
 capital itself has. To substitute the latter conception for the 
 former in the course of argument would evidently have the 
 character of begging the question. However unnecessary this 
 reminder should be, it must be given ; because, as we shall 
 see, among the Productivity theorists nothing is more common 
 than the arbitrary confusing of these conceptions. 
 
 To come now to the second point, of which at this 
 introductory stage I am very anxious to give a clear state- 
 ment, the nature of the task assigned to the productive 
 power of capital by the theories in question. 
 
 This task may be very simply described in the words ; 
 the Productivity theories propose to explain interest by the 
 productive power of capital. But in these simple words lie 
 many meanings which deserve more exact consideration. 
 
 The subject of explanation is Interest on capital. Since 
 there is no question that contract interest (loan interest) is 
 founded in essential respects on natural interest, and can be 
 easily dealt with in a secondary explanation, if this natural 
 
 2100 days of labour, only 100x30 = 3000 fish, while with the hand alone he 
 could have caught in the same time 2100 x 30 = 6300 fish. On the other hand, 
 if we look at the second phase by itself, then the capital, now in existence, 
 of course shows itself " productive" ; with its help in 300 days the fisher catches 
 3000 fish ; without its help, only 300. If, on that account, we speak, even in 
 this case, of a productive surplus result, and of a productive power of capital as, 
 in fact, we usually do it is not without justification ; only the expression has 
 quite a different and a much weaker meaning. Further, with the recognition of 
 the productive power of capital is often bound up the additional meaning, that 
 capital is an independent productive power ; not only the proximate cause of a 
 productive effect, traceable in the last resort to the labour which produced the 
 capital, but an element entirely independent of labour. . . . I have intentionally 
 not gone into these varieties in the text, as I do not wish to burden the reader 
 with distinctions of which, in the meantime at least, I do not intend to make any 
 use.
 
 116 THE PRODUCTIVE POWER OF CAPITAL BOOK n 
 
 interest first be satisfactorily explained, the subject of explana- 
 tion may be further limited to Natural Interest on capital 
 
 The facts about natural interest may be shortly described 
 as follows. 
 
 Wherever capital is employed in production, experience 
 shows that, in the normal course of things, the return, or 
 share in the return, which the capital creates for its owner, 
 has a greater value than the sum of the objects of capital 
 consumed in obtaining it. 
 
 This phenomenon appears both in those comparatively 
 rare cases where capital alone has been concerned in the 
 obtaining of a return, as, e.g. when new wine, by lying in 
 store, becomes changed into matured and better wine, and in 
 the much more common cases where capital co-operates with 
 other factors of production, land and labour. For sufficient 
 reasons that do not concern us here, men engaged in economic 
 pursuits are accustomed to divide out the total product into 
 separate shares, although it is made by undivided co-operation. 
 To capital is ascribed one share as, its specific return; one 
 share to nature as produce of the> ground, produce of mines, 
 etc. ; one share, finally, to the labour that co-operates, as product 
 of labour. 1 Now experience shows that that quota of the total 
 product which falls to the share of capital that is, the gross 
 return to capital is, as a rule, of more value than the capital 
 expended in its attainment. Hence an excess of value a 
 " surplus value " which remains in the hands of the owner of 
 the capital, and constitutes Jiis natural interest. 
 
 The theorist, then, who professes to explain interest must 
 explain the emergence of Surplus Value. The problem, more 
 
 1 Whether the shares allotted, in practical economic life, to tho individual 
 factors in production exactly correspond to the quota which each of them has 
 produced in the total production, is a much disputed question that I cannot 
 prejudge meantime. I hare, on that account, chosen to use in the text modes 
 of expression that do not commit me to any view. Moreover it is to be noted 
 that the phenomenon of surplus value takes place, not only between individual 
 shares in the return as thus allotted, and the sources of return that correspond 
 to them, but also, on the whole, between the goods brought forward and the 
 goods that bring them forward. The totality of the means of production em- 
 ployed in- making a product labour, capital, and use of land has, as a rule, a 
 smaller exchange value than the product has when finished a circumstance that 
 makes it difficult to trace the phenomenon of "surplus value" to mere relations 
 of allotment inside the return.
 
 CHAP, i SURPLUS VALUE 117 
 
 exactly stated, will therefore run thus : Why is the gross return 
 to capital invariably of more value than the portions of capital 
 consumed in its attainment ? Or, in other words, Why is there 
 a constant difference in value between the capital expended 
 and its return ? l To take a step farther. 
 
 This difference in value the Productivity theories think to 
 explain, and ought to explain, by the productive power of 
 capital. 
 
 By the word " explain " I mean that they must show the 
 productive power of capital to be the entirely sufficient cause 
 of surplus value, and not merely name it as one condition 
 among other unexplained conditions. To show that, without 
 the productive power of capital, there could be no surplus 
 value, does not explain surplus value any more than it would 
 explain land-rent if we showed that, without the fruitfulness 
 of the soil, there could be no land -rent; or than it would 
 explain rain if we showed that water could not fall to the 
 ground without the action of gravity. 
 
 If surplus value is to be explained by the productive 
 power of capital, it is necessary to prove or show in capital a 
 productive power of such a kind that it is capable, either by 
 itself or in conjunction with other factors (in which latter 
 case the other factors must equally be included in the ex- 
 planation), of being the entirely sufficient cause of the exist- 
 ence of surplus value. 
 
 It is conceivable that this condition might be fulfilled in 
 any of three ways. 
 
 1. If it were proved or made evident that capital possesses 
 in itself a power which directly makes for the creating of value, 
 a power through which capital is. able, as it were, to breathe 
 value like an economic soul into those goods which it assists, 
 physically speaking, to make. This :s value productivity in 
 the most literal and emphatic sense that could possibly be 
 given it. 
 
 2. If it were proved or made evident that capital by its 
 services helps towards the obtaining of more goods, or more 
 useful goods; and if, at the same time, it was immediately 
 evident that the more goods, or the better goods, must also be 
 
 1 On the putting of the problem see my Rcchte und Verhaltnisse, Innsbruck, 
 1881, p. 107, etc.
 
 113 THE PRODUCTIVE POWER OF CAPITAL BOOK n 
 
 of more value than the capital consumed in their production. 
 This is physical productivity with surplus value as a self- 
 explanatory result. 
 
 3. If it were proved or shown that capital by its services 
 helps towards the obtaining of more goods, or more useful 
 goods ; and if, at the same time, it were expressly proved that 
 the more goods, or the better goods, must also be of more 
 value than the capital consumed in their production, and why 
 they should be of more value. This is physical productivity 
 with surplus value expressly accounted for. 
 
 These are, in my opinion, the only modes in which the 
 productive power of capital can be taken as sufficient foundation 
 for surplus value. Any appeal to that productive power 
 outside these three modes can, in the nature of the case, 
 have no explanatory force whatever. If, e.g. appeal is made 
 to the physical productivity of capital, but if it is neither 
 shown to be self-evident, nor expressly proved, that a surplus 
 value accompanies the increased amount of goods, such a pro- 
 ductive power would evidently not be an adequate cause of 
 surplus value. 
 
 The historical development of the actual productivity 
 theories is not behind the above abstract schem'e of possible 
 productivity theories in point of variety. Each of the possible 
 types of explanation has found its representative in economical 
 history. The great internal differences that exist between 
 separate typical developments strongly suggest that, for pur- 
 poses of statement and criticism, we should arrange the pro- 
 ductivity theories in groups. The grouping will be based on 
 our scheme, but will not follow it quite closely. Those 
 productivity theories which follow the first two types have 
 so much in common that they may conveniently be treated 
 together ; while, within the third type, we find such important 
 differences that a further division seems to be required. 
 
 1. Those productivity theories which claim for capital a 
 direct value-producing power (first type), as well as those which 
 start from the physical productivity of capital, but believe that 
 the phenomenon of surplus value is self- evidently and neces- 
 sarily bound up with it (second type), agree in this, that they 
 derive surplus value immediately, and without explanatory 
 middle term, from the asserted productive power. They
 
 CHAP, i THREE ACTUAL THEORIES 119 
 
 simply state that capital is productive ; adding, perhaps, a very 
 superficial description of its productive efficiency, and hastily 
 conclude by placing surplus value to the account of the 
 asserted productive power. I shall group these together under 
 the name of the Naive Productivity theories. The paucity 
 of argument, which is one of their characteristics, is in many 
 cases such that it is not even clear whether the author belongs 
 to the first or the second type one more reason for grouping 
 tendencies that merge into one another under one historical 
 consideration. 
 
 2. Those theories which take their starting-point in the 
 physical productivity of capital, but do not regard it as self- 
 evident that quantity of products should be bound up with 
 surplus in value, and accordingly consider it necessary to 
 pursue their explanation into the sphere of value, I shall 
 call the Indirect Productivity theories. They are distinguished 
 by the fact that, to the assertion and illustration of the pro- 
 ductive power of capital, they add a more or less successful 
 line of argument to prove that this productive power must 
 lead (and why it must lead) to the existence of a surplus 
 value which falls to the capitalist. 
 
 3. From these latter, finally, branches off a group of 
 theories which, like the others, connect themselves with 
 physical productivity, but lay the emphasis of their explana- 
 tion on the independent existence, efficiency, and sacrifice of 
 the uses of capital. These I shall call the Use theories. In 
 the productive power of capital they do certainly see a condition 
 of surplus value, but not the principal cause of its existence. 
 As then they do not altogether merit the name of productivity 
 theories, I prefer to treat them separately, and devote to them 
 a separate chapter.
 
 CHAPTER II 
 
 THE NAIVE PRODUCTIVITY THEORIES 
 
 THE founder of the Naive Productivity theories is J. B. Say. 
 
 It is one of the most unsatisfactory parts of our task to 
 state what are Say's views on the origin of interest. He is a 
 master of polished and rounded sentences, and understands 
 very well how to give all the appearance of clearness to his 
 thoughts. But, as a matter of fact, he entirely fails to give 
 definite and sharp expression to these thoughts, and the 
 scattered observations which contain his interest theory 
 exhibit, unfortunately, no trifling amount of contradiction. 
 
 After careful consideration it seems to me impossible to 
 interpret these observations as the outcome of one theory, which 
 the writer had in his mind. Say hesitates between two theories ; 
 he makes neither of them particularly clear ; but all the same 
 the two are distinguishable. One of them is essentially a 
 Naive Productivity theory ; the other contains the first germs 
 of the Use theories. Thus, notwithstanding the obscurity of 
 his views, Say takes a prominent position in the history of 
 interest theories. He forms a kind of node from which spring 
 two of the most important theoretical branches of our subject. 
 
 Of Say's two chief works, the TraiU d' Economic Politique 1 
 and the Cours Complet d' Economic Politique Pratique, 2 it is on the 
 former that we must rely almost exclusively for a statement of 
 his views. The Cours Complet avoids suggestive expressions 
 almost entirely. 
 
 According to Say all goods come into existence through 
 the co-operation of three factors nature (agents naturels), 
 
 1 Published 1803. I quote from the seventh edition, Paris. Guillaumin and 
 Co., 1861. 2 Paris, 1828-29.
 
 CHAP, ii /. B. SA Y 1*21 
 
 capital, and human labour power (faeultt industri&lle). 
 These factors appear as the productive funds from which all 
 the wealth of a nation springs, and constitute its fortune} 
 Goods, however, do not come into existence directly from these 
 funds. Each fund produces, first of all, productive services, 
 and from these services come the actual products. 
 
 The productive services consist in an activity (action) or 
 labour (travail) of the fund. The industrial fund renders its 
 services through the labour of the producing man ; nature 
 renders hers through the activity of natural powers, the work 
 of the soil, the air, the water, the sun, etc. 2 But when we 
 come to the productive services of capital, and ask how they 
 are to be represented, the answer is less distinctly given. On 
 one occasion in the Traitthe says vaguely enough : " It (capital) 
 must, so to speak, work along with human activity, and it is 
 this co-operation that I call the productive service of capital." 3 
 He promises, at the same time, to give a more exact exposi- 
 tion later on of the productive working of capital, but in 
 fulfilling this promise he limits himself to describing the 
 transformations which capital undergoes in production. 4 Nor 
 does the Cours Complet give any satisfactory idea of the labour 
 of capital. It simply says, capital is set to work when one 
 employs it in productive operations (On fait travailler un 
 capital lorsqu'un I'emploie dans des operations productifs), i. p. 
 239. We learn only indirectly, from the comparisons he 
 is continually drawing, that Say thinks of the labour of capital 
 as being entirely of the same nature as the labour of man and 
 of natural powers. We shall soon see the evil results of 
 the vague manner in which Say applies the ambiguous word 
 " service " to the co-operation of capital. 
 
 There are certain natural agents that do not become private 
 property, and these render their productive services gratuitously 
 the sea, wind, physical and chemical changes of matter, etc. 
 The services of the other factors human labour-power, capital, 
 and appropriated natural agents (especially land) must be 
 purchased from the persons who own them. The payment 
 comes out of the value of the goods produced by these services, 
 and this value is divided out among all those who have 
 
 1 Cours, i. p. 234, etc. 2 TraiU, p. 68, etc. 
 
 Book i. iii. p. 67. 4 Book i. chap. x.
 
 122 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 co-operated in its production by contributing tbe productive 
 services of their respective funds. The proportion in which 
 this value is divided out is determined entirely by the relation 
 of the supply of and demand for the several kinds of services. 
 The function of distributing is performed by the undertaker, 
 who buys the services necessary to the production, and pays 
 for them according to the state of the market. In this way 
 the ' productive services receive a value, and this value is to 
 be clearly distinguished from the value of the fund itself out 
 of which they come. 1 
 
 Now these services form the true income (rdvenu) of their 
 owners. They are what a fund actually yields to its owner. 
 If he sells them, or, by way of production, changes them into 
 products, it is only a change of form undergone by the income. 
 
 But all income is of three kinds, corresponding to the 
 triplicity of the productive services; it is partly income of 
 labour, (profit de Vindiistrie), partly land-rent (profit du fonds 
 de terre), partly profit on capital (profit or rtfvenu du capital). 
 Between all three branches of income the analogy is as com- 
 plete as it is between the different categories of productive 
 service. 2 Each represents the price of a productive service, 
 which the undertaker uses to create a product. 
 
 In this Say has given a very plausible explanation of 
 profit. Capital renders productive services ; the owner must 
 be paid for these; the payment is profit. This plausibility 
 is still further heightened by Say's favourite method of sup- 
 porting his argument by the obvious comparison of interest 
 with wage. Capital works just as man does ; its labour must 
 receive its reward just as man's labour does ; interest on 
 capital is a faithful copy of wages for labour. 
 
 When we go deeper, however, the difficulties begin, and 
 also the contradictions. 
 
 If the productive services of capital are to be paid by an 
 amount of value taken out of the value of the product, it is 
 above all necessary that there be an amount of value in the 
 product available for that purpose. The question immediately 
 forces itself on us and it is a question to which in any case 
 the interest theory is bound to give a decisive answer Why 
 is there always that amount of value ? To put it concretely, 
 
 1 Traitt, pp. 72, 343, etc. 2 Cours, iv. p. 64.
 
 CHAP, ii SAY 12 J 
 
 Where capital has co-operated in the making of a product, 
 why does that product normally possess so much value that, 
 after the other co-operating productive services, labour and use 
 of land, are paid for at the market price, there remains over 
 enough value to pay for the services of capital enough, 
 indeed, to pay these services in direct proportion to the amount 
 and the duration of the employment of capital ? 
 
 Suppose a commodity requires for its production labour 
 and use of laud to the value of 100, and suppose that it 
 takes so long to make the commodity that the capital advanced 
 to purchase those services (in this case 100) is not re- 
 placed for a year, why is the commodity worth, not 100, but 
 more say 105 ? And suppose another commodity has cost 
 exactly the same amount for labour and use of land, but takes 
 twice as long to make, why is it worth, not 100, nor 105, 
 but 110 that being the sum with which it is possible 
 adequately to pay for the productive services of the 100 of 
 capital over two years ? l 
 
 It will be easily seen that this is a way of putting the 
 question of surplus value accommodated to Say's theory, and 
 that it goes to the very heart of the interest problem. So far 
 as Say has yet gone, the real problem has not been even 
 touched, and we have yet to find what his solution is. 
 
 When we ask what ground Say gives for the existence of 
 this surplus value, we find that he does not express himself 
 with the distinctness one could wish. His remarks may be 
 divided into two groups, pretty sharply opposed to each other. 
 
 In one group Say ascribes to capital a direct power of 
 .creating value ; value exists because capital has created it, 
 and the productive services of capital are remunerated because 
 the surplus value necessary for this purpose is created. Here, 
 then, the payment for the productive services of capital is the 
 result of the existence of surplus value. 
 
 In the second group Say exactly transposes the causal 
 relation, by representing the payment of the services of capital 
 as the cause, as the reason for the existence of surplus value. 
 Products have value because, and only Because, the owners of 
 
 1 In this illustration, besides the expenditure for labour and use of land, I 
 do not introduce any separate expenditure for substance of capital consumed, 
 because, according to Say, that entirely resolves itself into expenditure for 
 elementary productive services.
 
 124 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 the productive services irom which they come obtain payment ; 
 and products have a value high enough to leave over a profit 
 for capital, because the co-operation of capital is not to be had 
 for nothing. 
 
 Omitting the numerous passages where Say speaks in 
 a general way of a facultt productive and a pouvoir productif 
 of capital, there falls within the first group a controversial 
 note in the fourth chapter of the first book of his Traitt 
 (p. 71). He has been arguing against Adam Smith, who, he 
 says, has mistaken the productive power of capital when 
 he ascribes the value created by means of capital to the labour 
 by which capital itself was originally produced. Take the 
 case of an oil mill. " Smith is mistaken," he says. " The 
 product of this preceding labour is, if you will, the value of 
 the mill itself; but the value that is daily produced by the 
 mill is another and a quite new value ; just in the same way 
 as the rented use of a piece of ground is a separate value from 
 that of the piece of ground itself, and is a value which may 
 be consumed without diminishing the value of the ground." 
 And then he goes on : " If capital had not in itself a pro- 
 ductive power, independent of the labour that has created it, 
 how could it be that a capital, to all eternity, produces an 
 income independent of the profit of the industrial activity 
 which employs it ? " Capital, therefore, creates value, and its 
 capability of doing so is the cause of profit. Similarly in 
 another place : " The capital employed pays the services 
 rendered, and the services rendered produce the value which 
 replaces the capital employed." * 
 
 In the second group I place first an expression which does 
 not indeed directly refer to profit, but must by analogy be 
 applied to it. " Those natural powers," says Say, " which are 
 susceptible of appropriation become productive funds of value 
 because they do not give their co-operation without payment." 2 
 Further, he constantly makes the price of products depend 
 on the height of the remuneration paid to the productive 
 services which have co-operated in their making. " A product 
 will therefore be dearer just in proportion as its production 
 requires, not only more productive services, but productive 
 services that are more highly compensated. . . . The more 
 
 1 Book ii. chap. viii. 2, p. 395, note 1. 2 Book i. chap. iv. at end.
 
 CHAP, ii SA Y 125 
 
 lively the need that the consumers feel for the enjoyment of 
 the product, the more abuudait the means of payment they 
 possess ; and the higher the compensation that the sellers are 
 able to demand for the productive services, the higher will go 
 the price." l 
 
 Finally, there is a decided expression of opinion in the 
 beginning of the eighth chapter of book ii. on the subject 
 of profit. " The impossibility of obtaining a product without 
 the co-operation of a capital compels the consumers to pay for 
 that product a price sufficient to allow the undertaker, who 
 takes on himself the work of producing, to buy the services of 
 that necessary instrument." This is in direct contradiction to 
 the passage first quoted, where the payment of the capitalist 
 was explained by the existence of the surplus value " created," 
 for here the existence of the surplus value is explained by 
 the unavoidable payment of the capitalist. It is in harmony 
 with this latter conception, too, that Say conceives of profit 
 as a constituent of the costs of production. 2 
 
 Contradictions like these are the perfectly natural result 
 of the uncertainty shown by Say in his whole theory of value. 
 He falls into Adam Smith and Ricardo's theory of costs quite as 
 often as he argues against it. It is very significant of this 
 uncertainty that Say in the passages already quoted (Traite, pp. 
 315, 316) derives the value of products from the value of the 
 services which produce them ; and at another time (Traite, p. 
 338) he does quite the opposite, in deriving the value of the 
 productive funds from the value of the products which are 
 obtained from them (Leur valevr dcs fonds productifs vient 
 done dc la valeur du produit qui pent en sortir), an important 
 passage to which we shall return later. 
 
 What has been said is perhaps sufficient to show that no 
 injustice is done to Say in assuming that he had not himself 
 any clear view as to the ultimate ground of interest, but 
 hesitated between two opinions. According to the one opinion 
 interest comes into existence because capital produces it ; ac- 
 cording to the other, because " productive services of capital " 
 are a constituent of cost, and require compensation. 
 
 Between the two views there is a strong and real antag- 
 onism, stronger than one would perhaps think at first sight. 
 
 1 Book ii. chap. i. p. 315, etc. - Traite, p. 395.
 
 126 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 The one treats the phenomenon of interest as above all a 
 problem of production ; the other treats it as a problem of 
 distribution. The one finishes its explanation by referring 
 simply to a fact of production : capital produces surplus value, 
 therefore there is surplus value, and there is no occasion for 
 further question. The other theory only rests by the way on 
 the co-operation of capital in production, which it of course 
 presupposes. It finds its centre of gravity, however, in the 
 social formations of value aud price. By his first view, Say 
 stands in the rank of the pure Productivity theorists; by 
 his second he opens the series of the very interesting and 
 important Use theories. 
 
 Following the plan of statement indicated, I pass over 
 Say's Use theory in the meantime, to consider the development 
 taken by the Naive Productivity theory after him. 
 
 Of development in the strict sense of the word we need 
 scarcely speak. The most conspicuous feature of the Naive 
 Productivity theories is the silence in which they pass over 
 the causal relation between the productive power of capital 
 and its asserted effect, the " surplus value " of products. 
 Thus there is no substance to develop, and the historical 
 course of these theories, therefore, is nothing but a somewhat 
 monotonous series of variations on the simple idea that capital 
 produces surplus value. No true development is to be looked 
 for till the succeeding stage that of the Indirect Productivity 
 theories. 
 
 The Naive Productivity theory has found most of its ad- 
 herents in Germany, and a few in France and Italy. The 
 English economists whose bent does not seem favourable, 
 generally speaking, to the theory of productivity, and who, 
 moreover, possessed an Indirect Productivity theory ever since 
 the time of Lord Lauderdale, have entirely passed over the 
 naive phase. 
 
 In Germany Say's catchword, the productivity of capital, 
 quickly won acceptance. Although, in the first instance, no 
 systematic interest theory was founded on it, it soon became 
 customary to recognise capital as a third and independent 
 factor in production, alongside of nature and labour, and to 
 put the three branches of income rent of land, wages of
 
 CHAP, ii SCHON, RIEDEL 127 
 
 labour, and interest on capital in explanatory connection 
 with the three factors of production. A few writers who do 
 so in an undecided kind of wayv and add ideas taken from 
 theories which trace interest to a different origin, have been 
 already mentioned in the chapter on the Colourless theories. 
 
 But it was not long before Say's conception was applied with 
 more definiteness to the explanation of interest. The first to do 
 so was Schon. 1 The explanation he gives is very short. He 
 first claims for capital, in fairly modest words, the character of 
 being a "third and distinct source of wealth, although an 
 indirect source" (p. 47). But at the same time he considers it 
 proved and evident that capital must produce a "rent." For 
 " the produce belongs originally to those who co-operated 
 towards its making" (p. 82), and "it is clear that the national 
 produce must set aside as many distinct rents as there are 
 categories of productive powers and instruments" (p. 87). 
 Any further proof is, very characteristically, not considered 
 necessary. Even the opportunity he gets when attacking 
 Adam Smith does not draw from him any more detailed reason- 
 ing for his own view. He contents himself with blaming 
 Adam Smith, in general terms, for only considering the im- 
 mediate workers as taking part in production, and overlooking 
 the productive character of capital and land an oversight 
 which led him into the mistake of thinking that the rent of 
 capital has its cause in a curtailment of the wages of labour 
 (p. 85). 
 
 Eiedel gives the new doctrine with more detail and with 
 greater distinctness. 2 He devotes to its statement a special 
 paragraph to which he gives the title " Productivity of Capital," 
 and in the course of this he expresses himself as follows : " The 
 productivity which capital when employed universally possesses 
 is manifest on observation of the fact that material values 
 which have been employed, with a view to production, in 
 aiding nature and labour, are, as a rule, not only replaced, but 
 assist towards a surplus of material values, which surplus could 
 not be brought into existence without them. . . . The product 
 of capital is to be regarded as that which in any case results 
 from an employment of capital towards the origination of 
 
 1 Neue Untcrsiichung dcr National-Ockonomie, Stuttgart and Tubingen, 1835. 
 2 Nativnal-Oekonomie odcr Volkswirthschaft, 1838.
 
 128 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 material values, after deduction of the value of that assistance 
 which nature and labour afford to the employment of capital. . . . 
 It is always incorrect to ascribe the product of capital to the 
 working forces of nature or labour which the capital needs in 
 order that it may be employed. Capital is an independent 
 force, as nature and labour are, and in most cases does not 
 need them more than they need it" (i. 366). 
 
 It is very significant that in this passage Eiedel finds the 
 productive power of capital "manifest on observation" of 
 excess of value. In his view it is so self-evident that surplus 
 value and productive power belong inseparably to each other, 
 that from the fact of surplus value he argues back to the 
 productive power of capital as its only conceivable cause. We 
 need not, therefore, be surprised that Eiedel considers that 
 the existence of natural interest is amply accounted for when 
 he simply mentions the catchword, " productivity of capital," 
 and does not give any accurate explanation of it. 
 
 But the writer who has done more than any other to 
 popularise the Productivity theory in Germany is Wilhelm 
 Roscher. 
 
 This distinguished economist, whose most signal merits do 
 not, I admit, lie in the sphere of acute theoretical research, 
 has unfortunately given but little care to the systematic 
 working out of the doctrine of interest. This shows itself, 
 even on the surface, in many remarkable misconceptions and 
 incongruities. Thus in 179 of his great. work 1 he defines 
 interest as the price of the uses of capital, although evidently 
 this definition only applies to contract and not to " natural " 
 interest, which latter, however, Eoscher in the same paragraph 
 calls a kind of interest on capital. Thus also in 148 he 
 explains that the original amount of all branches of income 
 " evidently " determines the contract amount of the same ; 
 therefore also the amount of the natural interest on capital 
 determines the amount of the contract interest. Notwithstand- 
 ing this, in 183, when discussing the height of the interest 
 rate, he makes its standard not natural interest but loan 
 interest. He makes the price of the uses of capital depend 
 on supply and demand " specially for circulating capitals " ; 
 the demand again depends on the number and solvability 
 
 1 Grundlagen der National-Ockonomie, tenth edition, Stuttgart, 1873.
 
 CHAP, ii ROSCHER 129 
 
 of the borrowers, specially the non- capitalists, such as land- 
 owners and labourers. So that from Koscher's statement it 
 seems as if the height of interest were first determined by 
 the relations of contract interest on the loan market, and then 
 transferred to natural interest, in virtue of the law of equal- 
 isation of interest over all kinds of employment; while ad- 
 mittedly the very opposite relation holds good. Finally, in 
 the theoretic part of his researches Roscher does not take up 
 the most important question in point of theory, the origin of 
 interest, but touches on it only slightly in his practical sup- 
 plement on the politics of interest, where he discusses its 
 legitimacy. 
 
 To judge by the contents of the following observations, 
 which are a medley of the Naive Productivity theory and of 
 Senior's Abstinence theory, Roscher is an eclectic. In 189 
 he ascribes to capital " real productivity," and in the note to 
 it he praises the Greek expression TO/CO?, the born, as " very 
 appropriate." In a later note he argues warmly against Marx, 
 and his " latest relapse into the old heresy of the non-pro- 
 ductivity of capital"; adducing, as convincing proof of its 
 productivity, such things as the increase in value of cigars, 
 wine, cheese, etc., " which, through simple postponement of 
 consumption, may obtain a considerably higher value both 
 use value and exchange value without the slightest additional 
 labour." In the same paragraph he illustrates this by the 
 well-known example of the fisher who first catches three fish 
 a day by hand, then saves up a stock of 100 fish, makes a 
 boat and net while living on his stock, and thereafter catches 
 thirty fish a day by the assistance of this capital. 
 
 In all these instances Roscher's view evidently amounts to 
 this, that capital directly produces surplus value by its own 
 peculiar productive power ; and he does not trouble himself to 
 look for any intricate explanation of its origin. I cannot, 
 therefore, avoid classing him among the Naive Productivity 
 theorists. 
 
 As already pointed out, however, he has not kept exclu- 
 sively to this view, but has formally and substantially co-ordinated 
 the Abstinence theory with it. He names as a second and 
 " undoubted " foundation of interest the " real sacrifice which 
 resides in abstinence from the personal enjoyment of capital " ; 
 
 K
 
 130 THE NAIVE PRODUCTIVITY THEORIES BOOK H 
 
 he calls special attention to the fact that, in the fixing 
 of the price for the use of the boat, the 150 days' 
 privatiou of the fisherman who saved w-ii.d be a weighty 
 consideration ; and he says that interest might be called a 
 payment for abstinence in the same way as the wage of labour 
 is called a payment for industry. In other respects too there 
 are many ill concealed contradictions. Among other things, 
 it agrees very badly with the productive power of capital 
 which Eoscher assumes to be self-evident, when in 183 he 
 declares the "use value of capital to be in most cases 
 synonymous with the skill of the labourer and the richness of 
 the natural powers which are connected with it" 
 
 Evidently the authority which the respected name of 
 Koscher enjoys among German economists has stood him in 
 good stead with his interest theory. If what I have said be 
 correct, his theory has a very modest claim indeed to the 
 cardinal theoretic virtues of unity, logic, and throughness ; yet 
 it has met with acceptance and imitation in many quarters. 1 
 
 In France Say's Productivity theory obtained as much 
 popularity as in Germany. It became unmistakably the 
 fashionable theory, and even the violent attacks made on it 
 after 1840 by the socialists, especially by Proudhon, did but 
 little to prevent its spread. It is singular, however, that it 
 was seldom accepted simpliciter by the French writers. 
 Almost all. who adopted it added on elements taken from one 
 or even more theories inconsistent with it. This was the case 
 to name only a few of the most influential writers with Rossi 
 and Molinari, with Josef Gamier, and quite lately with 
 Cauwes and Leroy-Beaulieu. 
 
 1 I venture to pass over a goodly number of German writers who since Roscher'a 
 time have simply repeated the doctrine of the productive power of capital, without 
 adding anything to it. Of these Friedrich Kleinwachter may be mentioned as 
 one who has worked at the doctrine, if not with much more success, at least 
 with greater thoroughness and care. See "Beitrag zum Lehre vom Eapital" 
 (Hildebrand's Jahrbucher, vol. ix. 1867, pp. 310-326, 369-421) and his con- 
 tribution to Schonberg's Handbuch. In the same category may be put Schulze- 
 Delitzsch. For his views, which, like Roscher's, are somewhat eclectic, and not 
 free from contradictions, see his Kapitel zu einem Deutschen Arbeiterkatechismus, 
 Leipzig, 1863, p. 24. 
 
 In the German edition of 1884 there are three pages of criticism on Klein- 
 wachter, which, by desire of Professor Bohm-Bawerk, I here omit. W. S.
 
 CHAP, ii LEROY-BEAULIEU, SCIALOJA 131 
 
 Since the Productivity theory experienced no essential 
 change at the hands of these economists, I need not go into 
 any detailed statement of their views, the less so that we shall 
 meet the most prominent of them in a later chapter among the 
 eclectics. I shall mention only one peculiarly strong statement 
 of the last-named writer, for the purpose of showing how 
 great a hold the Productivity theory has in French economics 
 at the present day, in face of all the socialist criticism. In 
 his Essai sur la Repartition des Richesscs, the most important 
 French monograph on the distribution of wealth a book which 
 has passed through two editions within two years Leroy- 
 Beaulieu writes, " Capital begets capital; that is beyond question." 
 And a little later he guards himself against being supposed to 
 mean that capital begets interest only in some legal sense, 
 or through the arbitrariness of laws : " It is so naturally and 
 materially ; in this case laws have only copied nature " (pp. 
 234, 239). 
 
 From the Italian literature of our subject I shall, finally, 
 instead of a number of writers, only mention one ; but his 
 method of treatment, with its simplicity in form and its 
 obscurity in substance, may be taken as typical of the Naive 
 Productivity theory the much read Scialoja. 1 
 
 This writer states that the factors of production, among 
 which he reckons capital (p. 39), share with, or transfer to 
 their products their own " virtual " or " potential " value, 
 which rests on their capacity towards production ; and that, 
 further, the share which each factor takes in the production 
 of value is itself the standard for the division of the product 
 among the co-operating factors. Thus in the distribution 
 each factor receives as much value as it has created ; if, 
 indeed, this share may not be fixed a priori in figures (p. 
 100). In conformity with this idea he then declares natural 
 interest to be that " portion " of the total profit of undertaking 
 " which represents the productive activity of capital during 
 the period of the production " (p. 125). 
 
 In turning now from statement to criticism, I must redis- 
 tinguish between these two branches of the Naive Productivity 
 theory which I put together for convenience of historical 
 
 1 PrincijA della Economia Sociale, Naples, 1840.
 
 132 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 statement. It has been shown that all the views already 
 examined agree in making surplus value result from the pro- 
 ductive power of capital, without showing any reason why 
 it should be so. But, as I have shown in last chapter, 
 beneath this agreement in expression there may lie two 
 essentially different ideas. The productive power of capital 
 referred to may be understood, in the literal sense, as Value 
 Productivity, as a capacity of capital to produce value directly; 
 or it may be understood as Physical Productivity, a capacity 
 of capital to produce a great quantity of goods or a special 
 quality of goods, without further explanation of the existence 
 of surplus value, it being regarded as perfectly self-evident 
 that the great quantity of goods, or the special quality of 
 goods, must contain a surplus of value. 
 
 In stating their doctrine most of the Naive Productivity 
 theorists are so sparing of words that it is more easy to 
 say what they may have thought than what they actually 
 did think ; and often we can only conjecture whether a writer 
 holds the one view or the other. Thus Say's "productive 
 power" equally admits of both interpretations. It is the 
 same with Eiedel's "productivity." Scialoja and Klemwachter 
 seem to incline more to the former; Eoscher, in his illustra- 
 tion of the abundant take of fish, rather to the latter. In 
 any case it is not of much importance to determine which 
 of these views each writer holds : if we submit both views 
 to criticism, each will get his due. 
 
 The Naive Productivity theory, in both its forms, I con- 
 sider very far from satisfying the demands, which we may 
 reasonably make on a theory purporting to be a scientific 
 explanation of interest. 
 
 After the sharp critical attacks that have been directed 
 against it from the side of the socialistic and the "socio- 
 political" school, its inadequacy has been so generally felt, 
 at least in German science, that in undertaking to prove this 
 judgment I am almost afraid I may be thrashing a dead horse. 
 Still it is a duty which I cannot shirk. The theories of 
 which we are speaking have been treated with such a lack 
 of thoroughness and such hastiness of judgment that, as critic, 
 I must at least avoid a similar blunder. But my chief 
 reason is that I mean to attack the Naive Productivity theory
 
 CHAP, ii CRITICISM 133 
 
 with arguments which are essentially different from the argu- 
 ments of socialistic criticism, and seem to me to go more 
 nearly to the heart of the matter. 
 To begin with the first form. 
 
 If we are expected to believe that interest owes its 
 existence to a peculiar power in capital directed to the creating 
 of value, the question must at once force itself upon us, 
 What are the proofs that capital actually possesses such a 
 power? An unproved assurance that it does so certainly 
 cannot offer sufficient foundation for a serious scientific theory. 
 
 If we run through the writings of the Naive Productivity 
 theorists, we shall find in them a great many proofs of a 
 physical productivity, but almost nothing that could be inter- 
 preted as an attempt to prove that there is a direct value- 
 creating power in capital They assert it, but they take no 
 trouble to prove it; unless the fact that the productive em- 
 ployment of capital is regularly followed by a surplus of value 
 be advanced as a kind of empirical proof of the power of 
 capital to produce value. Even this, however, is only men- 
 tioned very cursorily. It is perhaps put most plainly by 
 Say, when, in the passage above quoted, he asks how capital 
 could to all eternity produce an independent income, if it did 
 not possess an independent productive power ; and by Eiedel 
 when he " recognises " the productive power of capital in the 
 existence of surpluses of value. 
 
 Now what is the worth of this empirical proof? Does 
 the fact that capital when employed is regularly followed 
 by the appearance of a surplus in value, actually contain a 
 sufficient proof that capital possesses a power to create value ? 
 
 It is quite certain that it does no such thing ; no more than 
 the fact that, in the mountains during the summer months, a 
 rise of the barometer regularly follows the appearance of snow 
 is a sufficient proof that a magic power resides in the summer 
 snow to force up the quicksilver a naive theory which one 
 may sometimes hear from the lips of the mountaineers. 
 
 The scientific blunder here made is obvious. A mere 
 hypothesis is taken for a proved fact. In both cases there is, 
 first of all, a certain observed connection of two facts, the 
 cause of the facts being still unknown and being object of
 
 134 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 inquiry. There are in both cases a great many conceivable 
 causes for the effect in question. In both cases accordingly 
 a great many hypotheses might be put forward as to the 
 actual cause ; and it is only one among many possible hy- 
 potheses when the rising barometer is accounted for by a 
 specific power of the summer snow, or when the surplus 
 value of products of capital is accounted for by a specific 
 power in capital to create value. And it is all the more 
 a mere hypothesis since nothing is known in other respects as 
 to the existence of the " powers " referred to. They have only 
 been postulated for the purpose of explaining the phenomenon 
 in question. 
 
 But the cases we have compared resemble each other not 
 only in being examples of mere hypotheses, but in being 
 examples of bad hypotheses. The credibility of a hypothesis 
 depends on whether it finds support outside the state of 
 matters which has suggested it; and, particularly, whether 
 it is inherently probable. That this is not the case as regards 
 the naive hypothesis of the mountaineer is well known, and 
 therefore no educated man believes in the story that the rise 
 of the column of quicksilver is caused by a mysterious power 
 of the summer snow. But it is no better with the hypothesis 
 of a value-creating power in capital. On the one hand it is 
 supported by no single fact of importance from any other 
 quarter it is an entirely unaccredited hypothesis ; and, on 
 the other hand, it contradicts the nature of things it is an 
 impossible hypothesis. 
 
 Literally to ascribe to capital a power of producing value 
 is thoroughly to misunderstand the essential nature of value, 
 and thoroughly to misunderstand the essential nature of 
 production. Value is not produced, and cannot be produced. 
 What is produced is never anything but forms, shapes of 
 material, combinations of material ; therefore things, goods. 
 These goods can of course be goods of value, but they do not 
 bring value with them ready made, as something inherent that 
 accompanies production. They always receive it first from out- 
 side from the wants and satisfactions of the economic world. 
 Value grows, not out of the past of goods, but out of their 
 future. It comes, not out of the workshop where goods come 
 iato existence, but out of the wants which those goods will
 
 CHAP, ii CAPITAL DOES NOT CREATE VALUE 135 
 
 satisfy. Value cannot be forged like a hammer, nor woven like 
 a sheet. If it could, our industries would be spared those 
 frightful convulsions we call crises, which have no other 
 cause than that quantities of products, in the manufacture 
 of which no rule of art was omitted, cannot find the value 
 expected. What production ran do is never anything more 
 than to create goods, in the hope that, according to the 
 anticipated relations of demand and supply, they will obtain 
 value. It might be compared to the action of the bleacher. 
 As the bleacher lays his linsn in the sunshine, so production 
 puts forth its activity on things and in places where it may 
 expect to obtain value as its result. But it no more creates 
 value than the bleacher creates the sunshine. 
 
 I do not think it necessary to collect more positive proofs 
 in support of my proposition. It appears to me too self-evident 
 to require them. But it is perhaps well to defend it against 
 some considerations that at first sight but only at first sight 
 seem to run counter to it. 
 
 Thus the familiar fact that the value of goods stands in a 
 certain connection, though not a very close or exact connection, 
 with the cost of their production, may give the impression 
 that the value of goods comes from circumstances of their pro- 
 duction. But it must not be forgotten that this connection 
 only holds under certain assumptions. One of these assump- 
 tions is usually expressly stated in formulating the law that 
 value depends on cost of production; while the other is usually 
 tacitly assumed neither of them having anything at all to do 
 with production. The first assumption is that the goods 
 produced are useful ; and the second is that, as compared with 
 the demand for them, they are scarce, and continue scarce. 
 
 Now that these two circumstances, which stand so 
 modestly in the background of the law of costs, and not the 
 costs themselves, are the real and ruling determinants of value, 
 may be very simply shown by the following. So long as 
 costs are laid out in the production of things which are 
 adequately useful and scarce so long, therefore, as the 
 costs themselves are in harmony with the usefulness and 
 scarcity of the goods so long do they remain in harmony with 
 their value also, and appear to regulate it. On the other 
 hand, so far as costs are laid out on things which are not
 
 136 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 useful enough or scarce enough as, say, in the making of 
 watches which will not go, or the raising of timber in districts 
 where there is naturally a superfluity of wood, or the making 
 more good watches than people want the value no longer 
 covers the costs, and there is not even the appearance of things 
 deriving their value from the circumstances of their production. 
 
 Another plausible objection is this. We produce, it may 
 be, in the first instance, goods only. But since without the 
 production of goods there would be no value, it is evident 
 that in the production of goods we bring value into the world 
 also. When a man produces goods of the value of 1000, it 
 is quite evident that he has occasioned the existence of 1000 
 of value which would never have existed without the pro- 
 duction; and this appears to be a palpable proof of the 
 correctness of the proposition that value also comes into 
 existence through production. 
 
 Certainly this proposition is so far correct, but in a quite 
 different sense from that which is here given it. It is correct 
 in the sense that production is a cause of value. It is not 
 correct in the sense that production is the cause of value 
 that is to say, it is not correct in the sense that the complex 
 of causes entirely sufficient to account for the existence of 
 value is to be found in the circumstances of production. 
 
 Between these two senses lies a very great distinction, 
 which may be better illustrated by an example. If a corn-field 
 is turned up by a steam plough, it is indisputable that the 
 steam plough is one cause of the grain produced, and at the 
 same time is one cause of the value of the grain produced. 
 But it is quite as indisputable that the emergence of value on 
 the part of the grain is very far from being fully explained 
 by saying that the steam plough has produced it. One cause 
 of the existence of the grain, and at the same time of the 
 value of the grain, was certainly the sunshine. But if the 
 question were put why the quarter of corn possessed a value 
 of thirty shillings, would anybody think it an adequate answer 
 to say that the sunshine produced the value ? Or when the old 
 problem is put, whether ideas are innate or acquired, who 
 would decide that they were innate from the argument that, if 
 man were not born there would be no ideas, and that, conse- 
 quently, there is no doubt that birth is the cause of the ideas ?
 
 CHAP, ii NOR DOES LABOUR CREATE VALUE 137 
 
 And now to apply this to our present problem. Our 
 productivity friends are wrong because they over-estimate 
 their claim to be right If they had been content to speak 
 of a value-creating power of capital in the sense that capital 
 supplies one cause of the emergence of value, there would 
 have been nothing to object to. Next to nothing indeed 
 would have been done towards explaining surplus value. 
 It would only be stating explicitly what scarcely required 
 to be stated at all ; and in the nature of things our theorists 
 would have been compelled to go on to explain the other 
 and less obvious part -causes of surplus value. Instead of 
 that, they imagine that they have given the cause of the 
 existence of value. They assume that, in the words, " Capital, 
 in virtue of its productive power, creates value or surplus 
 value," they have given such a conclusive and complete 
 explanation of its existence that no further explanation 
 of any kind is needed, and in this they are grievously mis- 
 taken. 
 
 But from what has been said another important applica- 
 tion may be drawn, and I give it here, although it is not 
 directed against the Productivity theory. What is right for 
 the one must be fair for the other ; and if capital can possess no 
 value-creating power because value is not "created," on the 
 same ground no other element of production, be it land or be 
 it human labour, possesses such a power. This has escaped 
 the notice of that numerous school which directs the sharpest 
 weapons of its criticism against the assumption that land or 
 capital have any value -creating power, only with greater 
 emphasis to claim that very power for labour. 1 
 
 In my opinion those critics have only overturned one idol 
 to set up another in its place. They have fought against one 
 prejudice only to take up a narrower one. The privilege of 
 creating value belongs as little to human labour as to any 
 other factor. Labour, like capital, creates goods, and goods 
 only ; and these goods wait for and obtain their value only 
 from the economical relations which they are meant to serve. 
 The fact that there is a certain amount of legitimate agree- 
 ment between quantity of labour and value of product has 
 
 1 This view is widely accepted even outside the ranks of the Socialists proper. 
 See, e.g. Pierstorff, Lehre vom Unternehmergewinn, p. 22.
 
 138 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 its ground and reason in quite other things than a "value- 
 creating" power in labour; in things which I have already 
 suggested of course in the most cursory way in speaking 
 of the incidental connection of value and costs. Labour does 
 not and cannot give value. 
 
 All these prejudices have been a deplorable hindrance to 
 the development of theory. People were misled by them into 
 settling with the most difficult problems of the science much too 
 easily. If the formation of value was to be explained they 
 followed up the chain of causes a little way often a very little 
 way only to come to a stop at the false and prejudiced 
 decision that capital or labour had created the value. Beyond 
 this point they gave up looking for the true causes, and made 
 no attempt to follow the problem into those depths where we 
 first meet with its peculiar difficulties. 
 
 To turn now to the second interpretation that may be 
 given to the Naive Productivity theory. Here the productive 
 power ascribed to capital is, in the first instance, to be under- 
 stood as Physical Productivity only; that is a capacity of 
 capital to assist in the production of more goods or better 
 goods than could be obtained without its help. But it is 
 assumed as self-evident that the increased product, besides 
 replacing the costs of capital expended, must include a surplus 
 of value. What is the force of this interpretation ? 
 
 I grant at once that capital actually possesses the physi- 
 cal productivity ascribed to it that is to say, by its 
 assistance more goods can actually be produced than without 
 it. 1 I will also grant although here the connection is not 
 quite so binding that the greater amount of goods produced 
 by the help of capital has more value than the smaller 
 amount of goods produced without its help. But there is not 
 one single feature in the whole circumstances to indicate that 
 this greater amount of goods must be worth more than the 
 
 1 I purposely disclaim at this point any inquiry whether the physical 
 productivity of capital thus conceded is an originating power in capital, or 
 whether the productive results attained by the help of capital should not rather 
 be put to the account of those productive powers through which capital itself 
 originates ; particularly to the account of the labour which made the capital. I do 
 this to avoiu diverting the discussion from that sphere where alone, in my opinion, 
 the interest problem can be adequately solved, that of the theory of value.
 
 CHAP, ii NOR DOES LABOUR CREATE VALUE 139 
 
 capital consumed in its production, and it is this phenomenon 
 of surplus value we have to explain. 
 
 To put it in terms of Eoscher's familiar illustration, I at 
 once admit and understand that, with the assistance of a boat and 
 net, one may catch thirty fish a day, where without this capital 
 one would only have caught three. I admit and understand, 
 further, that the thirty fish are of more value than the three 
 were. But that the thirty fish must be worth more than 
 the proportion of boat and net worn out in catching them, is 
 an assumption which, far from being self-evident, we are not 
 in the least prepared for by the presuppositions of the case. 
 If we did not know from experience that the value of the 
 return to capital was regularly greater than the value of the 
 substance of capital consumed, the Naive Productivity theory 
 would not give us one single reason for looking on this as 
 necessary. It might very well be quite otherwise. Why 
 should a concrete capital that yields a great return not be 
 highly valued on that account so highly that its capital 
 value would be equal to the value of the abundant return 
 that flows from it ? Why, e.g. should a boat and net which, 
 during the time that they last, help to procure an extra return 
 of 2700 fish, not be considered exactly equal in value to these 
 2700 fish? But in that case in all physical productivity 
 there would be no surplus value. 
 
 It is remarkable that, in certain of the most prominent 
 representatives of the Naive Productivity theory, there are to 
 be found statements which would lead us to expect such a 
 result, viz. the absence of a surplus value. Some of our authors 
 directly teach that the value of real capital has a tendency to 
 adapt itself to the value of its product. Thus Say writes 
 (Traitt, p. 338) that the value of the, productive funds springs 
 from the value of the product which may come from them. 
 Eiedel in 91 of his National-Oekonomie lays down in detail 
 the proposition that " the value of means of production " 
 therefore the value of concrete portions of capital- " depends 
 substantially on their productive ability, or on a capacity 
 assured them, in the unchanging principles of production, to 
 perform a greater or less service in the producing of material 
 values." And Koscher says in 149 of the Principles : 
 " Moreover land has this in. common with other means of
 
 140 THE NAIVE PRODUCTIVITY THEORIES BOOK n 
 
 production that its price is essentially conditioned by that of 
 its product." 
 
 What then, if, in accordance with these views, the value of 
 real capital accommodates itself entirely to the value of the 
 product, and becomes quite equal to it ? And why should it 
 not ? But in that case where would be the surplus value ? l 
 
 If then surplus value be actually bound up with the 
 physical productivity of capital, the fact is certainly not self- 
 evident ; and a theory which, without a word of explanation, 
 takes that as self-evident has not done what we expect of 
 a theory. 
 
 To sum up. Whichever of the two meanings we give to 
 the expression "productive power," the Naive Productivity theory 
 breaks down. If it asserts a direct value-creating power in 
 capital, it asserts what is impossible. There is no power in any 
 element of production to infuse value immediately or necessarily 
 into its products. A factor of production can never be an ad-j 
 equate source of value. Wherever value makes its appearance 
 it has its ultimate cause in the relations of human needs and 
 satisfactions. Any tenable explanation of interest must go 
 back to this ultimate source. But the hypothesis of value- 
 creating power is an attempt to evade this last and most 
 difficult part of the explanation by a quite untenable assump- 
 tion. 
 
 If, however, the writers we are discussing understand by 
 productivity, merely physical productivity, then they are mis- 
 taken in treating surplus value as an accompanying phenomenon 
 that requires no explanation. In assuming that it is self- 
 explanatory, and contributing no proof to the assumption, their 
 theory leaves out the most important and difficult part of the 
 explanation. 
 
 It is, however, very easy to understand the strong adher- 
 ence given to the Naive Productivity theory in spite of these 
 defects. It is impossible to deny that at the first glance there 
 is something exceedingly plausible about it. It is undeniable 
 that capital helps to produce, and helps to produce "more." 
 At the same time we know that, at the end of every production 
 
 1 See also on this point myRechte und Verhdltnisse, p. 104, etc. ; and particularly 
 pp. 107-109.
 
 CHAP, ii FAILURE OF THE EXPLANATION HI 
 
 in which capital takes part, there remains over a " surplus " 
 to the undertaker, and that the amount of this surplus bears a 
 regular proportion to the amount of capital expended, and to 
 the duration of its expenditure. In these circumstances noth- 
 ing really is more natural than to connect the existence of this 
 surplus with the productive power that resides in capital. It 
 would have been wonderful indeed if the Productivity theory 
 had not been put forward. 
 
 How long one remains under the influence of this theory 
 depends on how soon one begins to reflect critically on the 
 meaning of the word " productive." So long as one does not 
 reflect, the theory appears to be an exact representation of facts. 
 It is a theory which, one might say with Leroy-Beaulieu, " N'a 
 fait ici que copier la nature." But when one does reflect, this 
 same theory shows itself to be a web of dialectical sophistry, 
 woven by the misuse of that ambiguous term, "Productive 
 Surplus Result " of capital. 
 
 That is why the Naive Productivity theory is, I might say, 
 the predestinated interest theory of a primitive and half- 
 matured condition of the science. But it is also predestinated 
 to disappear so soon as the science ceases to be "naive." That 
 up till the present day it is so widely accepted is not a matter 
 on which modern political economy has any reason to con- 
 gratulate itself.
 
 CHAPTER III 
 
 THE INDIRECT PRODUCTIVITY THEORIES 
 
 THE Indirect 1 Productivity theories agree with the Naive theories 
 in placing the ultimate ground of interest in a productive power 
 of capital But in the working out of this fundamental idea 
 they show a twofold advance. First, they keep clear of the 
 mysticism of " value-creating powers," and, remaining on solid 
 ground of fact, they always mean physical productivity when 
 they speak of the " productivity of capital." Second, they do 
 not consider it to be self-evident that physical productiveness 
 must be accompanied by surplus in value. They therefore 
 insert a characteristic middle term, with the special function 
 of giving reasons why the increased quantity of products must 
 involve a surplus in value. 
 
 Of course the scientific value of all such theories depends 
 on whether the middle term will bear investigation or not; 
 and since the writers of this group differ very considerably as 
 regards this middle term, I shall be obliged in this chapter to 
 state and criticise individual doctrines with much more minute- 
 ness than was necessary in the case of the almost uniform 
 naive theories. In doing so I certainly impose on myself 
 and on my readers no small amount of trouble, but it is 
 impossible to do otherwise without sacrificing honest and solid 
 criticism. When a writer has anything particular to say, the 
 honest critic must allow him to say it, and must answer him 
 
 1 I use the unsatisfactory word Indirect for the German Motivirte (reasoned 
 or motivated). The place taken by philosophy in German culture allows the 
 use of many philosophical terms in general literature that we could not employ 
 in English without pedantry. Our political economy, as we are often told, must 
 use the language of the market and the shop. W. S.
 
 CHAP, in LAUDERDALE 143 
 
 point by point : the particular must not be dismissed with a 
 general phrase. 
 
 The series of the Indirect Productivity theories begins with 
 Lord Lauderdale. 1 
 
 In the theoretical history of interest Lauderdale has rather 
 an important place. He recognises, as none of his predecessors 
 did, that here is a great problem waiting on solution. He 
 first states the problem formally and explicitly by asking, 
 What is the nature of profit, and in what way does it originate ? 
 His criticism on the few writers who had expressed them- 
 selves on the subject of natural interest before his time is 
 well weighed. And, finally, he is the first to put forward a 
 connected and argued theory in the form of a theory, and not 
 in the form of scattered observations. 
 
 He begins by pronouncing capital, in opposition to Adam 
 Smith, to be a third original source of wealth, the others being 
 land and labour (p. 121). Later on he goes very thoroughly 
 into consideration of the method of its working as a source of 
 wealth (pp. 154-206) ; and here at the very first he recognises 
 the importance and difficulty of the interest problem, and takes 
 occasion, in a remarkable passage, to put the problem formally. 2 
 
 He is not satisfied with the views of his predecessors. He 
 expressly rejects the doctrine of Locke and Adam Smith, who 
 are inclined to derive interest from the increment of value 
 which the worker produces by working with capital. He 
 rejects also Turgot's doctrine, which, much too superficially, 
 connects interest with the possibility of obtaining rent by the 
 purchase of land. 
 
 Lauderdale then formulates his own theory in these words : 
 " In every instance where capital is so employed as to produce 
 a profit it uniformly arises either from its supplanting a portion 
 of labour, which would otherwise be performed by the hand of 
 man, or from its performing a portion of labour, which is 
 
 1 An Inquiry into the Nature and Origin of Public Wealth, Edinburgh, 1804. 
 
 2 "By what means capital or stock contributes towards wealth is not so 
 apparent. What is the nature of the profit of stock, and how does it originate ? 
 are questions the answers to which do not immediately suggest themselves. 
 They are indeed questions that have seldom been discussed by those who have 
 treated on political economy, and important as they are, they seem nowhere to 
 have received a satisfactory solution " (p. 155). I may here note that Lauderdale, 
 like Adam Smith and Ricardo, does not distinguish between interest proper and 
 undertaker's profit, but groups both under the name of profit.
 
 144 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 beyond the reach of the personal exertion of man to accom- 
 plish " (p. 161). 
 
 In thus proclaiming the power of capital to supplant 
 labourers as the cause of profit, Lauderdale refers, under a 
 somewhat altered name, to the same thing as we have agreed 
 to call the physical productivity of capital. For as a matter 
 of fact Lauderdale himself, many times and with emphasis, 
 calls capital "productive" and "producing," as on pp. 172, 
 177, 205. 
 
 Still the chief question remains, In what way does profit 
 originate from the power of capital to supplant labourers ? 
 According to Lauderdale it is, that the owner of real capital l 
 is able to secure for himself as his share, either wholly or at 
 least in part, the wages of those workers who are replaced by 
 the capital. 
 
 " Supposing, for example," says Lauderdale, in one of the 
 many illustrations by which he tries to establish the correctness 
 of his theory, 2 " one man with a loom should be capable of 
 making three pairs of stockings a day, and that it should 
 require six knitters to perform the same work with equal 
 elegance in the same time ; it is obvious that the proprietor 
 of the loom might demand for making his three pairs of stock- 
 ings the wages of five knitters, and that he would receive 
 them ; because the consumer, by dealing with him rather than 
 the knitters, would save in the purchase of the stockings the 
 wages of one knitter" (p. 165). 
 
 An objection obviously suggests itself which Lauderdale 
 thus tries to weaken : " The small profit which the proprietors 
 of machinery generally acquire, when compared with the wages 
 of labour, which the machine supplants, may perhaps create 
 a suspicion of the rectitude of this opinion. Some fire- 
 engines, for instance, draw more water from a coal pit in one 
 day than could be conveyed on the shoulders of 300 men, 
 
 1 Compounds like Kapitalstucke and KapitalgiUer I usually translate " Real 
 Capital." W. S. 
 
 2 Lauderdale with great patience and thoroughness applies his theory to all 
 possible employments of capital. He distinguishes five classes of such employ- 
 ment building and obtaining machinery, home trade, foreign trade, agriculture, 
 and " conducting circulation. " The illustration quoted in the text is from the 
 first of these five divisions. I have chosen it because it most clearly illustrates 
 the way in which Lauderdale puts before himself the connection of profit with 
 the labour-replacing power of capital.
 
 CHAP, in LAUDERDALE 145 
 
 even assisted by the machinery of buckets ; and a fire-engine 
 undoubtedly performs its labour at a much smaller expense 
 than the amount of the wages of those whose labour it thus 
 supplants. This is, in truth, the case with all machinery." 
 
 This phenomenon, however, Lauderdale explains, should 
 not mislead us. It simply arises from the fact that the 
 profit obtainable for the use of any machine must be regu- 
 lated by the universal regulator of prices, the relation of 
 supply and demand. "The case of a patent, or exclusive 
 privilege of the use of a machine . . . will tend further to 
 illustrate this. 
 
 " If such a privilege is given for the invention of a 
 machine, which performs, by the labour of one man, a quantity 
 of work that used to take the labour of four ; as the possession 
 of the exclusive privilege prevents any competition in doing 
 the work but what proceeds from the labour of the four 
 workmen, their wages, as long as the patent continues, must 
 obviously form the measure of the patentee's charge that is, 
 to secure employment he has only to charge a little less than 
 the wages of the labour which the machine supplants. But 
 when the patent expires, other machines of the same nature 
 are brought into competition ; and then his charge must be 
 regulated on the same principle as every other, according to 
 the abundance of machines, or (what is the same thing), 
 according to the facility of procuring machines, in proportion 
 to the demand for them." 
 
 In this way Lauderdale thinks he has satisfactorily estab- 
 lished that the cause and source of profit lies in a saving of 
 labour, or of the wages of labour. 
 
 Has he really succeeded in establishing this ? Has 
 Lauderdale in the foregoing passages really explained the 
 origin of interest ? A careful examination of his arguments 
 will very soon enable us to answer this question in the 
 negative. 
 
 No fault can be found with the starting-point that he 
 takes for his argument. It is to continue Lauderdale's own 
 illustration quite correct to say that one man with a knitting 
 loom may turn out as many stockings in a day as six hand 
 knitters. It is quite correct, also, to say that, where the loom 
 is an object of monopoly, its owner may easily secure for its 
 
 L
 
 146 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 day's work the wage of five knitters, or, in the case of unlimited 
 competition, of course a correspondingly less amount ; and 
 thus, after deducting the wages of the man who tends the 
 machine, there remains over as the owner's share four days' 
 wages of labour under free competition, correspondingly less, 
 but always something. Here it is shown that a share in value 
 does really go to the capitalist. 
 
 But this, share, thus proved to go to capital, is not the 
 thing that was to be explained, the Net Interest or profit ; but 
 only the gross return to the use of capital. The five wages 
 which the capitalist secures, or the four wages that he retains 
 after paying the man who attends to the machine, are the total 
 income that he makes by the machine. In order to get the 
 net profit contained in that income we must, evidently, deduct 
 the wear and tear of the machine itself. But Lauderdale, who 
 in the whole course of his reasoning is always looking to 
 profit, has either overlooked this thus confusing gross and 
 net interest or he considers it quite self-evident that, after 
 deducting from gross interest a proportion for wear and tear, 
 something remains over as net interest. In the first case he 
 has made a distinct blunder ; in the second case he has 
 assumed without proof that very point which is the most 
 difficult, indeed the only difficult point to explain, that, after 
 deduction from the gross return of capital of so much of the 
 real capital as has been consumed, something must remain 
 over as surplus value, and why it should remain over. In 
 other words, he has not touched on the great question of the 
 interest problem. 
 
 As everything turns on this point, let me put it in its 
 clearest light by means of figures. Suppose, for convenience, 
 that the labourers get. a pound a week, and that the machine 
 lasts a year before it is entirely worn out. Then the gross 
 use of the machine for a year will be represented by 4x52 = 
 208. To ascertain the net interest contained in that we must 
 evidently deduct the whole capital value of the machine 
 now completely worn out by the year's work. How much will 
 this capital value be ? This evidently is the crucial point. 
 If the capital value is less than 208, there is a net interest 
 over. If it is equal to, or higher than 208, there can be no 
 interest or profit over.
 
 CHAP, in LAUDERDALE 147 
 
 Now on this decisive point Lauderdale has given neither 
 proof nor even assumption. No feature of his theory prevents 
 us assuming that the capital value of the machine amounts 
 to fully 208. On the contrary, if, with Lauderdale, we think 
 of the machine as an object of monopoly, there is a certain 
 justification in expecting that its price will be very high. 
 I grant that experience goes to show that machines and real 
 capital in general, be their monopoly price forced up ever so 
 high, never cost quite so much as they turn out. But this 
 is only shown by experience, not by Lauderdale ; and by 
 entirely shirking the explanation of that empirical fact he has 
 left the heart of the interest problem untouched. 
 
 In that variation of the illustration where Lauderdale 
 assumes that unrestricted competition ensues, it is true that we 
 might consider the value of the machine as fixed (relatively at 
 least) by the amount of its cost of production. But here 
 again we are met by the doubt as regards the other determining 
 factor, the amount of the gross use. Say, e.g. that the machine 
 lias cost 100, and that 100 is presumably its capital 
 value, then whether there is any net interest over or not will 
 depend on whether the daily gross return of the machine 
 exceeds g- or not. Will it exceed that ? All that Lauder- 
 dale says on this point is that the claim of the capitalist 
 " must be regulated on the same principle as everything else," 
 the relation of supply and demand. That is, he says nothing 
 at all. 
 
 And yet it was very necessary to say something, and, 
 moreover, to prove what was said. For it is not in the least 
 self-evident that the gross use is higher than the capital value 
 of the machine, if that value is pressed down by free competi- 
 tion to the amount of its cost. It is just where unrestricted 
 competition prevails in the use of the machine, that it presses 
 down the value of the products of capital also in this case, 
 the stockings and thus presses down the gross return to 
 the machine. Now, so long as the machine produces more 
 than it costs, there remains a profit to the undertaker ; and 
 the existence of a profit, one would think, will act as induce- 
 ment to the further multiplication of the machines till such 
 time as, through the increased competition, the extra profit 
 entirely vanishes. Why should competition call a halt earlier?
 
 148 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 Why, e.g. should it call a halt at the time when the gross use 
 of a machine which costs 100 has sunk to 110 or 105, 
 w,hen a net interest of 10 per cent or 5 per cent is thereby 
 assured ? This calls for a satisfactory explanation of its own, 
 and Lauderdale has not said a word about it. 
 
 His explanation has therefore shot beside the mark. 
 What it actually explains is something that had no need of 
 explanation, viz. the fact that capital gives a gross interest, a 
 gross return. But what had great need of explanation, viz. 
 the remainder of a net return in the gross return, remains as 
 obscure as before. 
 
 The test by which Lauderdale attempts to confirm the 
 accuracy of his theory, and on which he lays great weight, 
 will not do much to change our opinion. He shows that 
 where a machine saves no labour where, e.g. the machine 
 takes three days to make a pair of stockings, while the 
 hand- worker does the same in two days there is no "profit." 
 This, according to Lauderdale, is an evident proof that profit 
 does come from the power of capital to replace labourers (p. 
 164). 
 
 The reasoning is weak enough. It shows of course that the 
 power of the machine to replace labour is an indispensable 
 condition of the profit which is tolerably self-evident, since, 
 if the machine had not this property, it would have no use 
 at all, and would not even belong to the class we call " goods." 
 But it is very far from showing that interest is fully explained 
 by this power. By using a strictly analogous test he might 
 have proved a totally opposite theory, viz. that profit comes 
 from the activity of the workman who tends the machine. 
 If nobody tends the machine it stands still, and if it stands 
 still it never yields any profit. Consequently it is the work- 
 man who creates the profit ! 
 
 I have purposely taken the greater care in examining the 
 blunders into which Lauderdale's method of explanation leads 
 him, because the criticism applies not to Lauderdale alone, but 
 to all those who, in trying to trace interest to the productivity 
 of capital, have fallen into the same errors. And we shall see 
 that the number of those who have thus been criticised in 
 advance is not small, and embraces many a well-known 
 name.
 
 CHAP, in MALTHUS 149 
 
 Lauderdale found his first important follower, though by 
 no means his disciple, in Malthus. 1 
 
 With Lis usual love of exact definition Malthus has 
 carefully stated the nature of profit. " The profits of capital 
 consist of the difference between the value of the advances 
 necessary to produce a commodity and the value of the 
 commodity when produced" (p. 293 ; second edition, p. 262). 
 
 "The rate of profit," he continues more exactly than 
 euphoniously, " is the proportion which the difference between 
 the value of the advances and the value of the commodity 
 produced bears to the value of the advances, and it varies 
 with the variations of the value of the advances compared 
 with the value of the product." 
 
 After expressions like these the question would seem to 
 suggest itself, Why must there be this difference between the 
 value of the advances and the value of the product ? Un- 
 fortunately Malthus does not go on to put this question 
 explicitly. He has given all his care to the inquiry as to the 
 rate of interest, and has left only a few rather inadequate 
 indications as to its origin. 
 
 In the most complete of these Malthus, quite in the style 
 of Lauderdale, points to the productive power of capital. " If 
 by means of certain advances to the labourer of machinery, 
 food, and materials previously collected, he can execute eight 
 or ten times as much work as he could without such assistance, 
 the person furnishing them might appear at first to be entitled 
 to the difference between the powers of unassisted labour and 
 the powers of labour so assisted. But the prices of commodities 
 do not depend upon their intrinsic utility, but upon the supply 
 and the demand. The increased powers of labour would 
 naturally produce an increased supply of commodities ; their 
 prices would consequently fall, and the remuneration for the 
 capital advanced would soon be reduced to what was necessary, 
 in the existing state of society, to bring the articles, to the 
 production of which they were applied, to market. With 
 regard to the labourers employed, as neither their exertions 
 nor their skill would necessarily be much greater than if they 
 had worked unassisted, their remuneration would be nearly the 
 
 1 Principles of Political Economy. London, 1820, third edition ; Pickering, 
 1836.
 
 150 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 same as before. ... It is not, therefore," continues Malthus, 
 making his point of view more precise by a polemical remark, 
 " quite correct to represent, as Adam Smith does, the profits of 
 capital as a deduction from the produce of labour. They are 
 only a fair remuneration for that part of the production con- 
 tributed by the capitalist, estimated exactly in the same way 
 as the contribution of the labourer" (p. 80). 
 
 In this analysis the reader will have no difficulty in 
 recognising the principal ideas of Lauderdale's Productivity 
 theory, only put in a somewhat modified form and with some- 
 what less precision. There is only one feature that points in 
 another direction ; that is, the prominence if we may use so 
 strong a word given to the fact that the pressure of competi- 
 tion must always leave over a share to the capitalist as 
 much as may be " necessary to bring the articles, to the produc- 
 tion of which the capital was applied, to market." Malthus 
 indeed has not said anything in further explanation of this 
 new feature. But the fact of his mentioning it at all shows 
 distinctly his feeling that, in the formation of profit, some- 
 thing besides the productivity of capital must be concerned. 
 
 The same idea comes out more forcibly in Malthus's direct 
 statement that profit is a constituent part of the costs of 
 production. 1 
 
 The formal enunciation of this proposition, to which Adam 
 Smith and Eicardo inclined without explicit mention of it, 2 was, 
 as things have turned out, a literary event of some importance. 
 It started the stirring controversy which was carried on for 
 some decades with great vigour, first in England, and then in 
 other countries, and this controversy was, indirectly, of great 
 use in developing the interest theory. For when economists 
 were eagerly discussing whether profit should belong to the 
 costs of production or not, they could scarcely avoid making 
 a more thorough investigation into its nature and origin. 
 
 The proposition that interest is a constituent portion of 
 
 1 Principles, p. 84, and many other places ; Definitions in Political Economy 
 Nos. 40, 41. 
 
 2 A note which may be found in Ricardo's Principles at the end of 6, 
 chap. i. (p. 30 of 1871 edition), has sometimes given the impression that Ricardo 
 had by that time stated the above proposition explicitly. This, however, is 
 not the case. He only suggested the idea to Malthus, who put it into words. 
 See Wollenborg, Intorno al costo relativo di Produzione, Bologna, 1882, p. 26.
 
 CHAP, in MALTHUS 151 
 
 the costs of production is likely to be judged in an essentially 
 different way by the theorist, and by the historian of theory. 
 The former will pronounce it a gross mistake, as did Malthus's 
 contemporary Torrens, and as lately Pierst&ff has done in 
 harsh terms much too harsh, in my opinion. 1 Profit is not 
 a sacrifice that production requires, but a share in its fruits. 
 To pronounce it a sacrifice was only possible by a somewhat 
 gross confusion of the national economic standpoint with the 
 individual economic standpoint^ the standpoint of the indi- 
 vidual undertaker who, of course, feels the paying out of 
 interest on borrowed capital as a sacrifice. 
 
 But still, even in this unfortunate form, there lies an idea 
 which is full of significance, and which points beyond the 
 inadequate Productivity theory; and this Malthus evidently 
 had in his mind. It is the idea that the sacrifices of produc- 
 tion are not exhausted in the labour which is employed in 
 production, whether that labour be directly, or as embodied 
 in real capital indirectly employed ; that beyond this there is 
 a peculiar sacrifice demanded from the capitalist which equally 
 demands its compensation. Malthus of course was not able to 
 indicate more accurately the nature of this sacrifice. Yet in 
 this somewhat unusual mention of profit as a constituent of 
 costs the historian of theory will recognise an interesting 
 middle course between Adam Smith's first suggestion, that 
 the capitalist must have a profit, because otherwise he would 
 have no interest in the accumulation of capital, and the 
 more precise theories ; whether, with Say, these theories 
 pronounce productive services to be a sacrifice demanding 
 compensation and a constituent part of the costs of production, 
 or, with Hermann, pronounce the use of capital to be that 
 sacrifice, or, like Senior, find this sacrifice and cost in the 
 capitalist's abstinence. In Malthus, indeed, the first notes of 
 these more precise doctrines are yet too lightly sounded to 
 drown the ruder explanation, which, like Lauderdale, he 
 deduced from the productive power of capital. 
 
 But that neither the one explanation nor the other really 
 passed into a substantial theory is shown by his remarks on 
 the rate of profit (p. 294). Instead of deriving the current 
 rate of interest, as one would naturally have expected, from 
 
 1 Lehre vom Ujiternehmergeurinn, p. 24.
 
 152 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 the play of those same forces that bring interest into existence, 
 he explains it as determined by influences of a different kind 
 altogether ; by the height of wages on the one hand and the 
 price of products on the other. 
 
 He calculates in the following manner. Profit is the 
 difference between the value of the costs advanced by the 
 capitalist, and the value of the product. The rate of profit 
 will, accordingly, be greater, the less the value of the costs 
 and the greater the value of the product. But as the greatest 
 and most important portion of the costs consist in wages of 
 labour, we have as the two determinants which influence the 
 rate of profit, the height of wages on the one hand and the 
 price of products on the other. 
 
 However logical this way of explanation seems to be, it is 
 easy to show that it does riot, at any rate, go to the heart of 
 the matter. To show what I mean, perhaps I may be allowed 
 to make use of a comparison. Suppose we wish to name the 
 cause that determines the distance between the car of a 
 balloon and the balloon itself. It ii clear at the first glance 
 that the cause is to be found in the length of the rope that 
 fastens the car to the balloon. What should we say if some 
 one were to conduct the investigation thus : the distance is 
 equal to the difference in the absolute height of the balloon 
 and of the car, and is therefore increased by everything that 
 increases the absolute height of the balloon and diminishes the 
 absolute height of the car; and is diminished by everything 
 that diminishes the absolute height of the balloon and in- 
 creases the Absolute height of the car ? And now the ex- 
 plainer would call to the assistance of his explanation everything 
 that could have any possible influence over the absolute eleva- 
 tion of the balloon and of the car such as density of the 
 atmosphere, weight of the covering of balloon and car, number 
 of persons in the car, tenuity of the gases employed to fill it 
 only omitting the length of the rope that tied the two ! 
 
 And just in this way does Malthus act. In page after 
 page of research he inquires why wages are high or low. 
 He is never tired of controverting Eicardo, and proving that 
 the difficulty or ease of production from land is not the only 
 cause of a high or a low wage, but that the abundance of 
 capital which accompanies the demand for labour has also its
 
 CHAP, in MALTHUS 153 
 
 influence on wage. In the same way he is never tired of 
 asserting that the relation of supply and demand for products, 
 by fixing their price higher or lower, is the cause of a high or 
 a low profit. But he forgets to put the simplest question of 
 all the question on which everything hinges, What power is 
 it that keeps wage of labour and price of product apart in such 
 a way that, no matter what be their absolute level, they leave 
 a space between them which is filled up by profit ? 
 
 Only once, and then very faintly even more faintly than 
 Ricardo on a similar occasion does Mai thus hint at the 
 existence of a power of this sort, when he remarks on p. 303 
 that the gradual diminution of the rate of profit must, in the 
 long run, bring " the power and the will to accumulate capital " 
 to a standstill But he does not make any more use of this 
 element to explain the height of profit than did Ricardo. 
 
 Finally, Malthus's explanation loses any force it had through 
 the fact that, to determine the prices of products price being 
 one of his two standard factors he cannot bring forward 
 anything more substantial than the relation of supply and 
 demand. 1 Here the theory finds a conclusion where it is, I 
 grant incontrovertible, but where at the same time it ceases 
 to say anything. That the rate of interest is influenced by 
 the relation between the demand and the supply of certain 
 goods is, considering the fact that interest is itself a price, 
 or a difference in price, a little too obvious. 2 
 
 After Malthus the theory of the productive power of capital 
 was only handed on in England by Read. 3 As Read, however, 
 took elements from other theories, we shall have to speak of him 
 again among the eclectics. But very similar views are to be found 
 somewhat later in the writings of certain celebrated American 
 economists, particularly Henry Carey and Peshine Smith. 
 
 Carey 4 offers one of the very worst examples of confused 
 
 1 ". . . the latter case shows at once how much profits depend upon the 
 prices of commodities, and upon the cause which determines these prices, namely, 
 the supply compared with the demand" (p. 334). 
 
 2 I think I may pass over Malthus's wearisome and unfruitful controversy 
 & gainst Ricardo's interest theory. It offers many weak points. Those who 
 wish to read an accurate judgment on it will find it in Pierstorff, p. 23. 
 
 3 An Inquiry into the Natural Grounds of Right to Vendible Property or 
 Wealth. Edinburgh, 1829. 
 
 4 His chief work is the Principles of Social Science, 1858.
 
 154 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 thinking on a subject where there has already been much con- 
 fusion. What he says on interest is a tissue of incredibly 
 clumsy and wanton mistakes ^mistakes of such a nature that 
 it is almost inconceivable how they should ever have received 
 any consideration in the scientific world. I should not express 
 this opinion in such severe terms if it were not that Carey's 
 interest theory even yet enjoys a reputation which I consider 
 very ill deserved. It is one of those theories which, to my 
 mind, cast discredit not only on their authors, but on the 
 science that lets itself be seduced into credulous acceptance of 
 them ; not so much that it errs as for the unpardonably 
 blundering way in which it errs. Whether I speak too 
 harshly of it or not let the reader judge. 
 
 Carey has not given any abstract formulation to his views 
 on the source of interest. Following his favourite plan of 
 explaining economical phenomena by introducing simple situa- 
 tions of Eobinson Crusoe life, he contents himself, in the 
 present case, with giving a pictorial account of the origin of 
 interest, so that we discover his opinion on its causes only by the 
 characteristic features which he gives to imaginary transactions. 
 It is from such pictures that we have to put together Carey's 
 theory. 
 
 He deals with our subject ostensibly in the forty -first 
 chapter of his Principles, under the title, " Wages, Profit, and 
 Interest" After a few introductory words the following 
 picture occurs in the first paragraph : 
 
 "Friday had no canoe, nor had he acquired the mental 
 capital required for producing such an instrument. Had 
 Crusoe owned one, and had Friday desired to borrow it, the 
 former might thus have answered him 
 
 " ' Fish abound at some little distance from the shore, 
 whereas they are scarce in our immediate neighbourhood. 
 Working without the help of my canoe, you will scarcely, with 
 all your labour, obtain the food required for the preservation 
 of life ; whereas, with it, you will, with half your time, take 
 as many fish as will supply us both. Give me three-fourths 
 of all you take, and you shall have the remainder for your 
 services. This will secure you an abundant supply of food, 
 leaving much of your time unoccupied, to be applied to giving 
 yourself better shelter and better clothing.'
 
 CHAP, in CAREY 155 
 
 "Hard as this might seem, Friday would have accepted 
 the offer, profiting by Crusoe's capital, though paying dearly 
 for its use." 
 
 Up to this point one can easily see that Carey's theory is 
 a tolerably faithful copy of Lauderdale's. Like him Carey 
 starts by making capital the cause of a productive surplus 
 result. This forms the occasion for the capitalist receiving a 
 price for the use of his capital, and this price as appears from 
 many passages is without further examination identified 
 by Carey, as it was by Lauderdale, with interest, although 
 obviously it only represents the gross use of the capital It 
 makes no difference that Carey, unlike Lauderdale, does not 
 look on capital as an independent factor in production, but 
 only as an instrument of production. The essential feature 
 remains that the surplus result from the production, associated 
 with the employment of capital, is put down as the cause of 
 interest. 
 
 But while Lauderdale is only open to the charge of having 
 mixed up gross and net use, Carey plays fast and loose with a 
 whole row of conceptions. Not only does he confuse net and 
 gross use, but he confuses these two conceptions again witli 
 real capital itself, and that not occasionally but consistently. 
 That is to say, he deliberately identifies the causes of a high 
 or low interest with the causes of a high or low value of real 
 capital, and deduces the height of the interest rate from the 
 height of the value of real capital. 
 
 This almost incredible confusion of ideas shows itself in 
 every passage where Carey treats of interest. For statement 
 of his argument I shall use chap. vi. (on Value) and chap. xli. 
 (on Wage, Profit, and Interest), where he expresses himself most 
 connectedly on the subject. 
 
 According to Carey's well-known theory of value, the value 
 of all goods is measured by the amount of the costs required 
 for their reproduction. Progressive economical development, 
 which is simply man's progressive mastery over nature, 
 enables man to replace the goods he needs at a steadily 
 decreasing cost. This is true, among other things, of those 
 tools that form man's capital ; capital shows, therefore, 
 the tendency to fall steadily in value with the advance of 
 civilisation. " The quantity of labour required for reproducing
 
 156 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 existing capital and for further extending the quantity of 
 capital diminishes with every stage of progress. Past accumu- 
 lations tend steadily to decline in value, labour rising not less 
 steadily when compared with them" (iii. p. 130; so also i. 
 chap. i. passim). 
 
 Accompanying this and as result of the decrease in the 
 value of capital comes a fall in the price paid for its use. 
 This proposition is not actually stated by Carey ; he evidently 
 thinks it too self-evident to require that, as indeed, rightly 
 understood, it is, but it is assumed and referred to in his 
 pictures of Crusoe's economical development. He relates how 
 the owner of the first axe may have been able to demand for 
 the loan of it more than half the wood that could be cut by 
 it, while later, when better axes can be made at a cheaper 
 price, a lower (relative) price is paid for their use (i. p. 193). 
 
 On these preliminary facts, then, Carey builds his great 
 law of interest ; that, with advancing economical civilisation, 
 the rate of profit on capital that is, the rate of interest 
 falls, while the absolute quantity of profit rises. The way in 
 which Carey arrives at this law can only be adequately 
 appreciated by reading his own words. The reader may there- 
 fore pardon the somewhat lengthy quotation that follows. 
 
 " Little as was the work that could be done with the help 
 of an axe of stone, its service to the owner had been very 
 great. It was therefore clear to him that the man to whom he 
 lent it should pay him largely for its use. He could, too, as 
 we readily see, well afford to do so. Cutting with it more 
 wood in a day than without it he could cut in a month, he 
 would profit by its help were he allowed but a tenth of his 
 labour's products. Being permitted to retain a fourth, he 
 finds his wages much increased, notwithstanding the large 
 proportion claimed as profit by his neighbour capitalist. 
 
 " The bronze axe being next obtained, and proving far more 
 useful, its owner being asked to grant its use is now, 
 however, required to recollect that not only had the produc- 
 tiveness of labour greatly increased, but the quantity required 
 to be given to the production of an axe had also greatly 
 decreased, capital thus declining in its power over labour, as 
 labour increased in its power for the reproduction of capital. 
 He, therefore, limits himself to demanding two-thirds of the
 
 CHAP, in CAREl- 157 
 
 price of the more potent instrument, saying to the woodcutter : 
 ' You can do twice as much work with this as you now do 
 with our neighbour's stone axe ; and if I permit you to retain 
 a third of the wood that is cut, your wages will still be 
 doubled.' This arrangement being made, the comparative 
 effects of the earlier and later distributions are as follows : 
 
 Total Labourer's Capitalist's 
 
 Product. Share. Share. 
 
 First 4 . . 1 . . 3 
 
 Second . . 8 . 2'66 . . 5-33 
 
 " The reward of labour has more than doubled, as a con- 
 sequence of the receipt of an increased proportion of an in- 
 creased quantity. The capitalist's share has not quite doubled, 
 he receiving a diminished proportion of an increased quantity. 
 The position of the labourer, which had at first stood as only 
 one to three, is now as one to two ; with great increase of 
 power to accumulate, and thus to become himself a capitalist. 
 With the substitution of mental for merely physical power, 
 the tendency to equality becomes more and more developed. 
 
 " The axe of iron next coming, a new distribution is required, 
 the cost of reproduction having again diminished, while labour 
 has again increased in its proportions as compared with capital. 
 The new instrument cuts twice as much as had been cut by 
 the one of bronze, and yet its owner finds himself compelled 
 to be content with claiming half the product ; the following 
 figures now presenting a comparative view of the several 
 modes of distribution : 
 
 Total. Labourer. Capitalist. 
 
 First 4 . . 1 . . 3 
 
 Second 8 2'66 . . 5'33 
 
 Third . 16 . . 8 . . 8 
 
 " The axe of iron and steel now coming, the product is 
 again doubled, with further diminution in the cost of repro- 
 duction ; and now the capitalist is obliged to content himrelf 
 with a less proportion, the distribution being as follows : 
 
 Fourth . . 32 . . 19-20. . 12-80 
 
 " The labourer's share has increased, and, the total product 
 having largely increased, the augmentation of his quantity is 
 very great
 
 158 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 " That of the capitalist has diminished in proportion, but, 
 the product having so much increased, this reduction of pro- 
 portion has been accompanied by a large increase of quantity. 
 Both thus profit greatly by the improvements that have been 
 effected. With every further movement in the same direction 
 the same results continue to be obtained the proportion of 
 the labourer increasing with every increase in the productive- 
 ness of effort the proportion of the capitalist as steadily 
 diminishing, with constant increase of quantity and equally 
 constant tendency towards equality among the various portions 
 of which society is composed. . . . 
 
 " Such is the great law governing the distribution of labour's 
 products. Of all recorded in the book of science, it is perhaps 
 the most beautiful, being, as it is, that one in virtue of which 
 there is established a perfect harmony of real and true interests 
 among the various classes of mankind" (iii. pp. 131-136). 
 
 I beg the reader to stop for a moment at this point of the 
 quotation, and to decide exactly what it is that Carey has up to 
 this point asserted, and, if not strictly speaking proved, has at 
 least made quite clear. The object of Carey's inquiry was the 
 price paid for the use of the axe that is, its hire. The amount 
 of this hire was compared with the amount of the total return 
 which a worker could obtain by the help of the axe. The 
 result of this comparison is the proposition that, with advanc- 
 ing civilisation, the hire paid for capital forms an always 
 decreasing proportion of that total return. This and nothing 
 else is the substance of the law which Carey up till now has 
 expounded and proved, and which he often abridges in the 
 words, " The proportion of the capitalist falls." 
 
 Let us hear Carey further. " That the law here given 
 as regards the return to capital invested in axes is equally 
 true in reference to all other descriptions of capital will be 
 obvious to the reader upon slight reflection." He demonstrates 
 its efficacy first in the reduction of the rent of old houses, 
 on which there is nothing particular to remark, and then goes 
 on. " So, too, with money. Brutus charged almost 5 per 
 cent interest for its use, and in the days of Henry VIII the 
 proportion allotted by law to the lender was 10. Since then 
 it has steadily declined, 4 per cent having become so much 
 the established rate in England that property is uniformly
 
 CHAP, in CAREY 159 
 
 estimated at twenty-five years' purchase of the rent ; so large, 
 nevertheless, having been the increase in the powers of man 
 that the present receiver of a twenty-fifth can command an 
 amount of convenience and of comfort twice greater than could 
 have been obtained by his predecessors who received a tenth. 
 In this decline in the proportion charged for the use of capital 
 we find the highest proof of man's improved condition " (iii. p. 
 135). 
 
 In these words Carey has suddenly performed a bold volte- 
 face. He speaks as if the proof adduced in the foregoing 
 passages referred to the rate of interest, and thenceforth treats 
 it as an established fact that the depreciation of the value of 
 capital brings about a depreciation of the rate of interest ! x 
 
 This change of front rests on as gross a piece of juggling 
 as can well be imagined. In the whole course of the preceding 
 argument Carey has never once mentioned the rate of interest, 
 much less made it the subject of any proof. To apply 
 the argument to the rate of interest Carey has now to make 
 a double perversion of his conceptions first, of the conception 
 of " use " ; second, of the conception of " proportion." 
 
 In the course of his argument he has always employed the 
 phrase " use of capital" in the sense of " gross use." He who hires 
 out an axe sells its gross use ; the price which he receives 
 for it is a hire or gross interest. But now all at once he 
 employs the word use in the sense of net use, the use to which 
 the net (money) interest corresponds. While the argument, 
 therefore, was that gross interest has a tendency to fall 
 (relatively), the conclusion drawn by Carey from his argument 
 is that net use has this tendency. 
 
 But the second perversion is ^en more gross. 
 
 In the course of the argume ^ the word " proportion " had 
 always referred to the relation between the amount of the 
 interest and the total return to the labour done by the help 
 of capital. But now, in his application of the argument, 
 Carey interprets the word proportion as expressing a relation 
 between the amount of the use and the value of the parent 
 
 1 E.g. iii. p. 119 : " The proportion of the capitalist (profit or interest, as the 
 following lines show) declines because of the great economy of labour." P. 149 : 
 "Decrease of the costs of reproduction and reduction of the rate of interest con- 
 sequent on that," etc.
 
 160 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 capital in other words, the rate of interest. He speaks 
 of a " proportion of 1 per cent," by which he does not mean 
 as formerly 10 per cent of the return obtained by the assist- 
 ance of the capital lent, but 10 p'er cent on the parent capital. 
 And in the fall of the interest rate from 10 per cent to 4 per 
 cent " the decline in the proportion charged for the use of 
 capital " he sees a simple application of the law just proved, 
 without a suspicion that the proportion spoken of earlier means 
 something quite different from that now referred to. 
 
 In case the reader may think that this criticism is mere 
 hair -splitting, I would ask him to consider the following 
 concrete illustration, which I adapt as closely as possible to 
 Carey's line of argument. 
 
 Suppose that with a steel axe a worker, in a year's time, 
 can cut down 1000 trees. If only one such axe is to be had, 
 and no other of the same kind can be made, its owner may 
 ask and receive for the transference of its use a large part of 
 the total return say one-half. Thanks to the monopoly, the 
 capital value which the single axe obtains in these circum- 
 stances will also be high ; it may, e.g. amount to the value of 
 as many trunks as a man can fell with it in two years that 
 is, 2000 trunks. The price of 500 trees which is paid for 
 the year's use of the axe represents in this case a proportion 
 of 50 per cent of the total yearly return, but a proportion 
 of 2 5 per cent only of the value of the capital. This by itself 
 proves that the two proportions are not identical ; but let us 
 look further. 
 
 Later on people learn to manufacture steel axes in any 
 quantity desired. The capital value of the axes falls to the 
 amount of the costs of reproduction at the time. Say that 
 these costs are equal to eighteen days of labour ; then a steel 
 axe will be worth about as much as fifty trees, since the felling 
 of fifty trees also costs eighteen days' labour. Naturally if 
 the owner lend the axe he will now be content to take 
 a much smaller proportion of the 1000 trees that represent 
 the year's work ; instead of receiving the half, as before, he 
 now gets no more than a twentieth that is, fifty trees. 
 These fifty trees represent, on the one hand, 5 per cent of 
 the total return, and, on the other hand, 100 per cent of the 
 capital value of the axe.
 
 CHAP, in CAREY 161 
 
 What does this prove ? The one proportion, 50 per 
 cent of the gross, return, represented only 2 5 per cent of the 
 capital value of the axe; the smaller proportion, 5 per cent 
 of the total return, represents 100 per cent of the capital 
 value. In other words, while the proportion of the total 
 return fell to a tenth part of what it was at first, the rate of 
 interest represented by this proportion rose fourfold. So little 
 necessity is there that the proportions which Carey lightly 
 confuses with one another should run parallel ; and so little 
 does Carey's law of the " falling of the capitalist's proportion " 
 show what he intended to show the course pursued by the 
 rate of interest. 
 
 It scarcely needs further proof that Carey's contribu- 
 tions to the explanation of interest are entirely worthless. 
 The peculiar problem of interest, the explanation why it is 
 that the return falling to the share of capital is worth more 
 than the capital consumed in obtaining it, is not even touched. 
 That this sham-solution has, nevertheless, found admission into 
 the writings of many most respectable economists of our 
 own and other nations is a proof of the very small degree of 
 thoroughness and discrimination with which, ' unfortunately, 
 our most difficult subject is usually treated. 
 
 Scarcely more correct if at all than Carey himself is 
 his disciple E. Peshine Smith, whose Manual of Political 
 Economy (1853) has lately obtained a wide circulation in 
 Germany through Stopel's translation. 
 
 Peshine Smith finds the origin of profit in a partnership 
 between workman and capitalist. The object of the partner- 
 ship is " to change the form, of the commodities contributed 
 by the capitalist, and increase their value by combining them 
 with a new infusion of labour." The return, " the new thing 
 produced," is divided, and divided in such a way that the 
 capitalist receives more than the replacement of the capital 
 he has contributed, and so makes a profit. Smith obviously 
 considers it self-evident that it must be so. For without 
 taking the trouble of a formal explanation, he points out, 
 in quite general terms, that the bargain must promote the 
 interests of both, and that "both the capitalist and the 
 labourer expect to derive their respective shares in the ad- 
 
 M
 
 162 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 vantages of their partnership." Beyond this he simply appeals 
 to the fact : " In point of fact, they do so, however long may 
 be the series of transformations and exchanges before the 
 division is made" (p. 77). 
 
 A purely formal distinction of profit emerges according as, 
 in the partnership, it is the capitalist or the labourer who 
 takes the risk on himself. In the former case " the share in 
 the product which the workman obtains is called wages ; and 
 the difference in value between the materials as turned over 
 to the workman, the food, raiment, shelter, etc., furnished to 
 the workman in kind, or commuted in wages, the deterioration 
 of the tools employed, and the finished product, is termed 
 profits. If the workman takes the risk upon himself, that 
 share which he gives to the capitalist, in addition to replacing 
 the capital he had borrowed, is called rent" (p. 77). 
 
 In this passage, where Smith speaks for the first time of 
 profit, the superficial way in which he evades any deeper 
 explanation of it clearly shows that he has not grasped his 
 problem at all. Yet what he has said up till now, if not of 
 much importance, is not incorrect. 
 
 But even this modest praise cannot be given to what 
 follows, where he goes on to examine the influences which the 
 growth of capital exerts on the rate of profit. Here he 
 copies faithfully not only Carey's method of statement and 
 his final conclusions, but even all his mistakes and blunders. 
 
 First of all, quite in Carey's style, he introduces a couple 
 of economical pictures drawn from primitive conditions. A 
 savage goes to the owner of a stone axe, and gets permission 
 to use the axe under the condition that he builds one canoe 
 for the owner of the axe, as well as one for himself. A genera- 
 tion passes away, and copper axes are substituted, by the aid 
 of which three times as much work can be done as by the 
 stone axe. Of the six canoes that the worker now builds in 
 the same time as formerly he built two, he may retain four for 
 himself, while -two are claimed by the capitalist. The share 
 of the labourer has thus increased both in proportion and in 
 quantity ; that of the capitalist has also increased in quantity, 
 but has decreased in relative proportion, it has fallen from 
 a half to a third of the product. Finally, the celebrated 
 " American axes " of the present day come into use. With
 
 CHAP, in PESHINE SMITH 163 
 
 them three times the work can now be done that used to be 
 done by the copper axes, and of the eighteen canoes, or other 
 products of labour, which the borrower of the axe can now 
 make, he will have to pay four for the use of the axe, and 
 fourteen are left him as the share of his labour. In this case 
 again the share of the worker has proportionally advanced, 
 and that of the capitalist diminished. 
 
 Arrived at this point, Smith begins to apply his rules to 
 modern economic life and ita forms. 
 
 First, for the form of contract with the savage is substi- 
 tuted the modern loan contract. 
 
 " The cases we have put represent the capitalist agreeing 
 to make a fixed payment out of the product of the capital 
 which he entrusts to the labourer, and of the mechanical force 
 of the latter. In so doing he runs a risk that the labourer 
 may not exert himself to his full ability, and that the residue 
 after payment of wages, upon which he depends for profits, 
 may be less than he calculates. To insure himself against 
 this contingency, he naturally seeks to bargain for less wages 
 than he is confident that the earnest and honest exertion of 
 the workman's strength would enable him to pay, without 
 impairing his expected profit The workman, on the contrary, 
 knowing what he can do, and unwilling to submit to any 
 reduction, prefers to guarantee the profit which the capitalist 
 desires, taking upon himself the risk that the product will 
 leave a margin broad enough to provide for the wages which 
 the capitalist is afraid to guarantee. The contract thus 
 becomes one of hiring capital" (p. 80). 
 
 The careful reader will remark that in these words not 
 only is the new form of contract substituted for the old, to 
 which there is no objection, but, quite unexpectedly, for the 
 price of the use, which was the thing formerly mentioned, and 
 which was a gross interest, is now substituted the "profit" 
 (net interest), to which there are very serious objections. 
 
 But Peshine Smith goes still farther. Without hesitation 
 he substitutes for the proportion of the product the proportion 
 of the parent capital, or the rate of interest. Carey had made 
 this confusion blindly ; Smith makes it with all deliberation, 
 which is more singular and more difficult to excuse. " Men 
 reckon their gains by a comparison between what they pre-
 
 164 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 viously possessed and what is added to it The capitalist 
 reckons his profits not by his proportion of the product which 
 has been won by the combination with labour, but by the 
 ratio which the increment bears to the previous stock. He 
 says he has made so much per cent on his capital ; he rents 
 it for so much per cent for a year. The difference is one of 
 arithmetical notation, not of fact. When his proportion of the 
 product is small, it being composed of the original capital and 
 the increment, the ratio of the latter to the capital will also 
 be small" (p. 82). 
 
 That is to say, a small proportion of product and a small rate 
 of interest are substantially identical, and only different arith- 
 metical notations for the same thing. For judgment of this 
 strange doctrine I need only refer the reader to the illus- 
 tration already given when criticising Carey. We there saw 
 that the half of the product may represent 25 per cent of the 
 capital, and that a twentieth part of the product may represent 
 100 per cent of the capital. This does seem something more 
 than a mere difference in arithmetical notation ! 
 
 Substituting one term for another in this way, Smith is 
 able, finally, to proclaim Carey's " great law " that as civilisa- 
 tion advances the share of the capitalist that is, the rate of 
 interest falls ; and to verify it by the historical fact that in 
 rich countries the rate of interest does fall. At the same time 
 liis own example illustrates how a tolerably true proposition 
 may be deduced from very false reasoning. 
 
 In favourable contrast to the shallowness of the American 
 writer is the homely but conscientious and thorough-going way 
 in which the German investigator, Von Thiinen, has dealt with 
 our problem. 1 
 
 .Like Carey, Thiinen investigates the origin of interest 
 genetically. He goes back to primitive economical relations, 
 follows the first beginnings of the accumulation of capital, and 
 inquires in what manner and by what methods capital comes into 
 existence in these circumstances, as well as under what laws 
 it develops. Before beginning the inquiry itself he is careful 
 to put down with minute exactitude all the assumptions of 
 
 1 Der isolirte Stoat, second edition, Rostock, 1842-63. The page numbers 
 quoted in the text refer to the first division of the second part (1850).
 
 CHAP, in THUNEN 165 
 
 fact with which he starts, as well as the terminology he means 
 to use (pp. 74-90). This is valuable to Thiinen as an aid to 
 literary self-control, and is a characteristic example of his 
 conscientious thoroughness. 
 
 From this introduction we find that Thiinen starts by 
 supposing a people living in a latitude of tropical fruitfulness, 
 equipped with all the capacity, knowledge, and skill of civil- 
 isation, but still, so far, absolutely without capital, and without 
 communication with other peoples ; so that the accumulation 
 of capital must come from within, and not be influenced at 
 all from outside. Land has as yet no exchange value. All 
 men are equal in position, equally capable, and equally saving, 
 and get their means of support from labour. 
 
 The standard of value which Thiinen makes use of for the 
 scope of his inquiry is the labourer's means of subsistence, 
 taking as unit the hundredth part of the means of subsistence 
 required by a labourer during a year. The year's need he 
 calls s, the hundredth part he calls c; so that s = 100c. 
 
 "Suppose," he begins (p. 90), "that the worker, if diligent 
 and saving, can produce by his hands 10 per cent more than 
 he requires for his necessary subsistence say llOc in the 
 year. Then, after deducting what he must spend for his own 
 support, there remains over lOc. 
 
 " In the course, then, of ten years he may accumulate a 
 store on which he can live for a year without working ; or he 
 may for the one whole year devote his labour to the making 
 of useful tools that is, to the creation of capital 
 
 "Let us follow him now in the labour that creates the 
 capital 
 
 " With a hewn flint he manages to make wood into a bow 
 and arrow. A fish bone serves for the arrow's point From 
 the stalk of the plantain, or the fibrous covering of the cocoa- 
 nut, he makes string or packthread ; the one he uses to string 
 the bow, with the other he makes fishing nets. 
 
 " In the following year he applies himself again to the pro- 
 duction of means of subsistence, but he is now provided with 
 bow, arrows, and nets ; with the help of those tools his work is 
 much more remunerative, the product of his work much greater. 
 
 " Suppose that in this way the result of his work, after de- 
 ducting what he must spend to keep the tools in an equally
 
 166 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 good state, rises from 110 to 150c, then he can lay by in one 
 year 50c, and he only needs to devote two years now to the 
 production of the means of subsistence, when he is free again 
 to spend a whole year in the making of bows and nets. 
 
 " Now he himself can make no use of these, since the tools 
 made in the previous year are sufficient for his needs ; but he 
 can lend them to a worker who up till now has worked without 
 capital. 
 
 "This second worker has been producing llOc ; if then he 
 is lent the capital, on which the labourer who made it has ex- 
 pended a year's labour, his production, if he keeps up the 
 value of the tools lent him and returns them, is 150C. 1 
 
 " The extra production got by means of capital amounts 
 therefore to 40c. 
 
 " This worker can consequently pay a rent of 40c for the 
 borrowed capital, and this sum the worker who produced the 
 capital draws in perpetuity for his one year's labour. 
 
 " Here we have the origin and ground of interest, and its 
 relation to capital. As the wages of labour are to the amount 
 of rent which the same labour, if applied to the production of 
 capital, creates, so is capital to interest. 
 
 " In the present case the wage of a year's work is llOc; 
 the rent brought in by the capital that is, the result of a 
 year's labour is 40c. 
 
 "The ratio therefore is llOc : 40c = 100 : 36'4, and the 
 rate of interest is 3 6 '4 per cent." 
 
 The passage that follows refers not so much to the origin 
 as to the rate of interest, and I shall only make a brief abstract 
 of such of the leading ideas as may illustrate Thunen's 
 conception still further. 
 
 According to Thiinen, as capital increases, its productive 
 efficiency declines, each new increment of capital increasing 
 
 1 " But how can the object lent be kept and returned in equally good condition 
 and equal in value ? This, I admit, does not hold in the case of individual 
 objects, but it certainly does in the totality of objects lent within a nation. If, 
 e.g. any one hires out one hundred buildings for one hundred years, under the 
 condition that the hirer annually erects a new building, the hundred buildings do 
 retain equal value in spite of the annual wear and tear. In this inquiry we must 
 necessarily direct our attention to the whole, and if here only two persons are 
 represented as dealing with one another, it is simply a picture by which we may 
 make clear the movement that goes on simultaneously over the whole nation " 
 (note by Thiinen).
 
 CHAP, in THVNEN 167 
 
 the product of human labour in a less degree than the capital 
 formerly applied. If, e.g. the first capital increased the return 
 to labour by 40c say from llOc to 150c the capital next 
 applied may bring a further increase of only 36c, a third 
 capital 32'4c, and so on. This on two grounds. 
 
 1. If the most efficient of the tools, machines, etc., which 
 constitute capital, are to be had in sufficient quantity, then the 
 further production of capital must be directed to tools of less 
 efficiency. 
 
 2. In agriculture the increment to capital, if it every- 
 where finds employment, leads to the cultivation of less fertile 
 and less favourably situated lands, or to a more intensive 
 cultivation that necessitates greater costs ; and in these cases 
 the capital last employed brings a less rent than that formerly 
 employed (p. 195, and more in detail, p. 93). 
 
 In proportion as the extra return produced by the efficiency 
 of capital declines, naturally the price that will and can be 
 paid for the use of the capital transferred to the borrower also 
 declines ; and since there cannot be alongside each other two 
 different rates of interest one for the capital first applied and 
 another for the capital applied later the interest on capital as 
 a whole adjusts itself to " the use of that portion of capital 
 which is last applied" (p. 100). In virtue of these circum- 
 stances the rate of interest tends to sink with the increase of 
 capital, and the reduction of rent that follows from this is to 
 the advantage of the labourer, inasmuch as it raises the wage 
 of his labour (p. 101). 
 
 We see then that Thlinen very distinctly makes the pro- 
 ductive efficiency of capital his starting-point. Not only is 
 this productive efficiency the origin of interest, but the 
 current degree of the efficiency exactly determines the rate of 
 interest. 
 
 Xow the value of this theory depends altogether on the way 
 in which is explained the connection that exists between the 
 greater productiveness of labour supported by capital and the 
 obtaining of a surplus value by the owner of capital. 
 
 Thlinen happily keeps clear of two dangerous pitfalls. He 
 has no fiction of a value-creating power in capital; he only 
 ascribes to it what it actually has, viz. the capacity to assist
 
 168 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 towards the production of more products in other words, 
 physical productivity. And second, he has escaped the fatal 
 confusion of gross and net interest. What he calls net 
 interest, the 40, 36, 32'4c, etc., which the capitalist receives, 
 is really net interest, it being expressly assumed (p. 91) that 
 the debtor, over and above that interest, fully replaces the 
 value of the capital. 
 
 But by this very hypothesis Thiinen has laid his interest 
 theory open to attack from another side. 
 
 The connection of ideas which in Thiinen's theory leads 
 from the physical productivity of capital to the obtaining of 
 surplus value by the capitalist may be put as follows : 
 
 1. Labour supported by capital can obtain a greater 
 amount of products. This assumption is undoubtedly correct 
 
 2. The plus, which is traceable to the employment of 
 capital, is made up, in Thiinen's illustration, of two compo- 
 nents : first, of the 40, 36, or 32'4c, which the capitalist 
 receives in means of subsistence ; and second, of the replacement 
 of the real capital consumed in the employment. It is the 
 two components together that make up the gross return to the 
 employment of capital. A little calculation will show that 
 this important proposition, although not plainly stated by 
 Thiinen, is really contained in his doctrine. According 
 to Thiinen, a year's labour unassisted by capital produces 
 llOc. A year's labour assisted by capital is sufficient, not 
 only to renew the capital so far as it has experienced wear 
 and tear, but to produce 150c besides. The difference of the 
 two results, which represents the plus due the employment of 
 capital, presents, therefore, as a fact 40c and the upkeep of 
 the capital. Still it must be confessed that Thiinen has kept 
 the existence of the second component very much in the back- 
 ground not indeed mentioning it again except in two 
 passages of p. 91, and entirely omitting to notice it in making 
 out his later tables (pp. 98, 110, etc.) The exactness of 
 these tables is thus marred in no slight degree. For it may 
 be imagined that, when capitals representing six or ten years' 
 labour are employed, the yearly labour spent in replacing them 
 must absorb a considerable portion of the whole labour power 
 of the user. 
 
 3. The excess production called forth by the employment
 
 CHAP, in THUNEN 169 
 
 of capital l ( = renewal -f- 40 or 36 or 32'4c, as the case may be) 
 falls to the capitalist as such. This assumption of Thiinen's 
 is, in. my opinion, on the whole correct, even if the war 
 of prices may often modify the share of the capitalist in 
 individual cases. 
 
 4. This gross production of capital that falls to the capital- 
 ist is regularly more valuable than the real capital consumed 
 in obtaining it, so that a net production, a net interest, an 
 excess value remains. This proposition forms the natural 
 conclusion to the chain of thought. Thiinen has not put it 
 any more than the others in the form of a general theoretical 
 proposition. It only appears in the fact that his illustration 
 shows a regular surplus value in the amount received by the 
 capitalist over the amount given out by him, and this of 
 course seeing that the illustration chosen is meant to be a 
 typical one comes pretty much to an express formulation of 
 the theoretical proposition ; all the more so that Thiinen was 
 bound to maintain and explain a permanent surplus value of 
 the return to capital over the sacrifice of capital, if he meant 
 to explain the interest which is this very surplus value. 
 
 At this point we come to the last and the decisive stage in 
 Thiinen's argument. Hitherto we have found nothing essential 
 to object to, but just at this critical point the weakness of his 
 theory betrays itself. 
 
 When we ask, In what way does Thiinen explain and give 
 reasons for the existence of this surplus value? it must be 
 answered that he does not explain it, but assumes it. Indeed 
 the decisive assumption has merely slipped in at that very insig- 
 nificant passage where Thiinen says that the possession of a 
 capital enables the worker to produce a surplus product of 40, 
 36, and so on, after deduction of what is necessary to give back 
 the capital " in equally good condition " and " equal in value" 
 
 If we look more closely at this apparently harmless pro- 
 position, we find it to contain the assumption that capital 
 possesses power (1) to reproduce itself and its own value, and 
 (2) over and above that, to produce something more. If, as is 
 here assumed, the product of capital is always a sum of which 
 
 1 To avoid misunderstandings I should emphasise that Thiinen assumes the 
 surplus production of the capital last applied to be the standard for the whole 
 amount of capital.
 
 170 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 one constituent alone is equal to the whole sacrifice of capital, 
 then it needs no explanation that the whole sum must be 
 worth more than that sacrifice, and Thiinen is quite right not 
 to trouble with any further explanation. But the question is, 
 Was Thiinen justified in assuming any such efficiency in 
 capital ? 
 
 To my mind this question must be answered distinctly in 
 the negative. It is true that, in the concrete situation first 
 supposed by Thiinen, that assumption may appear to us quite 
 plausible. We find nothing at all out of place in assuming, 
 not only that the hunter equipped with bow and arrows is 
 able to bring down forty more head of game than he could 
 without those weapons, but that he might also have time 
 enough over to keep his bow and arrows in good condition, or 
 to renew them ; so that his renewed capital was worth as much 
 at the end of the year as it was at the beginning. But is it 
 allowable for any one to make analogous suppositions in 
 regard to a complicated condition of economical affairs that 
 is, a condition in which capital is too various, and the division 
 of labour too complete, to allow of the capital being renewed 
 by the labourer who has been using it ? If this labourer 
 must pay for the renewal of the capital, is it self-evident that 
 the excess in products obtained by the help of the capital will 
 exceed the costs of the renewal, or the value of the capital 
 consumed ? 
 
 Certainly not. There are, on the contrary, two conceivable 
 possibilities by which the surplus value might be swept away. 
 First, it is conceivable that the great productive utility assured 
 by possession of the capital increases the economical estimate of 
 this capital so much that its value comes up to the value of 
 the expected product ; that, e.g. bows and arrows which, during 
 the whole term of their existence, secure the obtaining of 100 
 head more of game become equal in value to the 100 head. 
 In that case the hunter, in order to replace the weapons worn 
 out, would be obliged to give to the maker of the weapons the 
 whole surplus return of 100 head (or the value of the 100 
 head), and would retain nothing to pay surplus value or interest 
 to the man who lent him the weapons. 
 
 Or, second, it is conceivable that the competition in the 
 making of weapons is so severe that it presses down their price
 
 CHAP, in THUNEN 171 
 
 below that very high economical estimate. But will this same 
 competition not also, of necessity, press down the claims which 
 the capitalist may impose when lending the weapons ? Lauder- 
 dale has assumed such a pressure ; so has Carey ; and our 
 experience of economical life leaves no doubt that such a 
 pressure will be exerted. Now here we ask, as we did in the 
 case of Lauderdale, Why should the pressure of competition 
 on the capitalist's share never be so strong as to press down its 
 value to the value of the capital itself ? Why is it that there 
 is not so great a quantity of any particular form of capital 
 produced and employed that its employment returns just 
 enough to replace the capital and no more ? But if this were 
 to happen, the surplus value, and with it the interest, would, 
 in this case also, disappear. 
 
 There are, in short, three possibilities in the relation between 
 the value of the product of capital and the value of the capital 
 that produces that product. Either the value of the product 
 raises the value of the real capital to the level of its own 
 value ; or, through competition, the value of the real capital 
 brings down the value of the return to capital to its own value ; 
 or, finally, the share of capital in the product remains steadily 
 above the value of the real capital. Thlinen presupposes 
 the third of these possibilities without either proving or 
 explaining it ; and thus, instead of explaining the whole 
 phenomenon which is ostensibly the subject of explanation, 
 he has assumed it. 
 
 Our final judgment must, therefore, be expressed as follows. 
 Thlinen gives a more subtle, more consistent, more thorough 
 version of the Productivity theory than any of his predecessors, 
 but he too stumbles at the most critical step ; where the 
 problem is to deduce surplus value from the physical pro- 
 ductivity of capital, from the surplus in products, he 
 includes among his assumptions the thing he has to explain. 1 
 
 1 Not to burden the statement in the text by more difficulties than 
 I am compelled to bring before the reader, I shall put a few considerations 
 supplementary to the above criticism as a note. Thiinen makes two essays 
 which, possibly, may be interpreted as attempts to justify the above assumption, 
 and thus to give a real explanation of interest. The first essay is the remark he very 
 often makes (pp. Ill, 149), that capital obtains its highest rent when a certain 
 amount of it has been laid out, and that rent sinks when that limit is overstepped ; 
 so that capitalist producers have no interest in pushing their production beyond 
 this point. It is possible to read this proposition as explanatory of the fact that
 
 172 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 Thiinen's method marks a high level of solid and well 
 considered investigation. Unfortunately this level was not 
 long maintained, even in the literature of his own nation. 
 In his successors, Glaser 1 and Roesler, 2 who wrote on the 
 
 the supply of capital can never be so great as to press down the net interest to 
 zero. But this consideration of the totality of profits made by capitalists has 
 no deciding influence, perhaps no influence at all on the action of individual 
 capitalists ; it cannot, therefore, prevent the further growth of capital. Every 
 one ascribes, and rightly ascribes, to the increase of capital formed by his 
 own individual saving, an infinitely small effect on the height of the general 
 interest rate. On the other hand, every one knows that this individual saving 
 has a very notable effect in increasing the income that he individually gets in the 
 shape of interest. For this reason every one who has the inclination, and who 
 has the chance, will save, undisturbed by any such considerations ; just as every 
 landowner improves his land and betters his methods of cultivation, even when 
 he knows, as a matter of theory, that if all owners were to do the same it would 
 necessarily be followed, if the state of population remain unchanged, by a fall in 
 the price of products and, notwithstanding reduced costs, by a fall in rent. 
 
 The second attempt might be found in Thiinen's note quoted above on p. 
 166, at that place where he speaks of the renewal of the capital by the borrower. 
 There Thiinen points out that " in this inquiry we must necessarily direct our 
 attention to the whole." It is conceivable that this warning might be taken as 
 an attempt to prove that the phenomenon supposed in the text, where the user 
 of capital renews it by his own labour, and beyond that obtains a surplus product, 
 maintains its validity in all economic circumstances, provided the people as a whole 
 be substituted for the individual. That is to say, even if the single individual 
 cannot by his own personal labour renew the capital consumed by him, it will 
 hold, as regards the whole people, that by the use of capital men are able to 
 obtain a surplus product, and "besides, with a portion of the saved labour, to 
 replace the capital consumed. In this line of thought, then, we might see a 
 support of the objection I made in the text, where I pronounced Thiinen's 
 hypothesis to be applicable only to the simplest cases, and to be inadmissible in 
 complicated ones. I do not think that this warning to look at the wholes-was 
 meant by Thiinen in the sense I have just indicated. But if it was, it does not 
 take anything from the force of my objection. For in questions of distribution 
 and the question of interest is a question of distribution it is not right in every 
 circumstance to look at the whole. From the fact that society, as a whole, is 
 able by the help of capital to renew this capital itself, and over and above that, 
 to produce more products, it does not follow at all that there should be interest 
 on capital. For this plus in products might just as well accrue to the labourers 
 as surplus wage (they being certainly as indispensable to the obtaining of it as 
 the capital) as to the capitalist in the shape of interest. The fact is that interest, 
 as surplus value of individual return over individual expenditure of capital, 
 depends on the individual always obtaining particular forms of capital at a price 
 which is less than the value of the surplus product obtained by means of them. 
 But the consideration of society as a whole will not by itself guarantee this to 
 the individual ; at any rate it is not self-evident that it will do so. If it were 
 so surely there would not be so many theories over a self-evident thing ! 
 
 1 Die allgemeine Wirthschaftslehre oder Nationtd-Oekonomie, Berlin, 1852. 
 
 2 Kritik der Lehre vom Arbeitslohn, 1861. Grundsatze der VoUcswirth-
 
 CHAP, in STRASBURGER 173 
 
 same lines, we see a distinct falling off in thoroughness of 
 conception and strictness of method. 
 
 In the interval, however, the Productivity theories had 
 become the object of serious and weighty attacks. Rodbertus, 
 in a quiet but effective criticism, had accused them of con- 
 fusing questions of distribution and questions of production ; 
 pointing out that, in assuming the portion of the total product 
 called profit to be a specific product of capital, they had 
 committed a petitio principii ; at the same time enunciating his 
 own formula that the sole source of all wealth was labour. 
 Then Lasalle and Marx had varied this theme, each in his 
 own way ; the one with vehemence and wit, the other bluntly 
 and ruthlessly. 
 
 These attacks called out a reply from the camp of the 
 Productivity theorists, and with this we shall conclude a 
 chapter already too long. It comes from the pen of a still 
 youthful scholar, but it commands our full consideration ; 
 partly from the position of its author, who, as a member of the 
 Staatswissenschaftliche Seminar in Jena, and therefore in close 
 scientific relation with the leading representatives of the his- 
 torical school in Germany, may well be taken as representing 
 the views ruling in that school ; partly from the circumstances 
 which called out that reply. For, as it was written with full 
 knowledge of the weighty attacks which Marx in his great book 
 had directed against the productivity of capital, and in refuta- 
 tion of these attacks, we are justified in expecting it to contain 
 the best and the most cogent that its author, after full 
 critical consideration, was able to say in favour of the Pro- 
 ductivity theory. 
 
 The reply is to be found in two essays of K. Strasburger, 
 published in 1871 in Hildebrand's Jahrbucher fur National- 
 Oekonomie und Statistik. 1 
 
 The substance of his theory Strasburger has condensed in 
 the second of these essays as follows : 
 
 " Capital supplies natural powers which, while accessible to 
 
 schaftslehre, 1864. Vorlesungen uber Volkswirthschafi, 1878. In the German 
 edition Professor Bohm-Bawerk has devoted several pages to statement and 
 criticism of these two writers ; but in the present edition he wishes me to omit 
 them as of little importance. W. S. 
 
 1 " Zur Kritik der Lehre Marx' vom Kapitale " and "Kritik der Lehre vom 
 Arbeitslohn," vols. xvi. and xvii. of above.
 
 174 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 every one, can often be applied to a definite production only 
 by its help. Not every one possesses the means of subordi- 
 nating those natural powers. The power of the man who 
 works with a small capital is spent in doing things that are 
 done for another man who is amply supplied with capital by 
 natural powers. On this account the work of natural powers, 
 if effected through the medium of capital, is no gift of nature; it 
 is taken into account in exchange ; and lie who has no capital 
 must give over the product of his own labour to the capitalist 
 for the work of the natural powers. Capital, therefore, pro- 
 duces values, but the role it plays in production is quite 
 different from that played by labour." 
 
 And a little farther on (p. 329) he says: "What has 
 been already said will show how we understand the productivity 
 of capital. Capital produces values inasmuch as it gets natural 
 powers to do work which otherwise would have to be done by 
 man. The productivity of. capital, therefore, rests upon its 
 activity in production being distinct from that of living labour. 
 We have said that the work of natural powers is considered 
 in exchange as an equivalent of human labour. Marx main- 
 tains the contrary. He thinks that, if one worker is assisted 
 in his work by natural powers more than another, he creates 
 more use values the quantity of his products is greater ; but 
 that the action of the natural powers does not raise the 
 exchange value of the commodities produced by him. For 
 refutation of this view it is sufficient to remember what we 
 have already noted above that it is not every one who 
 possesses these means of subordinating natural powers ; those 
 who possess no capital must buy its work by means of their 
 own labour. Or if they work by the help of another man's 
 capital, they must give over to him a share of the value 
 produced. This share of the value newly produced is profit : 
 the drawing of a certain income by the capitalist is founded 
 on the nature of capital." 
 
 If we condense the substance of this still further we get 
 the following explanation. 
 
 While it is true that natural powers are in themselves 
 gratuitous, it is often only by the help of capital that they 
 can be made of use. Now since capital is only available in 
 limited quantity, its owners are able to obtain a payment for
 
 CHAP, in STRASBURGER 175 
 
 the co-operation of the natural powers thus made available. 
 This payment is profit. Profit, therefore, is explained by the 
 necessity of paying a price to the capitalists for the co-operation 
 of natural powers. 
 
 What success has this theory in explaining the phenomena 
 under discussion ? 
 
 Strasburger's premises may be readily conceded. I grant 
 at once that many natural powers can only be utilised through 
 the mediation of capital ; and I also grant that, the amount 
 of capital being limited, the owner of it may be able to get 
 paid for the co-operation of the natural powers thus made 
 available. But what I cannot grant is, that these premises 
 tell us anything at all of the origin of interest. It is a hasty 
 and unreasoned assumption of Strasburger that the existence 
 of interest follows from these premises, so long as these premises, 
 in their very nature, lead to entirely different economical pheno- 
 mena. It should not be difficult to expose Strasburger's mistake. 
 
 Only one of two things is here possible : either capital can 
 only be had in such a limited quantity that the capitalists can 
 obtain a payment for the powers of nature made available ; or 
 it can be had in unlimited quantity. Strasburger's theory 
 assumes the former of these to be the case. Accepting this 
 we ask, How does the capitalist, in practical business life, 
 actually obtain payment for the natural powers ? 
 
 It would be a hasty petitio principii to answer, Simply 
 by pocketing the profit. A very little consideration will make 
 it clear that, if interest comes from the payment of natural 
 powers, it can only make its appearance as a secondary result 
 of more complicated economical processes. That is to say, 
 since natural powers reside in capital, it is obvious they can 
 only be made use of at the same time as the services of 
 capital are made use of. But, further, since capital has come 
 into being through the expenditure of labour, and when 
 used either perishes in a single use or wears itself out 
 gradually, it is clear that, wherever the services of capital are 
 made use of, the labour that is embedded in the capital must 
 be paid for also. The payment for natural powers, therefore, 
 can only accrue to the capitalist as a constituent portion of 
 a gross return, which, over and above that payment, contains 
 a second payment for expenditure of labour.
 
 176 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 To be still more exact. The economical process by which 
 the capitalist receives payment for natural powers is the sale of 
 the services of his capital at a higher price than that which 
 represents the expenditure of labour made in producing the 
 concrete capital in question. If, e.g. a machine which lasts for 
 a year is made at the expenditure of 365 days of labour, and 
 if the customary day's wage is half a crown, to sell the daily 
 services of the machine for half a crown would only just pay 
 for the labour embedded in the machine, and leave nothing 
 over for the natural powers that it makes available. No 
 payment for these natural powers emerges until the daily 
 services of the machine are paid for by more than half a crown 
 - say by 2s. 9d. 
 
 Now this general process may take place under several 
 different forms. 
 
 One of these forms is when the owner of the capital uses 
 it himself in production as an undertaker. In this first case, 
 the payment of the total services of capital consists in that pro- 
 portion of the product which remains over after deducting the 
 other expenses of production, such as use of ground and direct 
 labour. This constitutes the " gross return to capital." If this 
 gross return, calculated by the day, amounts to 2s. 9d., and if 
 2s. 6d. only is required to pay for the labour which has created 
 the capital used up in a day, the surplus of 3d. a day represents 
 the payment for natural powers. It must not be taken for 
 granted, however, that this surplus is profit on capital On 
 that we shall decide later. 
 
 In a second and more direct way, the services of capital 
 may obtain payment by hiring. If our machine obtains a 
 day's hire of 2s. 9d., in exactly the same way 2s. 6d. will 
 represent the payment of the labour expended in making the 
 machine, and the surplus of 3d. again represents the payment 
 for natural powers. 
 
 But there is still a third way in which a man may part 
 with the services of capital that is, by parting with the 
 capital itself; which, economically, amounts to a cumulative 
 parting with all the services which that capital is able to 
 perform. 1 Now in this case will the capitalist be content if 
 he is compensated for the labour embedded in th,e machine? 
 
 1 See Knies, Kredit, part ii. pp. 34, 37.
 
 CHAP, in STRASBURGER 177 
 
 Will he not also demand a compensation for the natural 
 powers that are made available by its use ? Of course he 
 will. There is absolutely no ground to conceive why he 
 should get paid for natural powers in the case of a successive 
 parting with the machine's services, and not in the case of a 
 cumulative parting with them ; especially when, with Stras- 
 burger, we have assumed that the quantity of capital is so 
 limited that he can compel such a payment. 
 
 What form, then, will the payment for natural powers 
 take in this case ? Quite naturally they will take this form : 
 the price of the machine will rise above that amount which 
 represents the customary payment of the labour employed 
 in making the machine. Therefore, if the machine has 
 cost 365 days of labour at 2s. 6d. a day, its purchase price 
 will amount to more than 365 half-crowns. And since there 
 is no reason why, in cumulative parting with the services 
 of capital, natural powers should be paid for at a cheaper 
 rate than in successive partings, we may, as in our former 
 suppositions, assume in this case also a payment for natural 
 powers at 10 per cent of the l-.jour payment. Consequently 
 the capital price would be fixed at 365 + 36'5 = 401'5 half- 
 crowns, or 50 : 3 : 9. 
 
 Now what about interest under these suppositions ? There 
 is no difficulty in answering this. The owner of the machine, 
 who employs it in his own undertaking, or hires it out, draws 
 2s. 9d. a day for its services during the year which it lasts. 
 That yields a total income of 365 x 2s. 9d. = 50 : 3 : 9. But 
 since the machine itself is worn out through the year's use, 
 and its capital value amounted to quite 50:3:9, there 
 remains as surplus, as pure interest, nothing. Although, 
 therefore, the capitalist has got paid for natural powers, there 
 is no interest ; a clear proof that the cause of interest must lie 
 in something else than payment for natural powers. 
 
 An objection may very probably be made at this point. 
 It may be said, It is not possible for the value of real capital 
 to remain so high that its producers obtain in the price a 
 premium for natural powers; in such a case the production 
 of capital would be too remunerative, and would certainly call 
 out a competition that, in the long run, would press down the 
 value of the real capital to the value of the labour employed
 
 178 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 in its production. E.g. if a machine that had cost 365 days' 
 labour should, in consequence of natural powers being made 
 available by it, fetch a price of 50:3:9; then, supposing 
 the usual wage in other employments to be 2s. 6d. a day, the 
 labour directed to the making of such machines would be more 
 remunerative than any other kind of labour ; as a consequence 
 there would be a great rush into this branch of production, 
 and the manufacture of those machines would be multiplied 
 till the increased competition had pressed down their price to 
 365 half-crowns per machine. At the same time the advan- 
 tage obtainable by the labourer from their use would be 
 pressed down to the normal standard. 
 
 I grant at once the possibility of such an occurrence. 
 But I ask, on the other hand, If the machines have become 
 so numerous, and competition so strong that their producer 
 is glad to sell them at a bare compensation for his labour, 
 and can calculate nothing for the use of the natural powers 
 which he makes available, how should he, in hiring out these 
 machines, or employing them himself, be able all at once to 
 demand something for natural powers ? There is only one 
 alternative. Either the machines are scarce enough to allow 
 of a calculation for natural powers ; in which case their scarcity 
 will serve as well in selling as in hiring, and the capital value 
 of the machines will rise to the point of absorption of gross 
 interest, if no other thing prevents it. Or the machines are made 
 in such quantity that any calculation for natural powers is 
 made impossible by the pressure of competition ; in which case 
 it will be as true for the hiring as for the selling, and gross 
 interest will fall till it is once more absorbed in the cost of 
 replacement always supposing, again, that there is not some 
 factor, outside of the payment for natural powers, which keeps 
 the two quantities apart. 
 
 Thus Strasburger, like many of his predecessors, has missed 
 the very point which was to be explained. He shows, perhaps, 
 why the gross interest which capital yields is high in our 
 illustration, why the machine yields 2s. 9 d. instead of half-a- 
 crown per day but he does not show why the value of the 
 capital itself does not rise in the same proportion. He does 
 not explain why a machine which yields 2s. 9d. per day for 
 365 days is .not valued at 365 X 2s. 9d. = 50:3:9, but
 
 CHAP, in STRASBURGER 179 
 
 only at 365 half -crowns = 4 7. But the writer who means 
 to explain net interest must explain just this difference between 
 the value of the capital itself and the sum of its total gross 
 productiveness. 
 
 It is characteristic of the Indirect Productivity theories that 
 after almost seventy years' development they should end nearly 
 at the same point as that from which they started. What 
 Strasburger teaches in the year 1871 is in substance almost 
 exactly what Lauderdale taught in 1804. The "power of 
 capital to replace labourers," which power, on account of its 
 scarcity and in the measure of its scarcity, enables the capitalist 
 to obtain a payment, is only different in name from the natural 
 powers which the possession of capital makes available, and 
 which, equally in the measure of the scarcity of capital, compel 
 a payment. Here as there is the same confounding of gross 
 interest and capital value on the one side, and gross interest 
 and net interest on the other ; the same misinterpretation of the 
 true effects of premises assumed ; the same neglect of the true 
 causes of the phenomenon under discussion. 
 
 In this return to the starting-point is seen the whole 
 barrenness of the development that lies between. This 
 barrenness was no accident. It was not simply an unfortunate 
 chance that no one found the Open Sesame which had the power 
 to discover the mysterious origination of interest in the 
 productivity of capital. It was rather that on the road to 
 the truth a wrong turning had been taken. From the first it 
 was a hopeless endeavour 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 and value of consumed capital is the sub- 
 trahend. The productive power of capital may find its result 
 in increasing the minuend. But so far as that goes it cannot 
 increase the minuend without at the same time increasing the 
 subtrahend in the same proportion. For the productive power
 
 180 THE INDIRECT PRODUCTIVITY THEORIES BOOK n 
 
 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. 
 
 I may be allowed, in conclusion, one more comparison. If 
 a log is thrown across a flooded stream the level of water below 
 the log will be less than the level of water above the log. If 
 it is asked why the water stands higher above the log than 
 below, would any one think of the flood as the cause ? Of course 
 not. For although that flood causes the water above the log 
 to stand high, it tends at the same time, so far as that is 
 concerned, to raise the level of the water below the log just 
 as high. It is the cause of the water being " high " ; what 
 causes it to stand " higher " is not the flood, but the log. 
 
 Now what the flood is to the differences of level, the 
 productive power of capital is to surplus value. It may be an 
 adequate cause of the value of the product of capital being 
 high, but it cannot be the adequate cause that the product 
 is higher in value than the capital itself, seeing that it feeds 
 and raises the level of the capital in the same way as it does 
 that of the product. The true cause of the " plus " in this 
 case also is a log, and a log which has not been so much 
 as mentioned by the Productivity theories proper. It has 
 been sought by other theories in various things ; sometimes in 
 the sacrifice of a use, sometimes in the sacrifice of abstinence, 
 sometimes in a sacrifice of work devoted to make capital, 
 sometimes simply in the exploiting pressure of capitalist on 
 labourer ; but so far as we have gone there has been no satis- 
 factory recognition of its nature and action. 1 
 
 1 Many readers Eiay wonder why a writer who shows himself so very decidedly 
 opposed to the Productivity theory, does not at all avail himself of the abundant 
 and powerful support given by the socialist criticism ; in other words, why
 
 CHAP, in PRODUCTIVITY AND SURPLUS VALUE 181 
 
 I do not dismiss the theory with the argument that capital itself is the 
 product of labour, and thus its productivity, whatever else it be, is not an 
 originating power. The reason simply is that I attribute to this argument only 
 a secondary importance in the theoretical explanation of interest. The state 
 of the case seems to me to be as follows. No one will question that capita], 
 once made, manifests a certain productive effect. A steam-engine, e.g. is in any 
 case the cause of a certain productive result. The primary theoretic question 
 suggested by this state of matters now is, Is that productive capacity of capital 
 of capital made and ready the quite sufficient cause of interest ? If this 
 question were answered in the affirmative, then of course, in the second place, 
 would come the question whether the productive power of capital is an inde- 
 pendent power of capital, or whether it is only derived from the labour which 
 has produced the capital ; in other words, whether (manual) labour, through 
 the medium of capital, should not be considered the true cause of interest. But 
 having answered the first question in the negative, I have no occasion to enter 
 on the secondary question, whether the productive power of capital is an 
 originating power or not. Besides, in a later chapter I shall have the opportunity 
 of taking a position on the latter question.
 
 BOOK El 
 
 THE USE THEOEIES
 
 CHAPTEE I 
 
 THE USE OF CAPITAL 
 
 THE Use theories are an offshoot of the Productivity theories, but 
 an offshoot which quickly grew into an independent life of its own. 
 
 They attach themselves directly to that idea on which the 
 Productivity theories proper got into difficulties, the idea that 
 there is an exact causal connection between the value of pro- 
 ducts and the value of their means of production. If, as 
 economists began to recognise, the value of every product is, as 
 a rule, identical with the value of the means of production 
 expended in making it, then every attempt to explain surplus 
 value by the productive power of capital must fail ; for the 
 higher that power raises the value of the product, the higher 
 must it raise the value of the capital itself as identical with it. 
 The latter must follow the former with the fidelity of a 
 shadow, and there should be no possibility of the slightest 
 space between them. 
 
 Nevertheless there is a space. 
 
 This line of thought suggested almost of itself a new way 
 of explanation. If, on the one hand, it is true that the value 
 of every product is identical with the value of the means of 
 production sacrificed in making it, and if, on the other hand, 
 it is observed that, notwithstanding this, the product of capital 
 is regularly greater than the value of the real capital thus 
 sacrificed, the conviction almost forces itself on us that this 
 real capital may not represent all the sacrifice that is made 
 to obtain a product. Perhaps, besides this real capital, there is 
 something else that must be expended at the same time ; a 
 something which claims a part of the value of the product, 
 the surplus value we are inquiring about.
 
 186 THE USE OF CAPITAL BOOK HI 
 
 This Something was sought and found. Indeed, we might 
 say that more than one was found. Three distinct opinions 
 were put forward as to its nature ; and out of the one funda- 
 mental idea there grew three distinct theories the Use theory, 
 the Abstinence theory, and the Labour theory. Of these the 
 one that kept most closely by the Productivity theories, and 
 indeed made its first appearance simply as an extension of 
 them, is the Use theory. 
 
 The fundamental idea of the Use theory is the following. 
 Besides the substance of capital, the use (Gebrauch or Nutzung} 
 of capital is an object of independent nature and of inde- 
 pendent value. To obtain a return for capital it is not enough I 
 to sacrifice substance of capital alone ; the use of the capital I 
 employed must be sacrificed also during the period of the | 
 production. Now since, as a matter of theory, the value of 
 the product is equal to the sum of the values of the means 
 of production spent in making it, and since, in conformity 
 with this principle, the substance of capital and the use of 
 capital, taken together, are equal to the value of the product, 
 this product naturally must be greater than the value of the 
 substance of capital by itself. In this way the phenomenon 
 of surplus value is explained as being the share that falls to 
 the part sacrifice, the " use of capital." 
 
 This theory of course assumes that capital is productive, 
 but less emphatically, and in a way that is quite free from 
 ambiguity. It assumes that the accession of capital to a given 
 amount of labour assists in obtaining a relatively greater product 
 than labour, unsupported by capital, could obtain. It is not 
 necessary, however, that the capitalist process of production 
 on the whole, embracing as it does both the making and the 
 employing of capital, should be profitable. If, e.g. a fisherman 
 makes a net by 100 days' labour, and with the net catches 
 500 fish in the 100 days during which the net lasts, while 
 another fisherman without any net has been able to catch 
 three fish a day for the 200 days, evidently the total process 
 has not been a profitable one. Notwithstanding the employ- 
 ment of capital, only 500 fish have been caught by an outlay 
 of 200 days' labour, while in the other case 600 fish have 
 been caught. Nevertheless, according to the Use theory 
 as also according to facts the net once made must bear
 
 CHAP, i ACCORDING TO THE USE THEORY 187 
 
 interest. For, once made, it helps to catch more fish than 
 could be caught without a net, and this fact is sufficient to 
 assure the surplus return of 200 fish being calculated as due 
 to its assistance. But it is only calculated as such in 
 association with its use. There will be ascribed, therefore, a 
 part return of, perhaps 190 fish, or their value, to the substance 
 of the net ; the remainder will be ascribed to the use of the 
 net. Thus emerges a surplus value and an interest on capital. 
 
 If this very moderate amount of physical productivity on 
 the part of capital is sufficient, according to the Use theory, to 
 cause surplus value, it is self-evident that this theory in no 
 way assumes any direct value productivity; indeed, rightly 
 understood, it really excludes it. 
 
 The relation of the 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 neces- 
 sary 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 explanation of surplus value, 
 more on the productive power of capital or on the arguments 
 peculiar to the Use theory. It is only gradually that the Use 
 theories have cut themselves clear of this confusion with the 
 Productivity theory, and developed in complete independence. 1 
 
 In what follows I mean, first, to show the historical 
 development of the Use theories. Criticism of them I shall 
 divide into two parts. Such critical remarks as refer simply 
 to individual defects in individual theories I shall include at 
 once with the historical statement. My critical estimate of 
 the school as a whole will follow in a separate chapter. 
 
 1 The hesitating way in which many of the Use theorists have expressed 
 themselves is to blame in great part for the fact that, up till now, so little, 
 attention has been paid to the independent existence of these theories. Their 
 representatives were usually classed with the adherents of the Productivity 
 theories proper, and it was considered that the former had been confuted when 
 only the latter had been. From what I have said above it will be seen that 
 this is quite erroneous. The two groups of theories rest on essentially distinct 
 principles.
 
 CHAPTEE II 
 
 HISTORICAL STATEMENT 
 
 THE development of the Use theory is associated for the most 
 part with three names. J. B. Say first suggested it ; Hermann 
 worked out the nature and essence of the Uses, and so put 
 the theory on a firm foundation ; Menger gave it the most 
 complete form of which, in my opinion, it is capable. All the 
 writers that come between take one or other of these as their 
 model, and although some of them are well worthy of 
 attention, they are of secondary importance to those just 
 mentioned. 
 
 There are two things that strike us in looking over the 
 list of these writers. The first is that, with the single excep- 
 tion of Say, the working out of the Use theory has been done 
 entirely by German science. And the other is that in 
 Germany this theory seems to have attracted the marked 
 preference of our most thorough and acute thinkers. At least 
 we find represented here a remarkable number of the best 
 names in German science. 
 
 We have already considered at length the doctrine of Say, 
 the founder of this school. 1 In his writings Productivity 
 theory and Use theory grow up side by side ; so much so 
 that neither seems to come before or be subordinate to the 
 other ; and the historian of theory has no alternative but to 
 consider Say as the representative of both theories. As 
 basis for what follows I shall recapitulate very briefly the 
 line of thought followed in such of his ideas as belong properly 
 to the Use theory. 
 
 The fund of productive capital provides productive services. 
 
 1 See above, p. 120.
 
 CHAP, ii SA Y 189 
 
 These services possess economical independence, and are the 
 objects of independent valuation and sale. Now as these 
 services are indispensable for production, and at the same time 
 are not to be obtained from their owners without compensation, 
 the prices of all products of capital, under the play of supply 
 and demand, must adjust themselves in such a way that, over 
 and above the compensation to the other factors in production, 
 they contain the ordinary compensation for these productive 
 services. Thus the " surplus value " of the products of capital, 
 and with it interest, originates in the necessity of paying 
 independently for this independent sacrifice in production, the 
 " services of capital." 
 
 The most signal weakness of this doctrine, apart from its 
 being continually traversed by contradictory expressions of the 
 Naive Productivity theory, lies, perhaps, in the confusion in 
 which Say leaves the conception of productive services. A 
 writer who makes the independent existence and remuneration 
 of such services the axis on which his interest theory turns 
 is, at least, bound to express himself clearly as to what should 
 be understood by these terms. Not only has Say omitted 
 to do this, as we have already seen, but the few indications 
 that he does give point in an entirely wrong direction. 
 
 From the analogy that Say repeatedly draws between the 
 services of capital on the one hand, and human labour, as 
 also the activity of the " natural fund," on the other, we might 
 conclude that, by the services of capital, Say would -wish us to 
 understand the putting in motion of the natural powers that 
 reside in real capital; e.g. the physical actions of beasts of 
 burden, of machines, the setting free of the heating power in 
 coal, etc. But if this is what he means, then the whole 
 argument is on the wrong track. For this putting in motion 
 of natural powers is nothing else than what, in another place, 
 I have called the " Material Services " (Nutzlcistungcn) of goods. 1 
 It is what our current science, with its unsuggestive and 
 lamentably obscure vocabulary, has termed .the Nutzv.ng of 
 capital, meaning the gross use of capital. It is this that is 
 remunerated by the undiminished gross return sometimes called 
 Hire. 2 In a word, it is the substance of gross interest, not of 
 
 1 See my Eechte und Verhaltnisse, p. 57. More exactly also below. 
 
 It will be well to remember that the word Hire (Miethzins in Gorman) is
 
 190 HISTORY OF THE USE THEORY BOOK in 
 
 net interest, and it is net interest with which we are here 
 concerned. If this is what Say actually meant by his 
 services productifs, then his whole theory has missed the mark ; 
 for it is only gross interest that emerges from the necessity of 
 paying for productive services, not net interest ; and it is net 
 interest that is the object of explanation. But if by the services 
 productifs he meant anything else, he has left us absolutely in 
 the dark regarding the nature of it, and the theory built on its 
 existence is, to say the least of it, incomplete. 
 
 In any case, then, Say's theory is not satisfactory. Yet it 
 pointed out a new way which, when properly followed, led 
 much nearer the heart of the interest problem than the barren 
 Productivity theories had. 
 
 The two writers who come next after Say can scarcely be 
 said to have done much towards any such development. One 
 of them, indeed, Storch, fell very far short of the point to 
 which Say had brought the theory. 
 
 Storch 1 professes to follow Say, and often quotes him, but 
 he only takes Say's results. He does not use his argu- 
 ment, and he has not supplied the want by one of his own. 
 It is a characteristic symptom of the barren way in which 
 Storch deals with our subject that he does not explain loan 
 interest by natural interest, but natural by loan interest. 
 
 He starts by saying (p. 212) that capital is a "source of 
 production " although a secondary source along with nature 
 and labour, the two primary sources of goods. The sources of 
 production become sources of income inasmuch as they often 
 belong to different persons; and they must first, through a loan 
 contract be put at; the disposal of the person who unites them 
 
 properly used of the lending of a durable article where the sum paid monthly or 
 yearly includes wear and tear. If we pay 20s. a month for the hire of a piano, it 
 is understood that the piano suffers so much by our use, and that the 20s. covers 
 that deterioration. We are not expected to repair the damage done to the piano, 
 nor to pay an extra sum for repairing it. That is to say, the 20s. per month is a 
 gross interest, which includes the replacement of the capital. If in three years 
 the music-seller gets 36 in hires for an ordinary piano, it is evident that this is 
 far more than interest. The true interest (net interest) is found by deducting the 
 capital value of the piano. Sky that that value was 30, and that in three years' 
 time the piano is worn out ; then 6 is the interest obtained by the music-seller 
 over a period of three years on H capital sum of 30. But this distinction, 
 evident at a first glance in a concrete example, has been overlooked, as we see, 
 by more than one economist. W. S. 
 
 1 Cours d' Economic Politique, vol. i. Paris, 1823.
 
 CHAP, ii STORCH 191 
 
 in productive co-operation. For this they receive remuneration, 
 and this remuneration goes as income to the lender. "The 
 price of a loaned piece of land is called rent; the price of loaned 
 labour is called wages ; the price of a loaned capital is called 
 sometimes interest, sometimes hire." * 
 
 After Storch has thus given us to understand that lending 
 out of productive powers is the regular way of getting an 
 income, he adds, by way of postscript, that a man can obtain an 
 income even if he himself employs the productive powers. " A 
 man who cultivates his own garden at his own expense unites 
 in his own hands the land, the labour and the capital Never- 
 theless " (the word is significant of Storch's conception) " he 
 draws from the first a land rent ; from the second a subsist- 
 ence; from the third an interest on capital." The sale of 
 his products must return him a value which is, at least, equiv- 
 alent to the remuneration he would have got from the land, 
 labour, and capital if he had lent them ; eptherwise he 
 will stop cultivating the garden, and lend out his productive 
 powers. 2 
 
 But why should it be possible for him to get a remuneration 
 for the productive powers, particularly for the capital he lends ? 
 Storch does not take much trouble to answer this question. 
 "Since every man," he says on p. 266, "is compelled to eat 
 before he can obtain a product, the poor man finds himself 
 in dependence on the rich, and can neither live nor work if he 
 does not receive from him some of the food already in exist- 
 ence, which food he promises to replace when he has completed 
 his product. These loans cannot ~be gratuitous, for, if they 
 were, the advantage would be entirely on the side of the poor 
 man, and the rich would have no interest whatever in making 
 the bargain. To get the rich man's consent, then, it must be 
 agreed that the owner of the accumulated surplus or capital 
 draws a rent or a profit, and this rent will be in proportion to 
 
 1 These last words are .a quotation from Say. 
 
 2 Even in discussing the question of the rate of interest this perversion 
 of the relation of natural and loan interest reappears. On p. 285 Storch 
 makes interest determined by the proportion between the supply of the capitalists 
 having capitals to lend, and of the undertakers wishing to hire these capitals. 
 And on p. 286 he says that the rate of the income of those persons who 
 themselves employ their productive powers -adapts itself to that rate which 
 is determined by the demand and supply of loaned productive powers.
 
 192 HISTORY OF THE USE THEORY BOOK in 
 
 the amount of the capital advanced." This is an explanation 
 which, in economical precision, leaves almost everything to be 
 desired. 
 
 Of a second follower of Say, Nebenius, it cannot at any 
 rate be said that the theory received any harm at his hands. 
 
 In his celebrated work on Public Credit, 1 Nebenius has 
 devoted a brief consideration to our subject, and given a some- 
 what eclectic explanation of it. In the main he follows Say's 
 Use theory. He accepts his category of the productive 
 services of capital, 2 and bases interest on the fact that these 
 services obtain exchange value. But in course of the argument 
 he brings out a new element, in pointing to " the painful priva- 
 tions and exertions " 3 which the accumulation of capital 
 requires. In the long run he shows ample agreement with 
 the Productivity theory. Thus on one occasion he remarks 
 that the hire which the borrower has to pay for a capital 
 which he employs to advantage may be considered as the 
 fruit of that capital itself (p. 21); and, on another occasion, he 
 emphasises the fact that, " in the reciprocal valuation by which 
 the hire is determined, it is the productive power of the capitals 
 that forms the chief element" (p. 22). 
 
 Nebenius, however, does not enter on any more exact 
 explanation of his interest theory ; nor does he analyse the 
 nature of the productive services of capital, obviously taking 
 the category without question from Say. 
 
 At this point I may mention a third writer who rose into 
 prominence later writing long after Hermann but never 
 got beyond Say's standpoint; Carl Mario, in his System der 
 Wdtokonomie.* 
 
 1 Oeffcntliche Credit. I quote from the second edition, 1829. 
 
 2 See, e.g. pp. 19, 20. 
 
 3 "On the one hand, the necessity and the usefulness of capital for the busi- 
 ness of production in its most multifarious forms, and on the other, the hardship 
 of the privations to which we owe its accumulation ; these lie at the root of the 
 exchange value of the services rendered by capital. They get their compensation 
 in a share of the value of the products, to the production of which they have co- 
 operated " (p. 19). 
 
 "The services of oapital and of industry necessarily have an exchange value ; 
 the former because capitals are only got through more or less painful privations or 
 exertions, and people can be induced to undergo such only by getting an adequate 
 share. ..." (p. 22) 
 
 4 Kassel, 1850-57.
 
 CHAP, ii NEBENIUS, MARLO 193 
 
 In striking contrast with the imposing plan of this work, 
 and the supreme importance which, from its very nature, the 
 interest problem should have had in it, is the extremely 
 slight treatment which the problem actually received. One 
 may search these bulky volumes in vain for any connected 
 and thorough inquiry into the origin of interest ; indeed for any 
 real interest theory at all. If it were not that Mario in the 
 course of his polemic against his opponents particularly 
 against the doctrine that labour is the sole source of value * 
 had to some extent marked out his standpoint, what he said 
 positively on the question of interest would not be enough to 
 indicate, in the very slightest degree, what his opinions 
 were, to say nothing of introducing the uninitiated to the 
 nature of the problem. 
 
 Mario's views are a mixture of Use and Productivity 
 theories taken from Say. He recognises, with special 
 emphasis on the necessity of their working together, 2 
 two sources of wealth natural power and labour power 
 and from this comes his conception of capital as " perfected 
 natural power." 3 Corresponding to the two sources of wealth 
 are two kinds of income interest and wages. " Interest is the 
 compensation for the productive or consumptive use of parent- 
 wealth." "If we apply forms of wealth as instruments of 
 work, they contribute to production, and so render us a service. 
 If we apply them to purposes of consumption we not only con- 
 sume the wealth itself, but also the service which it might 
 have rendered if productively employed. If we employ wealth 
 belonging to other people, we must compensate the owners for 
 the productive service which it might have rendered. The com- 
 pensation for this is variously called interest or rent. If we 
 employ our own goods we ourselves draw the interest which 
 they bear." 4 It is a poor epitome of Say's old theory. 
 
 This unsatisfactory repetition of old arguments is still more 
 wonderful when we consider that in the interval a very 
 great stride had been taken towards the perfecting of the 
 Use theory by Hermann's Staaiswiriscliaftliche+Unterswhungen, 
 published in 1832. 
 
 1 i. sect. ii. p. 246, etc., and many other places. 
 
 2 ii. p. 214, and other places. * ii. p. 255. 
 4 ii. pp. 633, 660. 
 

 
 194 HISTORY OF THE USE THEORY BOOK in 
 
 This work forms the second milestone in the development 
 of the Use theory. Out of Say's scanty and contradictory 
 suggestions which he accepts with flattering recognition l 
 Hermann has built up a stately theory ; the same care ex- 
 pended on its foundations as on its details. And it is of no 
 small importance that this well-constructed theory has become 
 a vital part of Hermann's entire system. It permeates the 
 whole of his lengthy work from end to end. There is not a 
 chapter in it where a considerable space is not given to its 
 statement or application. There is not a passage in it where 
 the author allows himself to be untrue to the position which 
 his acceptance of the Use theory compels him to take. 
 
 In what follows I can only briefly state the principal points 
 of Hermann's theory, although it certainly deserves our more 
 thorough acquaintance. In doing so I shall confine myself 
 for the most part to the second edition of the Staatswirtschaft- 
 licke Untersuchungcn (1874), in which the theory is substanti- 
 ally unchanged, and is at the same time put more definitely 
 and in a more complete shape. 
 
 The foundation of Hermann's theory is his conception of 
 the independent use of goods. Quite in contrast to Say, who 
 tries to gloss over the nature of his services productifs with a 
 few analogies and metaphors, Hermann takes all possible care 
 in explaining his fundamental conception. 
 
 He introduces it first in the theory of Goods, where he 
 speaks of the different kinds of usefulness that goods have. 
 " Usefulness may be transitory or it may be durable. It is 
 partly the nature of the goods, partly the nature of the use 
 that determines this point. Transitory, often momentary use- 
 fulness belongs to freshly cooked food, and to many kinds of 
 drink. The doing of a service has only a momentary use 
 value, yet its result may be permanent, as is the case in 
 tuition, in a physician's advice, etc. Land, dwellings, tools, 
 books, money, have a durable use value. Their use, for the 
 time that they last (called in German their Nutzung)? can be 
 conceived of as a good in itself, and may obtain for itself an 
 exchange value which we call interest." 
 
 1 See first edition, p. 270, in the note. 
 
 8 " Ihr Gebrauch wiihrend dessen sie fortbestehen, wird ihr Nutzung 
 gennant," etc.
 
 CHAP, ii HERMANN 195 
 
 But not only are durable goods, but transitory and consum- 
 able goods also, capable of affording a durable use. Since this 
 proposition is of cardinal importance in Hermann's theory, I 
 give his exposition of it in his own words : 
 
 " 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 sha-pes, still continue unchanged in 
 value. Iron ore, coal, labour, 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 qualita- 
 tively in the new usefulness, added together quantitatively in 
 the exchange value. 
 
 " To goods that are of transitory material, technical pro- 
 cesses, through this change of form, add economical durability 
 and permanence. This persistence of usefulness and of ex- 
 change value which is given to goods otherwise transitory by 
 technical change of form, is of the greatest economical import- 
 ance. The amount of durable useful goods becomes thereby 
 very much greater. 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." I shall return to 
 this notable passage later on. 
 
 Hermann then makes use of this analysis to introduce his 
 conception of capital, which is based altogether on that of its use. 
 
 " Lasting or durable goods, and perishable goods which 
 retain their value while changing their shape, may thus be 
 brought under one and the same conception ; they are the 
 durable basis of a use which has exchange value. Such goods 
 we call capital." l 
 
 The bridge between these preliminary conceptions and 
 
 1 P. 111. Hermann of course does not always remain quite faithful to the 
 conception here given. In this passage he calls the goods which form the basis
 
 196 HISTORY OF THE USE THEORY BOOK in 
 
 Hermann's interest theory proper is formed by the proposition 
 that, in economic life, the uses of capital do regularly receive 
 the exchange value, of which, as independent quantities, they 
 are capable. Hermann does not treat this proposition with the 
 emphasis adequate to its importance. Although everything 
 further depends on it, he neither puts it formally, nor gives 
 it any detailed explanation. Explanation, indeed, there is in 
 plenty, but it is rather to be read between the lines than in 
 them. It amounts to this, that the "uses" possess exchange 
 value because they are economical goods a piece of informa- 
 tion which is concise indeed, but may be accepted as satis- 
 factory without further commentary. 1 
 
 His explanation of interest then proceeds as follows. 
 
 In almost all productions uses of capital, possessing ex- 
 change value, form an indispensable portion of the expenses of 
 production. These expenses are made up of three parts : 
 
 1. Of the outlay of the undertaker that is, the expendi- 
 ture of wealth previously existing ; as, for instance, principal, 
 secondary, and auxiliary materials, his own labour and that of 
 others, wear and tear of workshops, tools, etc. 
 
 2. Of the undertaker's active intelligence and care in the 
 initiation and carrying on of the undertaking, etc. 
 
 3. Of the uses of fixed and floating capital necessary for 
 the production all the time of their employment up till the 
 sale of the product. 2 
 
 of a durable use capital ; but later on lie is fond of representing capital as 
 something different from the goods as it were something hovering over them. 
 Thus, c.ij. when he says on p. 605: "Above all we must distinguish the object 
 in which a capital exhibits itself from the capital itself. Capital is the basis of 
 a durable use which has definite exchange value ; it continues to exist 
 undiminished so long as the use retains this value, and here it is all the same 
 whether the goods which form the capital are useful simply as capital or in 
 other ways that is, generally speaking, it is all the same in what form the 
 capital exhibits itself." If the question be put, What then is capital, if it is not 
 tlie substance of the goods in which it "exhibits" itself? it might be difficult 
 enough to give a straightforward answer, and one that would not be simply play- 
 ing with words. 
 
 1 Hermann evidently considers the exchange value of uses too self-evident to 
 need any formal explanation from him. Even the extremely scanty explanation 
 mentioned above is usually given only indirectly, although at the same time 
 quite plainly ; thus when on p. 507 he says : " For the use of land the corn 
 producer can obtain no compensation in price, so long as it is offered to any one 
 in any quantity as a free gift." 
 
 Pp. 312, etc., 412, etc.
 
 CHAP, ii HERMANN 197 
 
 Now since, economically, the price of the product must 
 cover the total costs of production, that price must be high 
 enough to cover " not only the outlays, but also the sacrifice 
 that the undertaker makes in the uses of capital, as also in 
 his intelligence and care ; " or, as it is usually expressed, over 
 and above the compensation for outlays, the price must yield 
 a profit (profit of capital and profit of undertaking). And 
 more exactly explaining his idea, Hermann adds ; this profit 
 " is by no means merely an advantage that comes by accident in 
 the struggle that determines price." Rather we should say that 
 profit is as much a compensation for goods possessing exchange 
 value that are really sacrificed in the product as the outlays 
 are. The only difference is that the undertaker makes these 
 outlays in order to procure and hold together certain productive 
 elements already existing, while the uses of the capital 
 employed and his own superintendence of the business are 
 new elements in the work, provided by himself during the 
 production. He makes use of the outlays in order to obtain 
 the highest possible remuneration for these new elements that 
 he adds. " This remuneration is profit " (p. 3 1 4). 
 
 To make this explanation of profit complete, one thing is 
 still wanting ; it should be made clear how it is that, in pro- 
 duction, there must be sacrifice of the uses of capital, besides 
 that of the outlays of capital. This Hermann supplies in 
 another place, where at the same time he points out, with 
 great circumstantiality, that all products may ultimately 
 be traced to exertions of labour and uses of capital. In doing 
 so he makes some interesting statements about the character 
 of the " use of goods," as he conceives of it, and it may be well 
 to give this passage also in full. 
 
 He is making an analysis of the sacrifices that are required 
 for the procuring of salt fish. He enumerates labour of catch- 
 ing, use and wear and tear of tools and boats, labour of pro- 
 curing salt ; and again the use of all kinds of tools, casks, and 
 so on. Then he breaks up the boat into wood, iron, cordage, 
 labour, and use of tools ; the wood again, into use of the forest 
 and labour ; the iron, into use of the mine, and so on. " But 
 this succession of labours and uses does not exhaust the sum 
 total of the sacrifices made in procuring salt fish. There must 
 besides be taken into calculation the period of time during
 
 198 HISTORY OF THE USE THEORY BOOK in 
 
 which each element of exchange value is embodied in the 
 product. For from that moment when a labour or a use is 
 employed in the making of a product, the disposal of it in any 
 other way is made impossible. Instead of being made use of 
 in itself, it is simply made to co-operate in the making and 
 delivery of the product to the consumers. To get a proper 
 idea of this, it is to be remembered that labours and uses, so 
 soon as they are employed in the making of a product, enter 
 into floating capital quantitatively, as a constituent element, 
 with the exchange value that they possessed at the time of 
 their employment. With this value they become floating 
 capital. But it is just this amount of value that a man ab- 
 stains from using in any other way till the product is paid 
 for by the buyer. As with the getting, working up, storing, 
 and conveying, the floating capital grows through ever new 
 labours and uses expended on it, it is itself wealth, the use of 
 which is handed over to the consumers with every new accession 
 of value up to the delivering over of the product to the 
 buyer. And what must be paid for by the buyer is not simply 
 the renunciation of that use which the undertaker might have 
 made of the wealth for his own gratification. No ; it is 
 actually a new and peculiar use which is handed over to him 
 along with the wealth itself; the putting together and keeping 
 together, the storing and keeping ready for use, of all the 
 technical elements of the production, from the acquiring of its 
 first basis in natural goods, on through all technical changes 
 and commercial processes, till the product is handed over 
 in the place, at the time and in the quantity desired. This 
 holding together of the technical elements of the product is the 
 service, the objective use of floating capital." ] 
 
 If we compare the form which Hermann has given to the 
 Use theory with the doctrine of Say, we find them alike in 
 their rough outlines. Both recognise the existence of indepen- 
 dent work done by capital. In the fact that capital is made 
 use of in production, both see a sacrifice independent of and 
 separate from the expenditure of the substance of capital. 
 And both explain interest as the necessary compensation for 
 this independent sacrifice. Still, Hermann's doctrine shows 
 
 1 P. 286, etc.
 
 CHAP, ii HERMANN 199 
 
 a substantial advance on Say's. Say had, in fact, given the 
 mere outlines of a theory, inside which the most important 
 features were left blank. His services productifs are nothing 
 but an ambiguous name, and the very important consideration 
 of how the sacrifice of these services constitutes an inde- 
 pendent sacrifice in production independent, that is, of the 
 substance of capital sacrificed is very much left to the reader's 
 fancy. In trying, with true German thoroughness, to work 
 out and make clear these two cardinal points, Hermann has 
 definitely filled in the outlines he took from Say, and in doing 
 so has given to the whole the rank of a solid theory. 
 
 A negative merit in Hermann, not to be under estimated, 
 is that he severely abstains from the secondary explanations 
 (explaining interest by productivity) that are so offensive in 
 Say. The expression " productivity " is perhaps as often in his 
 mouth, but he uses it in a sense that, if not happy, is at least 
 not misleading. 1 
 
 Hermann of course has not managed to keep his formula- 
 tion of the Use theory free from all inconsistencies. In 
 particular it remains doubtful, in his case also, what is the 
 nature of the connection between the exchange value of the 
 uses of capital and the price of the products of capital. Is 
 the price of products high because the exchange value of uses 
 is high ? Or, on the contrary, is the exchange value of the 
 uses high because the price of products is high ? This 
 point, over which Say falls into the wildest contradictions, 2 
 Hermann has not made entirely clear. In the passage 
 given above, and in many others, he obviously inclines to the 
 former view, and so represents the price of products as affected 
 by the value of the uses of capital. 3 But at the same time 
 there are many expressions which assume just the opposite. 
 Thus (p. 296) he remarks that the determining of the price of 
 products " is itself the first to react on the price of the labours 
 and uses." And similarly on another occasion (p. 559) he 
 ascribes a determining influence on the price of the incom- 
 plete products, not to the constituent costs which have gone to 
 create the incomplete product, but to the finished products 
 
 1 See below, p. 204. 3 See above, p. 125. 
 
 3 See also p. 560 : " The uses of capital are therefore a ground of the deter- 
 mination of prices. "
 
 200 HISTORY OF THE USE THEORY BOOK in 
 
 which are their final result. It was reserved for Menger to 
 make this difficult question entirely clear. 
 
 Thus far we have looked only at Hermann's doctrine of 
 the origin of interest. But we cannot pass over the quite 
 peculiar views that he propounds on the causes of the different 
 rates of interest. 
 
 Hermann starts from the proposition already referred to, 
 that " the total quantity of products," resolved into its simple 
 constituents, is " a sum of labours and uses of capital." If 
 we allow this, it becomes clear, in the next place, that all acts 
 of exchange must consist in the exchange of labours and uses 
 of capital possessed by one for labours and uses possessed 
 by another, these labours and uses being either direct or em- 
 bodied in products. Whatever, then, a man receives for his 
 own labour in other people's labours and uses is the exchange 
 value of labour, or wage ; and " whatever a man receives in the 
 labours and uses of other men, when he offers his own uses for 
 sale, forms the exchange value of these uses, or the profit of 
 capital." The wages of labour and the profit of capital 
 must therefore, between them, exhaust the total quantity of all 
 products coming to market. 1 
 
 On what, then, depends the rate of profit; or, which is 
 the same thing, the rate of the exchange value of the uses of 
 capital ? First, naturally, on the amount of other people's 
 labours and uses obtainable for these. But this itself 
 depends again, for the most part, on the proportion in which 
 the two participants in the total product, labour and uses of 
 capital, are supplied and demanded as against each other. 
 And of course every increase in the supply of labour tends 
 to diminish wages and to raise profit ; and every increase in 
 the supply of uses, to raise wages and lower profit. But, 
 again, the supply of either of these two factors may be 
 increased by two circumstances ; either by increase of the 
 available amount or by increase of its productiveness. These 
 circumstances act in the following way. 
 
 " If the amount of capital increases, more uses are offered 
 for sale, more equivalent values are sought for them. Now 
 these equivalent values can only be labours or uses. So far 
 1 Under capital Hermann includes land.
 
 CHAP, ii HERMANN 201 
 
 as, in exchange for the increased uses, other uses of capital are 
 demanded, a greater amount of equivalent values is actually 
 disposable. Since then supply and demand are equally 
 increased, the exchange value of the uses cannot alter. But 
 if, as is here assumed, the quantity of labour, on the whole, is 
 not increased, the owners of capital find, for the increased 
 amount of uses which they seek to exchange against labour, 
 only the amount of labour they got before that is, they get 
 an unsatisfactory equivalent value. The exchange value of 
 uses will therefore sink in comparison with labour ; with the 
 same exertions, the labourer will buy more uses. In the 
 exchange of use against use the capitalists now receive the 
 same equivalent value as formerly, but in the exchange of uses 
 against labour they receive less. The amount of profit, there- 
 fore, in proportion to the total capital that is, the rate of profit 
 must fall. The total quantity of goods produced is indeed 
 increased, but the increase has been divided among capitalists 
 and labourers. 
 
 " If the 'productiveness of capital increases, or if in the same 
 time it furnishes more means of satisfying needs, the owners 
 of capital offer for sale more useful goods than before, and ask 
 therefore for more equivalent values. They obtain these so far 
 as each one seeks other uses in exchange for his own increased 
 use. Here the supply has risen with the demand. The 
 exchange value must therefore remain unaltered that is, the 
 uses of equal capitals for equal times exchange with each 
 other although the character of these uses as regards usefulness 
 is higher than before. But under the assumption that labour is 
 not increased, all the uses with which the capitalist wishes to 
 buy labour do not obtain their former equivalent value ; this 
 must raise the competitive demand for labour, and must lower 
 the exchange value of uses as against labour. The labourers 
 now receive more uses for the same amount of labour as before, 
 and find themselves therefore better off; the owners of capital 
 do not themselves enjoy the whole fruit of the increased pro- 
 ductiveness of capital, but are compelled to share it with the 
 workers. But the lowering of the exchange value of tire uses 
 does not cause the owners of capital any loss, since the reduced 
 value can obtain more means of enjoyment than the higher 
 value formerly obtained."
 
 202 HISTORY OF THE USE THEORY BOOK in 
 
 On analogous grounds, which we need not further pursue, 
 Hermann shows that the rate of profit rises if the amount or 
 the productiveness of labour decreases. 
 
 The most striking feature in this theory certainly is, that 
 Hermann finds a reason for the decline of interest in the 
 increase of the productive power of capital. In this he goes 
 in direct opposition, on the one hand, to Eicardo and his 
 school, who found the principal cause of the declining rate of 
 interest in the decrease of the productiveness of capitals when 
 driven to worse lands ; but, on the other hand, to the Produc- 
 tivity theorists also, who, from the nature of their theory, were 
 bound to accept a direct proportion between the degree of 
 productivity and the rate of interest. 1 
 
 Whether the substance of Hermann's Use theory be tenable 
 or not, I leave in the meantime an open question. But 
 that Hermann's application of it to explain the height of the 
 interest rate is not correct is, I think, demonstrable even at 
 the present stage of our inquiries. 
 
 It appears to me that, in this part of his doctrine, Her- 
 mann has made too little distinction between two things 
 that should have been kept very clearly distinct, the ratio 
 between total profit and total wage, and the ratio between 
 amount of profit and amount of capital, or the rate of interest. 
 What Hermann has put forward admirably explains and 
 proves a lowering or raising of total profit in proportion to 
 wages of labour ; but that explains and proves nothing as 
 regards the height of profit, or the rate of interest. 
 
 The source of the oversight lies in this : the abstraction 
 in other respects quite justifiable in virtue of which he sees 
 nothing in products but" the labours and uses out of. which they 
 come, Hermann has extended to the sphere of exchange value, 
 where it should never have been applied. Accustomed to look 
 on uses and labours as representatives of all goods, Hermann 
 thought he might look at these representatives even where the 
 matter at issue concerned the high or low exchange value of 
 any one amount. He calculates thus : uses and labours are the 
 representatives of all goods. Consequently if the use buys as 
 many uses as before, but at the same time buys less labours, 
 
 1 E.g. Roscher, 183. Roesler, who accepts Hermann's results, although he 
 ascribes them to somewhat different causes, is the only exception.
 
 CHAP. II HERMANN 203 
 
 its exchange value is evidently smaller. - Now this is not true. 
 The exchange value of goods (in the sense of "power in 
 exchange," which is the sense that Hermann always gives to the 
 word) is measured, not only in the quantities of one or two 
 definite kinds of goods that can be got in exchange for it, but 
 in the average of all goods ; . among which, in this case, are to 
 be counted all products, each product having equal rights with 
 the goods called " labour " and with the goods called " use of 
 capital." Thus exchange value is understood in practical life 
 and in economics, and thus also it is understood by Hermann 
 himself. On p. 432 he expressly declares: "Among such 
 differences of the goods in which price is paid, the establishment 
 of an average price, such as we desired for the fixing of ex- 
 change value, is not to be thought of, but the conception of 
 exchange value is not impossible on that account. It is 
 arrived at by considering all the average prices which, in the 
 same market, are paid for one good in all goods ; it is a series 
 of comparisons of the same good against many other goods. 
 We shall call the exchange value of a good, as thus determined, 
 the ' real value ' of the good, to distinguish it from the average 
 amount of the money prices, or the money value." 
 
 Now it is not difficult to show that the power in exchange 
 of the use of capital as against products moves in quite a differ- 
 ent direction from its power in exchange against other uses and 
 labours. For instance, if the productiveness of all uses and 
 labours rises to exactly double, the power in exchange between 
 uses and labours, as regards each other, is not disturbed ; on 
 the other hand, the power in exchange of both as against the 
 products which result from them is very seriously disturbed : 
 it is, that is to say, doubled. 
 
 As regards the rate of interest, the question obviously is, 
 What is the proportion between the exchange power of the uses 
 of capital and the exchange power of a quite definite class of 
 product, viz. that real capital which furnishes the "use"? 
 If the power in exchange of the use of a machine be twenty 
 times less than the exchange power of the product machine, 
 the use of the machine " buys " 10, while the machine itself 
 obtains 200 as its equivalent value, and the proportion corre- 
 sponds to a 5 per cent rate of interest. If the exchange value 
 of the use of a machine again is only ten times less than that
 
 204 HISTORY OF THE USE THEORY BOOK in 
 
 of the product machine, the one buys 20 while the other 
 buys 200, and the proportion corresponds to a 10 per cent 
 rate of interest. 
 
 Now there is no obvious ground for assuming that the 
 exchange value of real capital is determined in a different 
 way from the exchange value of other products, and, as we 
 have seen, the exchange value of products as against the 
 exchange value of uses, generally speaking, can be altered in 
 another proportion than the exchange value between uses 
 and labour as regards each other is altered. It follows then 
 that the ratio between the power in exchange of the uses of 
 capital and the power in exchange of real capital (in other 
 words, the rate of interest) may take a different course from 
 the proportion of exchange value between uses and labour. 
 Hermann's rule therefore is not sufficiently proved. 1 
 
 In conclusion, let me say just a word on the position 
 that Hermann assumes towards the " productivity of capital." 
 I have already said that he often uses the expression, but 
 never with the meaning given to it by the Productivitv theorv. 
 
 O O t/ i- i/ 
 
 He is so far from saying that interest is produced directly from 
 capital, that he maintains high productive power to be a cause 
 of the lowering of interest. He expressly guards himself also 
 (p. 542) against being supposed to say that profit is a com- 
 pensation for " dead use." He asserts that capital, to give its 
 due results, demands " plan, care, superintendence, intellectual 
 activity generally." For the rest, he has not himself attached 
 any particularly clear conception to the expression "produc- 
 tivity." He defines it in the words : " The totality of the 
 ways in which capital is employed, and the relation of the 
 product to the expenditure, constitute what is called the 
 productivity of capital." 2 Does he mean by this the relation 
 of the value of the product to the value of the expenditure ? 
 If so, then high productivity would only accompany high interest, 
 whereas high productivity certainly occasions low interest. 
 Or does he mean the relation of the quantity of the product 
 to the quantity of the expenditure ? But in economic life 
 
 1 A note which occurs here in the German edition is omitted by the 
 author's instructions. W. S. 
 
 - P. 541 ; p. 212 of first edition.
 
 CHAP, ii BERNHARDI, MANGOLDT, SCHAFFLE 205 
 
 quantity, speaking generally, is of no importance. Or does he 
 mean the relation of the quantity of the product to the value 
 of the expenditure ? But quantity on one side and value on 
 the other are incommensurable. The fact of the matter, it 
 appears to me, is that Hermann's definition will not stand 
 strict interpretation. On the whole, it is just possible that he 
 may have had in his mind a kind of physical productivity. 
 
 In Germany many writers of note have accepted Hermann's 
 Use theory, and given it their strong support. 
 
 One very clear-headed follower of his is Bernhardi. 1 
 Without developing the theory any further, for he contents 
 himself with quoting Hermann's doctrine incidentally, and 
 expressing agreement with it, 2 he shows his originality and 
 profound thinking by a number of fine criticisms, directed 
 principally against the English school. 3 He has, too, a word of 
 censure for the school that stands at the opposite extreme, the 
 blind Productivity theorists, with their " strange contradiction " 
 of ascribing to the dead tool an independent living activity (p. 
 307). 
 
 Mangoldt again takes the same ground as Hermann, and 
 diverges from him only in unimportant particulars. Thus he 
 gives even less importance to the " productivity of capital " in 
 the formation of interest. 4 He would go so far as abolish that 
 expression as incorrect, although he does not scruple to use it 
 himself " for the sake of brevity." 5 Thus, too, where Hermann 
 puts the height of interest in inverse ratio to the productivity 
 of capital, Mangoldt puts it in direct ratio ; indeed, he accepts 
 Thlinen's formula, and puts it in direct ratio to the "last 
 applied dose of capital." 
 
 Similarly Mithoff, in his account of the economical dis- 
 tribution of wealth, lately published in Schonberg's Handhuch? 
 follows Hermann in all essential respects. 
 
 Schaffle takes a peculiar position on the Use theory. 
 One of the most prominent promoters of that critical movement 
 
 1 Versuch einer Kritik der Griinde die fur grosses und kleines Grundeigenthum 
 angefiihrt werden, St. Petersburg, 1849. 
 
 * E.g. p. 236, etc. 3 P. 306, etc. 
 
 * Volkswirtschaftslehre, Stuttgart, 1868 ; particularly pp. 121, 137, 333. 
 445, etc. 5 Pp. 122, 432. 
 
 * Schonberg's Handbuch, i. pp. 437, 484, etc.
 
 206 HISTORY OF THE USE THEORY BOOK in 
 
 which came into existence with the rise of scientific Socialism, 
 Schaffle was one of the first to pass -through the fermentation 
 of opinion which might have been expected when two such 
 different conceptions encountered each other. This fermenta- 
 tion has left very characteristic traces on his utterances on the 
 subject of interest. I shall show later on that in Schaffle's 
 writings may be found no less than three distinctly different 
 methods of explaining interest. One of these belongs to the 
 older, two to the later " critical " conception. The first of them 
 falls within the group of the Use theories. 
 
 In his first great work, the Gesdlschaftliehe System der 
 menschlichen Wirtschaft, 1 Schaffle states his entire theory of 
 interest according to the terminology of the Use theory. Profit 
 of capital is with him a profit from the "use (Nutzung) of 
 capital " : loan interest is a price paid for that use, and its 
 rate depends on the supply and demand of the uses of loan 
 capital : the uses are an independent element in cost, and so 
 on. But there are unmistakable signs that he is not far from 
 giving up the theory he 'professedly holds. He repeatedly 
 gives the word " use " a signification very far from that attached to 
 it by Hermann. He explains the use of capital as a " working" 
 ( Wirkeri) of an economical subject by means of wealth ; as a 
 " using " (Benutzung] of wealth for fruitful production ; as a 
 " devoting," an " employment " of wealth, as a " service " of the 
 undertaker expressions which would lead us to see in the Use, 
 not so much a material element in production issuing from 
 capital, -as a personal element proceeding from the undertaker. 2 
 This impression is, moreover, confirmed by the fact that Schaffle 
 repeatedly speaks of profit as premium for an economical 
 vocation. Further, he argues positively against the view that 
 profit is a product of the use of capital contributed to the 
 process of production (ii. p. 389). He charges Hermann 
 with having coloured his the'ory too much by the idea of an 
 independent productivity in capital (ii. p. 459). But, on the 
 other hand, he often uses the word " use " in such a way that 
 it can only be interpreted in the objective, and therefore in 
 Hermann's sense ; as, e.g. when he speaks of the supply and 
 demand of the uses of loan capital On one occasion he 
 
 1 Third edition, Tubingen, 1873. 
 
 2 Ges. System, third edition, i. p. 266 ; ii. p. 458, etc.
 
 CHAP, ii SCH'AFFLE, KNIES 207 
 
 explicitly admits that in the use, besides the personal element, 
 there may be contained a material element, which he calls the 
 Gebrauch of capital (ii. p. 458). And notwithstanding his 
 condemnation of Hermann, he himself does not scruple now 
 and then to ascribe " fruitfulness " to the use of capital. Thus 
 he neither entirely accepts the ground of the Use theory nor 
 entirely rejects it. 
 
 Even in his later systematic work, the Bau und Leben des 
 sozialen Korpers} Schaffle's views have not developed into 
 a completely clear and consistent theory. While he has 
 got beyond the old Use theory in one respect, in another he 
 has come nearer to it. In the Bau und Leben he always looks 
 upon interest as a " return to the use (Nutzwng) of capital," 
 which use at all times maintains an economical value. In 
 this he gives up the subjective meaning of use, and now treats 
 it unambiguously as a purely objective element contributed 
 by goods. He speaks of the uses as " functions of goods," as 
 " equivalents of useful materials in living labour," as " living 
 energies of impersonal social substance." Even in the socialist 
 state this objective use would retain its independent value, 
 and thereby preserve its capacity to yield interest. The 
 phenomenon of interest can only disappear if, in the socialist 
 state, the community, as sole owner of capital, should contribute 
 the valuable use of capital gratuitously ; in which case the 
 return from it would go to the advantage of the entire social 
 body (iii. p. 491). On the other hand, Schaffle rather diverges 
 from the old Use theory in not acknowledging the use of 
 capital as an ultimate and original element in production, and 
 in tracing all costs of production to labour alone (iii. pp. 273, 
 274). But in doing so he chances on another line of 
 explanation, which I shall have to discuss at length in another 
 connection. 
 
 While these followers of Hermann have not developed 
 his theory so much as broadened it, Knies may fairly claim to 
 have improved it in some essential respects. He has made 
 no change in its fundamental ideas, but he has given these 
 fundamental ideas a much clearer and more unambiguous 
 expression than Hermann himself gave them. That Hermann's 
 theory was very much in want of such improvement was 
 1 Second edition, Tubingen, 1881.
 
 HISTORY OF THE USE THEORY BOOK in 
 
 shown by the many misunderstandings of it. I have already 
 remarked that Schaffle considered Hermann a Productivity 
 theorist. Still more remarkable is it that Knies himself 
 thought he saw in Hermann, not a forerunner, but an opponent. 1 
 
 Knies was not always a Use theorist. In his JErorterungen 
 uber den Kredit? published in 1859, he looked on credit 
 transactions as barter transactions, or, according to circumstances, 
 buying transactions, in which what one party gives is given in 
 the present, and what the other gives as equivalent is given 
 in the future (p. 568). One of the ulterior results of this 
 conception was that interest must not be looked on as an 
 equivalent of a use transferred in the loan, but almost as 
 Galiani had put it long before 3 as a part-equivalent of the 
 parent loan itself. But since then Knies has expressly with- 
 drawn this conception, -considering that there is no call for such 
 an innovation, and that, on the contrary, there is much to 
 deter one from accepting it. 4 Later still, in a fully argued- 
 out analysis, he has expressed himself quite directly to the 
 effect, that any consideration of the different values which 
 present and future goods of the same class may possess on 
 account of the greater urgency of immediate need is, though 
 " not quite unfruitful," still distinctly insufficient to explain the 
 principal point in the phenomenon of interest 5 
 
 In place of this, in his comprehensive work Odd und Kredit, 
 Knies has laid down an unusually clear and thoroughly 
 reasoned Use theory. 6 
 
 Although the purpose of this work only called for investiga- 
 tion into Contract interest, Knies yet treats the subject from 
 such a general standpoint that his views on Natural interest 
 may easily be supplied from what he says on the other. 
 
 In fundamental ideas he agrees with Hermann. Like him 
 he conceives of the use (Nutzung) of a good as "that use 
 
 1 Knies, Geld und Kredit, ii. part ii. p. 35. See also Nasse's Recension in 
 vol. xxxv. of the Jahrbiicher fur National- Oekonomie und Statistik, 1880, p. 94. 
 
 a Zeitschrift fur die gesammte Staatswissenschaft, vol. xv. p. 559. 
 
 8 See above, p. 49. 
 
 4 Der Kredit, part i. p. 11. 
 
 8 Ibid. ii. p. 38. I may perhaps express the conjecture that the re- 
 spected author was led to the above polemic by the contents of a work which I 
 had written in his economical Seminar a few years before, and in which I had 
 laid down the views contested. 
 
 6 Das Geld, Berlin, 1873. Der Kredit, part i. 1876 ; part ii. 1879.
 
 CHAP, ii KNIES, MENGER 209 
 
 (Gebravdi) which lasts through a period of time, and is limitable 
 by moments of time " ; a use to be kept quite distinct from the 
 good itself which is the " bearer of the use " ; and a use capable 
 of economical independence. To the question which most 
 concerns the Use theory, whether an independent use and its 
 transfer are conceivable and practicable in the case of perishable 
 goods, he devotes a searching inquiry, which ends with a distinct 
 answer in the affirmative. 1 Another cardinal question of the 
 Use theory is, whether and why the independent use of capital 
 must possess an exchange value, and obtain a compensation 
 in the form of interest. This question, as we have seen, 
 Hermann does not leave without answer, but he has laid so 
 little stress on the answer, and put it in such an insignificant 
 form, that it has not unfrequently been quite overlooked. 2 
 In contrast to this, Knies has carefully reasoned it out, and 
 concludes that " the emergence and the economical justification 
 of a price for use, in the shape of interest, is founded on the 
 same relation as that on which the price of material goods is 
 founded." The use is an instrument for the satisfaction of 
 human need just as much as the material good is ; it is an 
 object that is " economically valuable and that is economically 
 valued." 3 When I add that Knies has avoided not only any 
 relapse into the Productivity theory, but even the very 
 appearance of such a relapse, and that he has appended to his 
 theory some very notable criticisms, particularly of the social- 
 istic interest theory, I have said enough to point out how 
 deeply Hermann's theory is indebted to a thinker equally 
 distinguished for his acuteness and for the conscientiousness 
 of his research. 
 
 We now come to that writer who has put the Use theory 
 into the most perfect form in which it could well be put 
 Karl Menger, in his Gh'undsatze der Volkswirthschaftslehre* 
 
 The superiority of Menger to all his predecessors consists 
 in this, that he builds his interest theory on a much more 
 complete theory of value, a theory which gives an elaborate 
 and satisfactory answer to the very difficult question of the 
 
 1 Das Geld, pp. 61, 71, etc. I shall return to the details of this inquiry later 
 on, when criticising the Use theory as a whole. 2 See above, p. 196. 
 
 3 Kredit, part ii. p. 33, and other places. 4 Vienna, 1871. 
 
 P
 
 210 HISTORY OF THE USE THEORY ROOK in 
 
 relation between the value of products and that of their means 
 of production. Does the value of a product depend on the 
 value of its means of production, or does the value of the 
 means of production depend on that of their product ? As 
 regards this question economists up till Monger's time had 
 been very much groping in the dark. It is true that a 
 number of writers had occasionally used expressions to the 
 effect that the value of the means of production was con- 
 ditioned by the value of their anticipated product; as, for 
 instance, Say, Eiedel, Hermann, Eoscher. 1 But these expres- 
 sions were never put forward in the form of a general law, 
 and still less in the form of an adequate logical argument. 
 Moreover, as must have been noticed, expressions are to be 
 found in these writers which indicate quite the opposite view ; 
 and with this opposite view the great body of economic 
 literature fully agrees in recognising as a fundamental law 
 that the cost of goods determines their value. 
 
 But so long as economists did not see clearly on this 
 preliminary question, their treatment of the interest problem 
 could scarcely be more than uncertain groping. How 
 could any one possibly explain in clear outline a difference 
 in value between two amounts expenditure of capital and 
 product of capital if he did not even know on which side of 
 the relation to seek for the cause, and on which side for the 
 effect ? 
 
 To Menger, then, belongs the great merit of having dis- 
 tinctly answered this preliminary question. In doing so he 
 has definitely and for all time indicated the point at which, 
 and the direction in which, the interest problem is to be solved. 
 His answer is this. The value of the means of pro- 
 duction ("goods of higher rank," in his terminology) is 
 determined always and without exception by the value of their 
 products (" goods of lower rank "). He arrives at this 
 conclusion by the following argument. 2 
 
 1 See above, pp. 139, 199. 
 
 - I regret that I must deny myself the pleasure of introducing in this place 
 more than the barest outlines of Monger's value theory. Holding as I do that 
 his theory is among the most valuable and most certain acquisitions of modern 
 economics, I feel that it cnnnot be at all adequately appreciated from any such 
 sketch. In my next volume I shall have the opportunity of going more thoroughly 
 into the subject. Meanwhile, for more exact information on the propositions
 
 CHAP, ii MENGER 211 
 
 Value is the importance " which concrete goods, or quantities 
 of goods, receive for us through the fact that we are conscious 
 of being dependent, for the satisfaction of our wants, on having 
 these goods at our disposal." The amount of value that goods 
 possess always depends on the importance of those wants, 
 which depend for their satisfaction on our disposal over the 
 goods in question. Since goods of " higher rank " (means of 
 production) are only of service to us through the medium of 
 those goods of "lower rank" (products) which result from 
 them, it is clear that the means of production can only have 
 an importance as regards the satisfaction of our wants so far as 
 their products possess such an importance. If the only use of 
 means of production were to consist in the making of valueless 
 goods, these means of production could evidently in no way 
 obtain value for us. 
 
 Further, since that circle of wants the satisfaction of 
 which is conditioned by a product is obviously identical with 
 that circle of wants the satisfaction of which is conditioned 
 by the sum of the means of production of the product, the 
 degree of importance which a product possesses for' the satis- 
 faction of our wants, and that which the sum of its means of 
 production possesses, must be essentially identical. On those 
 grounds the anticipated value of the product is the standard 
 not only for the existence, but also for the amount of the 
 value of its means of production. Finally, since the (subjective) 
 value of goods is also the basis for their price, the price, or, 
 as some people call it, the " economical value " of goods, is 
 regulated by the same principle. 
 
 This being the foundation, the interest problem assumes 
 the following shape. 
 
 A capital is nothing else than a sum of " complementary 
 goods " of higher rank. Now if this sum derives its value from 
 the value of its anticipated product, how is it that it never quite 
 reaches that value, but is always less by a definite proportion ? 
 Or, if it is true that the anticipated value of the product is the 
 source and the measure of the value of its means of production, 
 how is it that real capital is not valued as highly as its product? 
 
 which I have given in very condensed form in the text, I must refer to Menger's 
 own unusually luminous and convincing statement in the Grundsdtze, particu- 
 larly p. 77 onward.
 
 212 HISTORY OF THE USE THEORY BOOK HI 
 
 To this Menger gives the following acute answer. 1 
 
 The transformation of means of production into products 
 (or, shortly, Production) always demands a certain period of 
 time, sometimes long, sometimes short. For the purposes of 
 production it is necessary that a person should not only have 
 the productive goods at his disposal for a single moment inside 
 that period of time, but should retain them at his disposal 
 and bind them together in the process of production over the 
 whole period of time. One of the conditions of production, 
 therefore, is this : the disposal over quantities of real capital 
 during definite periods of time. .It is in this Disposal that 
 Menger places the essential nature of the use of capital. 
 
 The use of capital, or the disposal over capital, thus de- 
 scribed, in so far as it is in demand and is not to be had in 
 sufficient quantity, may now obtain a value, or, in other words, 
 may become an economical good. When this happens, as is 
 usually the case, then, over and above the other means of 
 production employed in the making of a concrete product (over 
 and above, e.g. the raw materials, auxiliary materials, labour, and 
 so on), there enters into the sum of value contained in the 
 anticipated product, the disposal over those goods that are 
 required for the production, or the use of capital. And 
 since, on that account, in this sum of value there must 
 remain something for the economical good we have called " use 
 of capital," the other means of production cannot account for 
 the full amount of the value of the anticipated product. This 
 is the origin of the difference in value between the concrete 
 capital thrown into production and the product ; and this at 
 the same time is the origin of interest. 2 
 
 In this doctrine of Menger the Use theory has at last 
 attained to its full theoretical clearness and maturity. In it 
 there is no falling back on old errors ; there is nothing that 
 could even recall the old Productivity theories and their dangers ; 
 and with that the interest problem has definitely passed from 
 a production problem, which it is not, to a value problem, 
 which it is. The value problem is, at the same time, so clearly 
 and so sharply put, its outlines so happily filled in by the 
 
 1 Pp. 133-138. 
 
 2 Mataja in his Unternehmergcwinn (Vienna, 1884) is in substantial agree- 
 ment with Menger. This valuable work, unfortunately, reached me too late to 
 allow me to make any thorough use of it.
 
 CHAP, ii MENGER 213 
 
 exposition he gives of the value relation between product and 
 meana of production, that Menger has not only distanced his 
 predecessors in the Use theory, but has laid a permanent founda- 
 tion on which all earnest work at the problem of interest must, 
 for the future, be built. 
 
 The work of the critic as regards Menger, therefore, is 
 different from that as regards any of his predecessors. In 
 considering the previous doctrines I have purposely laid on one 
 side the question whether the fundamental principle of the Use 
 theory was warranted or not. I have only examined them in the 
 way of asking whether they presented this principle with more 
 or less completeness, with more or less internal consistency and 
 clearness. In fact, up till now I have, to some extent, tested the 
 concrete Use theories by the ideal Use theory, but I have not 
 tested the ideal Use theory itself. In the case of Menger, 
 however, it is only this latter test that needs to be applied. 
 As regards his theory only one critical question remains to 
 be put, but that the most decisive one : Can the Use theory 
 give us a satisfactory explanation of the interest problem ? 
 
 I shall try to answer this question in such a way that it 
 will not merely be a special criticism of Monger's formulation 
 of the theory, but will warrant us in forming an opinion on 
 the whole theoretical movement that reaches its highest 
 development with Menger. 
 
 In doing so I am conscious of having undertaken one of 
 the most difficult tasks in criticism. Difficult through the 
 general nature of the matter, which has for so many decades 
 baffled the endeavours of the most prominent minds ; difficult, 
 in particular, because I shall be compelled to oppose opinions 
 put forward, after most careful consideration, by the best minds 
 of our nation, and supported with most marvellous ingenuity ; 
 difficult, finally, in this, that I shall be compelled to oppose 
 ideas that were once vehemently contested in long past times, 
 then won most brilliant victory over their opponents, and since 
 then have been taught and believed in as dogmas. For what 
 follows, then, I must particularly ask the reader to grant me 
 an unbiassed hearing, patience, and attention.
 
 CHAPTEE III 
 
 PLAN OF CRITICISM 
 
 ALL the Use theories rest on the following assumption. Not 
 only does real capital itself possess value, but there is a Use 
 (Nutzun-g) of capital which exists as an independent economical 
 good, possessing independent value ; and this latter value, 
 together with the value of the capital, makes up the value of 
 the product of capital. 
 
 Now in opposition to this I maintain : 
 
 1. There is no independent "use of capital," such as is 
 postulated by the Use theorists ; there can, therefore, be no 
 independent value of the kind asserted, and the phenomenon 
 of " surplus value " cannot thus be accounted for. The 
 assumption is nothing but the product of a fiction which is in 
 contradiction of actual fact. 1 
 
 2. Even if there were a " use of capital " of such a nature 
 as is assumed by the Use theorists, the actual phenomena of 
 interest would not be satisfactorily explained thereby. 
 
 The Use theories, therefore, rest on a hypothesis which 
 contradicts actual facts, and is, besides, insufficient to explain 
 the phenomena in question. 
 
 In proceeding to prove these two theses, I feel that I stand in 
 a somewhat unfortunate position as regards the former. While 
 the discussion of the second thesis opens up virgin soil, un- 
 
 1 To guard against a misunderstanding which I should very much deprecate, 
 let me say in so many words that I have no intention of denying the existence 
 of " uses of capital " in general. What I must deny is the existence of that 
 special something which our theorists point to as the "use" of capital, and 
 which they endow with a variety of attributes that, in my opinion, go against 
 the nature of things. But this is anticipating..
 
 CHAP, in PLAN OF CRITICISM 215 
 
 disturbed as yet by the strife of economists, the first seems to 
 put me in the position of attacking a res judicata, a case long 
 ago carried up through all courts, and long ago decided con- 
 clusively against me. It is, indeed, essentially the same question 
 as was in dispute centuries ago between the canonists and the 
 defenders of loan interest. The canonists mainlined : P^perty 
 in a thing includes all the uses that can d made f it ; 
 there can, therefore, be no separate use which stands v atside 
 the article and can be transferred in the loan along with it. 
 The defenders of loan interest maintained that there was 
 such an independent use. And Salmasius and his followers 
 managed to support their views with such effectual arguments 
 that the public opinion of the scientific world soon fell in 
 with theirs, and that to-day we have but a smile for the 
 " short-sighted pedantry " of these old canonists. 
 
 Now fully conscious that I am laying myself open to the 
 charge of eccentricity, I maintain that the much decried doctrine 
 of the canonists was, all the same, right to this extent ; that 
 the independent use of capital, which was the object of dispute, 
 has no existence in reality. And I trust to succeed in proving 
 that the judgment of the former courts in this literary process, 
 however unanimously given, was in fact wrong. 
 
 In the next few chapters, then, I hope to prove my first 
 thesis that there is no " use of capital " of the kind postulated 
 by the Use theorists. 
 
 The first thing we have to do is of course to define the 
 subject of discussion. What then is this Use, this Nutzuny, 
 the independent existence of which is maintained by the Use 
 theorists and denied by me ? 
 
 As to the nature of the Use there is no agreement among 
 the theorists themselves. Menger in particular gives an essen- 
 tially different reading of the conception from that of his prede- 
 cessors. In view of this I find it necessary to divide my 
 inquiry into at least two parts, the first of which has to do 
 with the conception given by the Say-Hermann school, while 
 the second will deal with Monger's conception,
 
 CHAPTER IV 
 
 THE USE OF CAPITAL ACCORDING TO THE SAY-HERMANN SCHOOL 
 
 AMONG the writers of the Say-Hermann school there obtains 
 no exact agreement in the description and definition of the 
 Use. But this want of agreement appears to me traceable, not 
 so much to any real difference of opinion about the subject, as 
 to their common failure to give any clear account of its nature. 
 They hesitate in their definitions, not because, they have different 
 objects in view, but because, of the one object that all have in 
 view, they have only uncertain vision. One proof of this lies 
 in the fact that the individual Use theorists get into contra- 
 diction with their own definitions almost as often as with those 
 of their colleagues. In this chapter we shall gather together 
 provisionally the more important readings of the conception. 
 
 Say speaks of the " productive services " of capital, and 
 defines them as a " labour " which capital performs. 
 
 Hermann in one place (p. 109) defines the Nutzung of 
 goods as their Gebrauch. He repeats this on p. Ill, where he 
 says that the Gebrauch of goods of perishable material may be 
 thought of as a good in itself, as a Nutzung. If Gebrauch here 
 is simply identified with Nutzung, this is not the case in a 
 passage on p. 125, where Hermann says that the Gebrauch is the 
 employment of the Nutzung. On p. 287, finally, he explains 
 " the holding together of the technical elements of the product" 
 as the " service," the " objective Nutzung " of floating capital. 
 
 Knies also identifies Gebrauch and Nutzung. 1 
 
 Schaffle in one place defines Nutzung as the "employment" 
 of goods (Gesell. System, iii. p. 143); similarly on p. 266 
 as "acquisitive employment." On p. 267 he calls it "the 
 
 1 Geld, p. 61: " Nutzung =i\\z GebraucJi of a good lasting over a period of 
 time, and limitable by moments of time. "
 
 CHAP, iv THE NUTZUNG 217 
 
 working of an economical subject by means of wealth, a using 
 of wealth towards fruitful production." On the same page it is 
 called a " devotion " of wealth to production ; with which it is 
 a little inconsistent that, on the next page, he speaks of a 
 devotion of the Nutzung of capital that is, of the devotion of 
 a devotion. In the Bau und Leben, finally, Schaffle explains 
 the uses in one place (iii. p. 258) as "functions of goods"; 
 somewhat later (p. 259) as "equivalents of useful materials in 
 living labour " ; while on p. 260 the Nutzung is defined as the 
 " releasing of the utility (Nutzcri) from material goods." 
 
 If we look more closely at this somewhat chequered array 
 of definitions and explications we may see in them two in- 
 terpretations of the conception of use, a subjective and an 
 objective. These two interpretations correspond pretty exactly 
 with the double sense in which the ^word Use or Nutzung 
 is generally employed in ordinary speech. It indicates, on 
 the one hand, the subjective activity of the one who uses, 
 and is called in German indifferently Benutzung or Gebrauch 
 in the subjective sense of that equally ambiguous word ; or, 
 more significantly, GebrauchsJiandlung. And, on the other 
 hand, it indicates an objective function of the goods that 
 are used ; a service issuing from the goods. The subjec- 
 tive interpretation appears vaguely in Hermann's identifica- 
 tion of Nutzung and Gebrauch, and very strongly in Schaffle's 
 earlier work. The objective interpretation distinctly predomi- 
 nates with Say ; almost as distinctly with Hermann, who, indeed, 
 in one place speaks explicitly of the " objective use " of capital ; 
 and even Schaffle inclines to it in his latest work when he 
 speaks of the use as a " function of goods." 
 
 It is easy to see that of the two interpretations it is simply 
 and solely the objective that accords with the character of the 
 Use theory. For, taking it only on the most obvious grounds, 
 it is absolutely impossible to give a subjective meaning to those 
 uses of capital which the borrower buys from the lender, and 
 pays with loan interest. These cannot be acts of use performed 
 by the lender, for he does not perform any such. Nor can 
 they be acts of use performed by the borrower, for, although 
 he may intend to perform such actions, he does not of course 
 require to buy his own actions from the lender. To speak, 
 therefore, of a transference of the uses of capital in the loan,
 
 218 THE NUTZUNG BOOK in 
 
 has a meaning only if we understand by the word "uses" objective 
 elements of use of some kind or other. I think, then, that I 
 am justified in leaving out of account, as inconsistencies that 
 contradict the spirit of their own theory, those subjective 
 interpretations of use that are to be found sporadically in indi- 
 vidual Use theorists, and in confining myself exclusively to the 
 objective interpretations which have been adopted by the majority, 
 and which, since Schaffle's change of front, are the only recognised 
 interpretations. By Use, then, in the sense given it by the Say- 
 Hermann school, we have to think of an objective useful element 
 which proceeds from goods, and acquires independent economical 
 existence as well as independent economical value. 
 
 Now nothing can be more certain than that there are, in 
 fact, certain objective useful services of goods that obtain 
 economical independence, and may, not unfitly, be designated 
 by the name of Uses (Nutzungeri). I have already, in another 
 place, treated of these in detail, and done my utmost to de- 
 scribe their true nature as exactly and thoroughly as possible. 1 
 Singularly enough, this attempt of mine stands almost alone in 
 economic literature. I say " singularly enough " deliberately, 
 for it does seem to me a very wonderful thing that, in a 
 science which from beginning to end turns, as on its axis, on 
 the satisfying of needs by means of goods, on the relation 
 of use between men and goods, no inquiry has ever been 
 made into the technical character of the use of goods. Or 
 that, in a science where pages, chapters, even monographs have 
 been written on many another conception, not a couple of lines 
 should have been devoted to the definition or explanation of 
 the fundamental conception " use of a good," and that the 
 expression should be dragged into every theoretical research in 
 all the confusion and ambiguity which it has in ordinary life. 
 
 Since for our present purpose everything depends on us 
 getting a reliable idea of the useful functions which goods 
 serve, I must at this point go into the matter with some 
 exactitude ; only begging the reader not to look on what 
 follows as a digression, but as strictly germane to the subject. 2 
 
 1 See my Rechtc uiid Verhdltnisse vom Standpunkt-e der volkwirthscluiftlichen 
 Giitcrlehrc, Innsbruck, 1881, p. 51. 
 
 2 I take the liberty in the next chapter of repeating, partly in the same words, 
 the argument of my Rnshte und VerMltnissc, which was written some time ago 
 with a view to the present work.
 
 CHAPTER V 
 
 THE TRUE CONCEPTION OF THE USE OF GOODS 
 
 ALL material goods (Sachyuter) are of use to mankind through 
 the action of the natural powers that reside in them. They 
 are a part of the material world, and for that reason all their 
 working, including their useful working, must bear the 
 character that working generally has in the material world ; 
 it is a working of natural powers according to natural laws. 
 What distinguishes the working of material goods from the 
 working of other kinds of natural things, harmless or hurtful, 
 is the single circumstance, that the results of such working 
 admit of being directed towards the advantage of man, this 
 direction also being under the rule of natural laws. That is 
 to say, all things are endowed simply with working natural 
 powers, but experience shows that these powers only admit 
 of being directed to a definitely useful end, when the matter 
 which possesses these powers has taken on certain forms that 
 are favourable to them being so directed. All matter on the 
 surface of the earth, for instance, among other forms of energy, 
 possesses an amount of energy corresponding to its distance 
 from the centre of the earth. But while men can do nothing 
 with this form of energy when stored up in a mountain, that 
 same energy is useful to them when the matter possessing it 
 has taken on some form they wish that is, some form in which 
 the energy is available ; say, that of a clock pendulum, or a 
 paper weight, or a hammer. The energy of chemical affinity 
 which carbon possesses is identical in every molecule of it. We 
 get a direct economic utility, however, from the results of tin's 
 energy only when the carbon has taken such forms as that of 
 wood or coal ; not when it exists as part of one of the con-
 
 220 TRUE CONCEPTION OF USE OF GOODS BOOK in 
 
 stituents of the air. We may therefore say that the nature of 
 material goods, as opposed to those material things that are 
 not useful, is that they are such special forms of matter as 
 admit of the natural powers they possess being directed to the 
 advantage of man. 
 
 From this follow two important inferences, of which one 
 concerns the character of the useful functions of material 
 goods, and the other concerns the character of the use 
 (Gebraucli) of goods. 
 
 The function of goods can consist in nothing else than in 
 a giving off, or rendering up, or putting forth of power ; or, to 
 use the terminology of physical science, the passing of energy 
 into work. On the natural side it shows a complete parallelism 
 with the character of the useful function performed by a 
 manual labourer. In the same way as a porter or a navvy 
 is of use, when he puts forth the natural power residing 
 in his body in the form of rendering useful services, so 
 are material goods of use through concrete forthputting of the 
 natural powers inherent in them and capable of direction 
 physically speaking, through the forthputting in work of 
 the available forms of energy they possess. It is by the 
 passing of available energy into work that the " use " of 
 goods is obtained by man. 1 
 
 The use (Gfebrauck) of a thing then is realised in this way: 
 man takes the peculiar forms of energy of the good at the 
 proper time, supplies the conditions necessary to render them 
 available where they previously existed in an unavailable form, 
 and then brings these forms of energy into proper connection 
 with that object in which the useful effect is to take place. 
 For instance, in order to " use " the locomotive the stoker fills 
 the boiler with water, applies heat, and thus obtains in an 
 available form the heat energy of the steam, which is trans- 
 ferred into energy of motion of the locomotive. This last- 
 
 1 ,I may remind the reader that, according to the scientific conception of 
 energy energy being that quality the possession of which confers upon a body 
 the power of doing work it may exist either as available or unavailable energy ; 
 that is, the body may possess energy of which a use can be made, or it may 
 possess energy of which no use can be made. Thus the storage of energy in 
 certain material bodies in an unavailable form, and the change of this unavailable 
 into available energy, by means of which work is done that has a direct influ- 
 ence on the satisfaction of human wants, is just the physical conception applied 
 to economics. W. S.
 
 CHAP, v THE MATERIAL SERVICES 221 
 
 named energy is then transferred by connection to the carriages 
 that convey persons or goods. Or one brings a book into the 
 necessary relation with his eye for the image, which is continu- 
 ally being formed by reflection, to fall on the retina ; or brings 
 the house which continually offers shelter into proper relation 
 with his whole person. But any "use" of material goods 
 which does not consist in the receiving from them of useful 
 results due to their inherent powers or forms of energy, is 
 absolutely unthinkable. 
 
 I think I need have no fear of the propositions I have 
 just advanced meeting with any scientific opposition. The 
 conception laid down is no longer strange in our economic 
 literature ; l and in the present state of the natural sciences 
 the acceptance of it has indeed become a peremptory necessity. 
 If by any chance it should be objected that this conception is 
 one that belongs to the natural sciences and is not an economic 
 one, I answer that in these questions economic science must 
 leave the last word to natural science. The principle of the 
 unity of all science demands it. Economic science does not 
 explain the facts that belong to its province to the very bottom, 
 any more than any other science does. It solves only one 
 portion of the causal connection that binds together the pheno- 
 mena of things, and leaves it to other sciences to carry the 
 explanation farther. Not to mention other limiting sciences, 
 the sphere of economic explanation lies between the sphere 
 of psychological explanation on the one hand, and that 
 of the natural sciences on the other. To give a concrete 
 example. Economic science will explain thus far the cir- 
 cumstance that bread has an exchange value : it will point 
 out that bread is able to satisfy the want of sustenance, 
 and that men have a tendency to ensure the satisfaction 
 of their wants, if necessary by making a sacrifice. But 
 that men have this tendency, and why they have it, is not 
 explained by economic science but by psychology. To explain 
 that men want sustenance and why, falls within the domain 
 of physiology. Finally, it also falls within the sphere of 
 
 1 Schaffle, in particular, in the third volume of his Bau und Leben, very 
 beautifully puts the same point of view. Schaffle, I may say, forms an honour- 
 able exception among economists as regards this objectionable habit of not taking 
 any trouble with the principles that regulate the working of goods.
 
 222 TRUE CONCEPTION OF USE OF GOODS BOOK in 
 
 physiology to explain that bread is able to satisfy that want, 
 and why it is able to do so, but physiology does not finish the 
 explanation within its own sphere ; it has to call in assistance 
 from the more general physical sciences. 
 
 Now it is clear that all explanations given by economic 
 science have a value only under this condition, that they are 
 continuous with the related sciences. The explanations of 
 economics cannot rest on anything that a science related to it 
 is bound to declare untrue or impossible ; otherwise the thread 
 of the explanation is broken from the first. It must on that 
 account keep exactly in touch with the related sciences at the 
 points where they limit it, and one such point is just this 
 question as to the working of material goods. 
 
 The one thing of which I have, perhaps, some reason to 
 be afraid is, that the employment of this physical concep- 
 tion in regard to a certain limited class of material goods, 
 especially to the so-called "ideal goods," may be somewhat 
 startling at the first glance to some readers. That, e.g. a fixed 
 and stationary dwelling-house, a volume of poems, or a picture of 
 Eaphael should be of use to us through the forthputting of 
 inherent properties connected with one or other of the forms 
 of energy, or, as we may shortly express it, the forthputting of 
 its natural powers, may at first, I admit, be a little strange. 
 Objections like these, however, which have their origin more 
 in feeling than in understanding, may be removed by a single 
 consideration. All the things that I have named enter into 
 the relation which makes them " goods " only in virtue of the 
 peculiar natural powers which they possess, and possess, indeed, 
 in peculiar combination. That a house shelters and warms, is 
 nothing else than a result of the forces of gravity, cohesion, 
 and resistance, of impenetrability, of the non-conducting 
 quality of building materials. That the thoughts and feelings 
 of the poet reproduce themselves in us is mediated, in a 
 directly physical way, by light, colour, and form of written 
 characters ; and it is this physical part of the mediation which 
 is the office of the book. There must of course have been a 
 poet soul in whom ideas and feelings waked, and, again, it is 
 only in a spirit and through spiritual forces that they can be 
 reawakened ; but the way of spirit to spirit lies some little 
 distance through the natural world, and over this distance even
 
 CHAP, v THE MATERIAL SERVICES 223 
 
 the spiritual must make use of the vehicle of natural powers. 
 Such a natural vehicle is the book, the picture, the spoken 
 word! Of themselves they give only a physical suggestion, 
 nothing more ; the spiritual we give of our own on accepting 
 the suggestion ; and if we are not prepared beforehand for a 
 profitable acceptance of it, if we cannot read, or, reading, can- 
 not understand, or cannot feel, it remains simply a physical 
 suggestion. 
 
 With- these explanations perhaps I may consider it 
 established beyond question that material goods exert their 
 economical use through the forthputting of the natural powers 
 residing in them. 
 
 The individual useful forthputtings of natural powers that 
 are obtainable from material goods I propose to designate as 
 " Material Services." l In itself, indeed, the word Use (Nufzung) 
 would not be inappropriate, but to adopt it would be to 
 surrender our conception to all the obscurity that now, un- 
 fortunately, hangs over that ambiguous expression. 2 
 
 The conception of Material Services is, in my opinion, 
 
 1 I have already introduced this term Nutzleistung in my Rechte und Verlw.lt- 
 nisse ; before that I used it in a work written in 1876 but not printed. It is 
 employed by Kuies several times in the second portion of his KrecUt, but 
 unfortunately in the same ambiguous sense in which on other occasions he 
 uses the word Nutzung. 
 
 NOTE BY TRANSLATOR. 
 
 After much deliberation Material Service is the nearest rendering I can give to 
 the word Nutzleistung, introduced by Professor Bohm-Bawerk. Every translator 
 finds the difficulty of rendering scientific terms irom one language into another, 
 but this difficulty is greater in political economy, where we are bound to use words 
 " understanded of the people." The word Nutzlcistung is one of these happy 
 combinations which, as compounded of two familiar words, do not strike a German 
 as peculiar or clumsy, and are yet strict enough to satisfy scientific requirements. 
 But our language does not admit of many sucli combinations the literal 
 translation "use rendering" at once shows the impossibility in the present case 
 and in a translation one does not feel justified in coining a new word. In ren- 
 dering the word thus it becomes necessary to eliminate a note that follows in the 
 German edition, where Professor Bohm-Bawerk congratulates himself on having 
 escaped Say's services product if s, which might be objected to on the ground that 
 " only a person, not a thing, can render services." The prefix " material " seems 
 to me fairly to meet this objection, as the total expression now implies a service 
 a forthputting of natural powers in the service of man rendered by a material 
 object. W. S. 
 
 2 After this clause, in the German edition, come the words: "Und 
 andererseits scheint mir der Name Nutzleistung in der That ausserordentiich 
 pragnant zu sein : es sind im eigenstlichen Wortsinn niitzliche Krafteleistungen, 
 die von den Sachgiitern ausgehen. " W. S.
 
 224 TRUE CONCEPTION OF USE OF GOODS BOOK HI 
 
 destined to be one of the most important elementary concep- 
 tions in economic theory. In importance it does not come 
 Behind the conception of the economic Good. 1 Unfortunately 
 up till now it has received little attention and little develop- 
 ment. From the nature of our task it is indispensable that 
 we should repair this neglect, and follow out some of the more 
 important relations into which the material services enter in 
 economic life. 
 
 First of all, it is clear that everything which would lay 
 claim to the name of a " good " must be capable of rendering 
 material services, and that, with the exhausting of this capa- 
 bility, it ceases to have the quality of a good ; it falls out of 
 the circle of " goods " back into the circle of simple "things." 
 An exhaustion of this capability must not be thought of as an 
 exhaustion of the capability to exert or to put forth energy in 
 general ; for what we have called the " natural powers " of 
 the material are as imperishable as the material itself. But 
 although these powers or forms of energy never cease to exist 
 in some form or other, they may very well cease to be available 
 for material services in this way, that the original good, in the 
 course of doing work, has undergone such a change, be it 
 separation, dislocation, or uniting of its parts with other bodies, 
 that, in its changed form, its energy is no longer available 
 for human use. For instance, when the carbon of the wood 
 burned in the blast furnace has combined with oxygen in the 
 combustion process, its powers cannot again be employed to 
 smelt iron, although these powers are constant, and continue 
 to work according to natural laws. The broken pendulum 
 retains its energy due to gravity just as it did before, but the 
 loss of the pendulum form does not allow of this energy being 
 directed to regulate the clock. The exhaustion of capability 
 to render material services we are accustomed to call the using 
 up or Consumption of goods. 
 
 1 It is unfortunate that in English economics we have devoted so little 
 attention to this most elementary conception, on which Menger, in particular, has 
 bestowed so much pains. The poverty of our scientific nomenclature shows this de- 
 fect very markedly : the word "commodity" is really the only singular equivalent 
 we have for the familiar and suggestive word "goods," although I personally have 
 not scrupled to translate the German Gut by the English "good." There is, in- 
 deed, reason for Mr. Ruskin's sarcasm that our most famous treatise on Wealth 
 does not even define the meaning of the word "wealth." W. S.
 
 CHAP, v THE MATERIAL SERVICES 225 
 
 While all goods thus agree and must agree in this, 
 that they have to render material services, they differ 
 essentially from one another in the number of services 
 that they have to render. On this rests the familiar 
 division of goods into perishable and non-perishable, or 
 better, into perishable and durable. 1 Many goods are of 
 such a nature that, to render the uses peculiar to them, they 
 must give forth their whole power, as it were, at a blow, in 
 one more or less intense service, so that their first use quite 
 exhausts their capability of service, and is their consumption. 
 These are the so-called perishable goods, such as food, gun- 
 powder, fuel, etc. Other goods, again, are, in their nature, 
 capable of rendering a number of material services in the way 
 of giving off these services successively, within a shorter or 
 longer period of time ; and thus after a first, or even after many 
 acts of use, they may retain their capability of rendering further 
 services, and so retain their character of goods. These are 
 the durable goods, such as clothing, houses, tools, precious 
 stones, land, etc. 
 
 Where a good successively gives off a number of material 
 services, it may do so in one of two ways : either the services 
 following each other evidently separate themselves from each 
 other, as clearly marked single acts, in such a way that they 
 are easily distinguished, limited, and counted, as, e.g. the single 
 blows of a coining press, or the operations of the automatic 
 printing press of a great newspaper; or they issue from the 
 goods in unbroken, similar continuance, as, e.g. the shelter 
 silently given over long periods of time by a dwelling-house. 
 If, however, it is desired, in cases of this sort, to separate and 
 divide the continuous amount of services and practical need 
 often requires this the expedient is adopted that is generally 
 taken in the dividing of continuous quantities: the dividing 
 line that does not suggest itself in the phenomena under 
 consideration is borrowed from some outside circumstance, e.g. 
 from the lapse of a definite time; as when one delivers over 
 to the hirer of a house the services to be rendered by the 
 house during the year. 
 
 Another essential feature that meets us in the analysis of 
 
 1 Even the so-called non-perishable goods are perishable, however gradually 
 they perish. 
 
 Q
 
 226 TRUE CONCEPTION OF USE OF CAPITAL BOOK HI 
 
 material services is their capability of obtaining complete eco- 
 nomical independence. The source of this phenomenon is that 
 in very many, indeed in most cases, the satisfaction of a con- 
 crete human want does not demand the exhaustion of the entire 
 useful content of a good, but only the rendering of a single 
 material service. In virtue of this the single service in the 
 first instance obtains an independent importance as regards 
 the satisfaction of our wants, and then in practical economic 
 life this independence is fully recognised. We give the 
 recognition (1) wherever we make an independent estimate 
 of the value of isolated services ; and (2) wherever we make 
 them into independent objects of business transactions. This 
 latter i.:<.ppens T ">en we sell or exchange single services, or 
 groups of servi s, apart from the goods from which they 
 proceed. Economical custom and law have created a number 
 of forms in which this is effectuated. Among the most 
 important of these I may name the relations of tenancy, of 
 hire, and of the old commodatum ; l further, the institution of 
 easements, of fee farm, of copyhold (emphyteusis and siqwrficies). 
 A little considerac.on will convince us that, as a fact, all these 
 forms of transaction agree in this, that 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 of the good. 2 
 
 Finally, it is of great theoretic importance to determine 
 the relations that exist between the material services and 
 the goods from which they proceed. On this point I may 
 put down three cardinal propositions, all of which appear to 
 me so obvious that we may dispense here with any detailed 
 proof of them ; more especially as I have gone thoroughly into 
 the subject on another occasion. 3 
 
 1. It seems to me clear that we value and desire goods 
 only on account of the material services that we expect from 
 them. The services, as it were, form the economical substance 
 
 1 Not of the loan ; see below. 
 
 - See also my Reclitc nnd Verhiiltnissc, p. 70, etc. 
 
 3 In my Re.t-.hte und Vcrluiltnissc, p. 60, where, in particular, I have stated 
 the character of the material services as primary elements of our economic trans- 
 actions, and have deduced the value of goods from the value of the material 
 services.
 
 CHAP, v THE MATERIAL SERVICES 227 
 
 with which we have to do. The goods themselves form only 
 the bodily shell. 
 
 2. It follows from the above, and appears to me equally 
 beyond doubt, that, where entire goods are obtained and 
 transferred, the economical substance of such transactions always 
 lies in the acquisition and the transference of material services ; 
 indeed of the totality of these services. The transference of the 
 goods themselves constitutes only a form certainly a form that, 
 in the nature of things, is very prominent, but still only an accom- 
 panying and limiting form. To buy a good can mean nothing, 
 economically speaking, but to buy all its material services. 1 
 
 3. From this, finally, comes the important conclusion 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. 2 
 
 Before going farther let me illustrate these three proposi- 
 tions by a concrete example. I think all readers will agree 
 with me when I say that a cloth manufacturer values and 
 demands looms only because he expects to get from the looms 
 the useful energies peculiar to them ; that not only when he 
 hires a loom, but when he buys it, he looks, as a fact, to the 
 acquisition of its services ; and that the ownership he acquires at 
 the same time in the body of the machine only serves as greater 
 security that he will obtain these services. Even if this owner- 
 ship in point of law appears to be the primary thing, economically 
 it is certainly only the secondary. And, lastly, it will be granted, 
 I think, that the use which the whole machine renders is nothing 
 else than the use of all its material services thrown together 
 into one sum ; and that similarly the value and price of the 
 whole machine is nothing else, and can be nothing else, than 
 the value and price of all its material services thrown together 
 into one sum. 
 
 1 This idea, though put somewhat differently, is explicitly recognised by 
 Knies, Der Kredit, part ii. pp. 34, 77, 78. He expressly calls the selling price 
 of a house the price of the permanent use of a house in opposition to the hire 
 price, which is the price of the temporary uses of the same good. See also his 
 Geld, p. 86. Schaffle too (Ban imd Leben, second edition, iii.) describes goods 
 as "stores of useful energies" (p. 258). 
 
 a For more exact statement, see my Reckte und Verhaltnisse, p. 64.
 
 CHAPTER VI 
 
 CRITICISM OF THE SAY-HERMANN CONCEPTION 
 
 HAVING, then, sufficiently explained the nature and the 
 constitution of the use of goods, let us come back to the 
 principal point under consideration the critical examination 
 of the conception of " use " put forward by the Use theorists. 
 
 And first we ask, May it not be the case that the Uses 
 (Nutzungeri) of the Say-Hermann school are identical with our 
 Material Services (Nutzleistungeri)? There can be no doubt that 
 they are not identical. That something which the school in 
 question calls "use" is intended to be the basis and the equivalent 
 of net interest. The material services, on the contrary, are some- 
 times (in the case of durable goods) the basis of gross interest, 
 embracing the net interest and a part of the capital value 
 itself; sometimes (in the case of perishable goods) the basis 
 of the entire capital value. If I buy the material services 
 of a dwelling-house, I pay a year's rent for the services of 
 one year; this is a gross interest. If I buy the material 
 services of a cwt. of coal, I pay, for the services of the single 
 hour in which the coal burns to ashes, the whole capital value 
 of the coal. On the other hand, what the Use theorists call 
 "use" is paid for quite differently. The "use" that a cwt. of coal 
 gives off during a whole year attains no higher price than, say, 
 a twentieth part of the capital value of the coal Use and 
 Material Service must, therefore, be two quite distinct amounts. 
 From this, among other things, it is clear that those writers 
 who defined and pointed out the existence of what we have 
 called material services, under the idea that they were 
 defining the basis of net interest, and pointing to it, were 
 under a serious delusion. This criticism applies particularly
 
 CHAP, vi "NUTZUNGEN" AND "NUTZLEISTUNGEN" 229 
 
 to the services productifs of Say, and to Schaffle's earlier 
 definitions of use. 
 
 And now we come to the decisive question. If what the 
 Use theorists called " uses " (Nutzungen) are anything else than 
 the " material services " of goods, does their conception represent 
 anything real ? Is it conceivable that between, beside, or 
 among these material services we get some other useful thing 
 from goods ? 
 
 I can give no other answer to this question than the most 
 emphatic No. And I think every one will be compelled to give 
 this answer who admits that material goods are objects of the 
 material world ; that material results cannot be produced other- 
 wise than through manifestations of natural powers ; and that 
 even the " utility " of a tiling is an activity. Granted these 
 premises, none of which are likely to be opposed, it appears 
 to me that no other kind of use in material goods is con- 
 ceivable than that which comes through the forthputting of 
 their peculiar natural powers that is, through the rendering 
 of Material Services. 
 
 But it is not even necessary to appeal to the logic 
 of the natural sciences. I appeal simply to the common 
 sense of the reader. Take an example or two to remind 
 us of what we mean when we say that goods are "of 
 use." A thrashing machine, there is no doubt, is of use 
 economically in helping to thrash corn. How does it, how 
 can it, render this use ? Not otherwise than through putting 
 forth its mechanical powers one after another, till such time 
 as the worn-out mechanism refuses to put forth any more 
 power of the same kind. Can any reader picture to himself 
 the effect that the thrashing machine exerts in separating the 
 corn from the ear under any other form than that of a 
 forthputting of mechanical power? Can he imagine one 
 single use that the machine could exert in thrashing, not 
 through putting forth of power, but through some other kind 
 of Nutzung ? I doubt it very much. The thrashing machine 
 either thrashes by putting forth its physical powers, or it does 
 not thrash at all 
 
 It would be useless too to attempt to make out another 
 kind of use or Nvizung by pointing to different kinds of
 
 230 CRITICISM OF SA Y-HERMANN USE BOOK in 
 
 mediate uses that can be got from the thrashing machine. 
 Our grain when thrashed is certainly worth more than it was 
 before being thrashed, and the increment of value is a use we 
 get from the machine. But it is easy to see that this is not 
 a use in addition to the material services of the machine, but 
 a use through these services ; that it is just the use of the 
 machine. Take an exactly similar case. Suppose some one 
 were to give me 5 0, and with it I were to buy myself a riding- 
 horse. No one would say that I had received two presents 
 50 and a riding-horse. We have just as little right to 
 conceive of the mediate use of the material services as a second 
 and different useful service of the goods. 1 
 
 This becomes quite clear in the case of perishable goods. 
 What do I get from a cwt. of coal ? The heat-creating powers 
 that it gives off during combustion, and which I pay for by 
 the capital price of the coal, and, beyond that, nothing abso- 
 lutely nothing. And what I call my "use" of the coal consists 
 in this, that I put these material services, as they issue from 
 the coal, into connection with some one object in which I wish 
 to effect a change through heat ; the use lasts as long as these 
 services issue from the burning coal. 
 
 And when I lend a man a cwt. of coal for a year, what 
 does my debtor get from it ? Just the heat-creating power that 
 issues from the coal during a couple of hours, and besides that, 
 in this case also, nothing absolutely nothing. And his use of 
 the coal likewise is exhausted in the same number of hours. It 
 may perhaps be asked, Can he not, then, in virtue of the loan 
 agreement, use the coal over a whole year? The owner, I 
 admit, could have nothing to say against it, but nature has ; 
 and nature says inexorably that the use shall be over in a 
 couple of hours. What then remains of the contract is, that 
 the debtor is obliged at the expiry of the year, but not till then, 
 to replace the loan by another cwt. of coal. But it is surely 
 a most extraordinary confusion of ideas. that the fact of a man 
 having to give a cwt. of coal at the expiry of a year in place 
 of another cwt. of coal that has been burnt, should be taken 
 
 1 A hair-splitting critic might perhaps point out that the possession of 
 good machines assists the maker to secure, say, a good credit, a good name, 
 good custom, etc. The careful reader will have no difficulty in answering such 
 objections. To the same category belongs the " use through exchange."
 
 CHAP, vi "NUTZUNGEN" AND "NUTZLEISTUNGEN" 231 
 
 to mean that, in the burned cwt. of coal, there continues to 
 exist an objective use for a whole year ! 
 
 For any "use of goods," then, other than their natural 
 material services, there is no room either in the world of fact 
 or in the world of logical ideas. 
 
 Possibly many readers will consider this analysis suffi- 
 ciently convincing. But the matter is too important, and the 
 antagonistic views too deeply rooted, to admit of it resting 
 here ; and, accordingly, I shall try to bring forward still 
 further evidence against the existence of the use postulated by 
 the Use theorists. Of course the nature of my contention, as a 
 negative one, does not allow of a positive proof. I cannot put 
 before the mind the non-existence of a thing in the same way 
 as I might put the existence of a tiling. Nevertheless there is 
 no lack of decisive evidence on the point, and indeed it is 
 offered by my opponents themselves. 
 
 There are two criterions of a true proposition : that it 
 is obtained by a correct process of reasoning, and that it leads 
 to correct conclusions. In the case of the assertion we are 
 combating the assertion that there is an independent use 
 neither of these criterious applies, and what I mean to pro 1 * e 
 now is this : 
 
 1. That in all the reasoning by which the Use theorists 
 thought they had proved the existence of this Use, an error 
 or a misunderstanding has crept in. 
 
 2. That the assumption of an Independent Use necessarily 
 leads to conclusions that are untenable. 
 
 After what has been already demonstrated, that there is 
 no place for any objective Use or Nutzv.ng besides the Material 
 Services, the proof of the above points should afford the fullest 
 evidence that can be brought forward for my thesis.
 
 CHAPTEK VII 
 
 THE INDEPENDENT USE : AN UNPROVED ASSUMPTION 
 
 OF the prominent representatives of the Use theory, two 
 have taken particular pains to prove the existence of an 
 independent use, Hermann and Knies. I shall therefore 
 make their argument the chief subject of critical examination. 
 Besides these writers, however, the contribution made by Say, 
 the Nestor of the Use theory, and by Schaffle, deserve our 
 consideration. To begin with the last two writers, a few 
 words will show the misunderstanding into which they have 
 fallen. 
 
 Say ascribes to capital the rendering of productive services, 
 or, as he often expresses it, the rendering of " labour," and this 
 labour is, according to him, the foundation of interest. The 
 expressions Services and Labour may perhaps be objected to 
 as more applicable to the actions of persons than of im- 
 personal goods. But there is no doubt that Say is sub- 
 stantially right; capital does perform "labour." It appears 
 to me, however, just as much beyond doubt that the labour 
 which capital actually performs consists in what I have called 
 the Material Services of goods, and these form the foundation 
 of gross interest, or, as the case may be, of the capital value 
 of goods. Say appears quietly to assume that capital, besides 
 these, gives off services distinct from what we have defined 
 as the material services, and that such services may be the 
 separate foundation of a net interest, but he does not give the 
 slightest proof of it possibly because he had never remarked 
 the chameleon-like ambiguity of his conception of the services 
 productifs. 
 
 Very much the same is true of Schaffle. I need not speak
 
 CHAP, vii CRITICISM: SAY, SCHAFFLE, HERMANN 233 
 
 of the subjective interpretations of his earlier work, which are 
 inconsistent with the character of the Use theory, and which 
 have been quietly withdrawn in the latest edition of his Bau 
 und Lehen. In the later work, however, he calls goods " stores 
 of useful energies" (iii. p. 258), and he calls uses "func- 
 tions of goods," "equivalents of useful materials in living 
 labour" (iii. pp. 258, 259), "living energies of impersonal 
 social substance" (p. 313). This is all quite correct; but the 
 function of goods, the forthputting of useful energies, is 
 nothing else than our Material Services, and these, as we 
 have shown, find their equivalent not in net interest, as 
 Schaffle assumes, but in gross interest, or, in the case of perish- 
 able goods, in their capital value. Say and Schaffle, therefore, 
 have misunderstood what it was they had to prove, and their 
 arguments are therefore entirely beside the mark. 
 
 The way in which Hermann arrives at his independent 
 " use " (Nutzung) has quite a psychological interest. 
 
 His first introduction of the conception occurs when 
 speaking of the use of durable goods. " Land, dwellings, tools, 
 books, money, have durable use value. Their use, for the 
 time that they last, may be conceived of as a good in itself, 
 and may obtain for itself an exchange value which we call 
 interest." l Here no special evidence is adduced for the 
 existence of an independent use possessing an independent 
 value, and indeed there is no need to prove it; every one 
 knows that, as a fact, the use of a piece of ground, or the 
 use of a house, can be independently valued and sold. But 
 what must be emphasised is, that the thing which every 
 reader will understand in this connection, and must understand, 
 as use, is the gross use of durable goods ; the basis of rent in 
 the case of land, of hire in the case of houses the same thing, 
 in short, as we have called the material services of goods. 
 Further, the independent existence of this " use " alongside 
 of the good that renders the use, is only explained by the 
 fact that the use in question does not exhaust the good itself. 
 We are forced to admit that the use is something different from 
 the good itself and independent of it, because the good continues 
 to exist alongside it, in the sense that a portion of the use which 
 it is capable of affording remains intact. 
 
 1 Staatsicirthschaftliche Untersuchungen, second edition, p. 109.
 
 234 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 The second step that Hermann takes is to draw an analogy 
 between the use of durable and the use of perishable goods, 
 and to try to show that, in the case of the latter also, there 
 is an independent use with independent value existing along- 
 side the value of the good. He finds 1 that perishable goods, 
 through technical change of form, preserve their usefulness, and 
 although in changed shape, "may obtain permanence for their use." 
 If, e.g. iron-ore, coal, and labour are transformed into pig iron, 
 in being so transformed they contribute the chemical and 
 mechanical elements for a new usefulness which emerges from 
 their combination ; and if, in such case, the pig iron possesses 
 the exchange value of the three goods of exchange employed in 
 its making, then the former sum of goods persists, qualitatively 
 bound up in the new usefulness, quantitatively added together 
 in the exchange value. " But if in this way goods that are 
 perishable are capable of a lasting use, then," continues 
 Heraiann, " it is the same with goods that change their form 
 qualitatively while retaining their exchange value, as it is with 
 durable goods ; this use may be conceived of as a good in 
 itself, as a use (Nutzuwj) which may itself obtain exchange 
 value." 
 
 In this Hermann has of course reached the goal he set 
 before him, of proving that, even in perishable goods, there is 
 a use which exists alongside of the good itself. Let us look, 
 however, a little more closely at the basis of his argument. 
 
 First of all, it should be noticed that the sole support of 
 this demonstration is a conclusion drawn from analogy. The 
 existence of an independent use in perishable goods can in no 
 way appeal, like the use of durable goods, to the testimony of 
 the senses, and to practical economic experience. No one has 
 seen an independent use detaching itself from a perishable 
 good. If we think that it is to be seen in the case of every 
 loan inasmuch as a loan is nothing else than a transfer of the 
 use of perishable goods, we are wrong ; here we do not see an 
 independent use ; we only infer that there is one. What we 
 see is simply that the borrower receives 100 at the begin- 
 ning of the year, to give back at the end of it 105. That in 
 this case 100 is given for the sum that was lent, and 5 for 
 the use of the same, is not an immediate sensuous observation ; 
 
 1 P. llU, r-tc. See the quotation above, p. 194.
 
 CHAP, vii BY HERMANN 235 
 
 it is a construction put by us on our observation. At all 
 events, where the existence of an independent use in perishable 
 goods is in question, no appeal can be made to the case of 
 the loan ; for so long as the existence of that independent use 
 is questioned, of course the justification of interpreting the loan 
 as a transfer of use must also be questioned, and to try to 
 prove the one by the other is obviously begging the question. 
 
 If, therefore, the " independent use of perishable goods " 
 is to be anything more than an unproved assertion, it can only 
 be through the force of the argument from analogy that Her- 
 mann has introduced, not indeed in form but in substance, 
 in the passage just quoted. The argument there is as follows : 
 Durable goods are capable, as every one knows, of affording 
 a use independent of the goods themselves ; if we look closely 
 we can see that perishable goods, like durable goods, allow of 
 a durable use ; consequently perishable goods are, and must 
 be, capable of affording a use independent of the goods 
 themselves. 
 
 The conclusion thus drawn is false, for, as I shall prove 
 immediately, the analogy fails just at the critical point. I 
 admit at once that perishable goods, through technical change 
 of form, really become capable of durable use. I grant that 
 coal and iron ore are first used in the production of iron. I 
 grant that the use which the iron then affords is nothing but 
 a further result of the powers of those first things ; which first 
 things are therefore used in the shape of iron for the second 
 time, and again in the nail that is made out of the iron for 
 the third time, and in the house which the nail helps to hold 
 together for the fourth time ; that is to say, are used in a 
 lasting way. Only it must be carefully noted that the 
 durableness in this case rests on quite another ground, and 
 possesses quite another character from that of durable goods 
 properly so called. The durable gooJs are used over and over 
 again in this way that, in each act of use, only a part of their 
 useful content is exhausted, while another part is left un- 
 disturbed for future acts of use. But the perish'able goods are 
 used over and over again by exhausting the whole of them 
 over and over again by exhausting the whole useful content 
 of that form which the goods have at the time ; but since this 
 useful content then takes on a new shape, the exhaustive use
 
 236 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 is repeated in it again. The two kinds of use are as distinct 
 as the continuous outflow of water from a reservoir is distinct 
 from the continuous flow of water from one vessel to another 
 and back again ; or, to take an example from the economical 
 world, they are as distinct as the obtaining of successive pro- 
 ceeds from selling land piece by piece is distinct from the 
 obtaining of successive proceeds by spending the price of the 
 whole piece of ground in a new purchase, and selling this new 
 purchase over again. 
 
 A few words more will bring out more sharply the halting 
 nature of Hermann's analogy. 
 
 Between the " durable use " which Hermann points out in 
 perishable goods, and durable goods proper, there is really a 
 perfect analogy, but Hermann, instead of drawing this parallel, 
 has drawn another. We have here to do with one of those 
 points in which the neglect that our science has been guilty of 
 in regard to the conception of the " use of goods " has revenged 
 itself on the science. If Hermann had more accurately 
 examined the conception of use (Gebrauch) he would have 
 perceived that under that name two very distinct things are 
 coupled together things which, for want of a better expression, 
 I shall distinguish as the immediate and mediate use of goods. 
 The immediate use (the only one which perhaps has any 
 claim to the name of " use ") consists in the receiving of the 
 material services of a good. The mediate use (which perhaps 
 it would be more proper not to call " use " at all) consists in 
 receiving the material services of those other goods that only 
 come into existence through the material services of the first 
 " used " good ; then again the services of the goods that 
 proceed from the material services of these latter goods, and 
 so on. In other words, the " mediate use " consists in receiving 
 the more distant members of that chain of causes and effects 
 which takes its beginning in the first immediate use members 
 that possibly go on evolving to the crack of doom. 
 
 Now I should not like to say that it is exactly false to 
 call the use of these distant results of a good a use of the good 
 itself; in any case the two kinds of use have an entirely 
 different character. If any one likes to call my riding on a 
 horse a use of the hay that my horse has eaten, it is manifest, 
 at all events, that this is an entirely different kind of use from
 
 CHAP, vii BY HERMANN 237 
 
 the immediate use of the hay, and in some essential respects is 
 subject to totally different conditions. 
 
 If we wish therefore to draw an analogy between the 
 use of two goods, or of two kinds of goods, we must evidently 
 confine ourselves strictly to similar kinds of use. We may 
 compare the immediate use of one good with the immediate 
 use of another, or the mediate use of one good with the 
 mediate use of another; but not the immediate use of one 
 good with the -mediate use of another, particularly if we wish 
 to deduce further scientific conclusions from the comparison. 
 It is here that Hermann has gone wrong. Durable goods 
 as well as perishable goods permit of two kinds of use. Coal, 
 a perishable good, has its immediate use in burning; its 
 mediate use, as Hermann has quite correctly pointed out, in 
 the use of the iron which is smelted by its aid. But this is 
 the case also with every durable good. E.g. every spinning 
 frame, besides its immediate use which consists in the pro- 
 duction of yarn, has also a mediate use which consists in the use 
 of the yarn for making cloth, in the use of cloth for making 
 clothing, in the use of clothing itself, and so on. Now the 
 proper comparison would obviously be between the immediate 
 use of the durable goods and the momentary use of the perish- 
 able goods, 1 or between the durable mediate use of the 
 perishable and the similarly durable mediate use of the durable 
 goods. But Hermann has made a mistake in the parallels ; 
 he has drawn his analogy where there is really none 
 between the immediate use of durable goods and the mediate 
 use of the perishable ; misled by the circumstance that both 
 kinds of use are " durable," and overlooking the fact that, in 
 the two cases, this " durableness " rests on grounds that are 
 utterly and entirely distinct. 
 
 This much, I trust, has at all events been made clear by 
 the present analysis, that the analogy whioh Hermann draws 
 between the " durable " use of durable and of perishable goods 
 is not complete. But beyond this it is easy to show that the 
 dissimilarity comes in exactly at the critical point. Why is 
 
 1 To prove the appropriateness of this analogy we need only picture to our- 
 selves the graduation of transition from the durable goods, such as land, precious 
 stones, down through always less durable goods, as tools, furniture, clothes, 
 linen, tapers, paper collars, and so on, till we come to the entirely perishable 
 goods matches, food, drink, etc.
 
 238 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 it that we can see in durable goods an independent use with 
 an independent value by the side of the good itself? Not 
 simply because the use is a durable one, but because the use 
 that has already been made of the good leaves something over 
 of the good, and of the value of the good; because in that 
 portion of the immediate useful content that has been released 
 and in the portion that is not yet released we Jiave two 
 different things that exist beside each other, each of them 
 having simultaneously an economic value of its own. But in 
 the case of perishable goods the exact opposite of all this is 
 the case. Here the use of the moment entirely exhausts the 
 useful content of the form which the good had at the moment, 
 and the value of this use is always identical with the entire 
 value of the good itself. At no one moment have we two 
 valuable things alongside of each other ; only one and the 
 same valuable thing two times in succession. When we use 
 coal and iron ore in making iron, we consume them ; for this 
 use we pay the entire capital value of these goods, and 'not one 
 atom of them is saved, or continues to exist and have an 
 independent value beside and after this consumption. And it 
 is just the same when the iron is consumed again for the 
 making of nails. It is consumed ; the whole capital value of 
 the iron is paid for it ; and not the smallest fragment of it 
 continues to exist alongside. There never are in one single 
 moment the thing and its use beside each other; only the 
 things " coal and iron-ore," " iron," and " nails," after one, an- 
 other, and through their successive use. But such being the 
 case, it can be shown us neither by analogy nor in any other 
 way how the " use " of a perishable article can attain to an 
 existence and to a value independent of the article itself. 
 
 The fact is, Hermann's analogical reasoning is no more 
 correct than an argument like the following would be. From 
 a great water tank in an hour's time I can draw off a gallon of 
 water every second. Each of the 3600 gallons thus poured 
 out has an independent existence of itself, and is a perfectly 
 distinct thing ; distinct from the water -that has been drawn 
 and from the water that remains in the tank. But suppose I 
 have only one gallon of water, and go on pouring this from 
 one vessel in to another ; as in the former case, a gallon of 
 water is poured out every second for the space of an hour.
 
 CHAP, vii BY HERMANN AND KNIES 239 
 
 Therefore in this case also it must be 3600 independent 
 gallons that are poured out from our vessels ! 
 
 But, lastly, Hermann takes a third step, and resolves the 
 use of durable goods into tw<- elements ; one element that 
 alone deserves the name " use " (Gelrauch or Nutzung} and a 
 second element which he calls " using up " (Abnutzung). I 
 must confess that this last step reminds me very forcibly of 
 the old anecdote of Munchausen, in which Munchausen lets 
 himself down by a rope from the moon by always cutting the 
 rope above his head, and knotting it again below him. Very 
 much in the same way Hermann has at first treated of the 
 whole (gross) use of durable goods as use (Nutzuiiy), till such 
 time as he has based a conclusion from analogy on it, and 
 through it has demonstrated a use in perishable goods also. 
 No sooner has he got this length than he tears his primary 
 conception of use in pieces, nowise disturbed by the fact that 
 with it he destroys the peg to which he has attached his later 
 conception of independent use, and that this conception now 
 hangs in the air. 
 
 I shall return later on to the further inconsistencies involved 
 in this. In the meantime I content myself with saying 
 that the contention which looks so fascinating at the first 
 glance proves on closer examination to have no better support 
 than a false analogy. 
 
 It would be an obvious omission in my criticism if it 
 were not to include the thorough and conscientious efforts of 
 Knies on this subject. The work of this distinguished 
 thinker has a twofold similarity to Hermann's doctrine ; like 
 Hermann, his arguments are remarkably convincing at first 
 sight, and this power they owe to an effective employment of 
 analogies analogies, however, which, like those of Hermann, 
 I feel bound to declare false. 
 
 Knies chances on our subject when discussing the eco- 
 nomical nature of the loan. He agrees with the view that 
 the essence of the loan consists in a transfer of the use of the 
 sum lent ; and when trying, with his usual carefulness, to find 
 reasons for this conception, he is compelled to go into the 
 question of the existence or non-existence of an independent 
 use in perishable goods.
 
 240 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 In some introductory considerations he starts from the idea 
 that there are economical " transfers " which do not coincide 
 with the transfer of the rights of property. The transferences 
 of the simple use of goods seem to be of this sort. He goes 
 on to note the distinction between perishable and non-perish- 
 able goods, and then turns to a detailed consideration of 
 the transfer of the uses of non-perishable goods a considera- 
 tion which, with him as with Hermann, is made to serve as 
 bridge to explain the delicate phenomena in the use of 
 perishable goods. Here he puts down the distinction that 
 must be drawn between the Nutzung as " that Gebrauch of 
 a good which lasts over a period of time, and is measured 
 by moments of time," and the good itself as the " bearer of the 
 Nutzung." The economical principle of the transfers in 
 question is that the intention is to transfer a Nutzung, but 
 not the bearer of a Nutzung. But the nature of things 
 necessitates that the transfer of the Nutzungen of goods 
 always involves certain concessions in regard to the bearer of 
 the Nutzung. The owner of a leased piece of ground, e.g. must, 
 from physical considerations, deliver it over to the lessee, if 
 the lessee is to get the use of it. The amount of these con- 
 cessions, and the inevitable risk of loss as well as of deteriora- 
 tion of the good which bears the use, vary just as things 
 vary, and as the particular circumstances of the individual 
 case vary. In hire, for instance, a certain amount of deteriora- 
 tion, and the consent of the owner to this deterioration, are 
 quite necessary. 1 
 
 Then, after explaining the meaning of the legal categories 
 of fungible and non-fungible goods, Knies puts the following 
 question (p. 71), Is it not then actually possible, must it 
 not, indeed, be understood as the intention of a compact, that 
 the use (Nutzung} of a fungible, and even of a perishable good 
 should be transferred ? 
 
 In this sentence Knies implicitly asks whether there is 
 not an independent use of perishable goods. He answers the 
 question by putting the following case. 
 
 " A cwt. of corn is a fungible and perishable good of this 
 kind. The owner, in certain circumstances, cannot part with 
 this cwt, and is not inclined to exchange it, or sell it, perhaps 
 
 1 Oeld, p. 59, etc.
 
 CHAP, vii BY KNIES 241 
 
 because he is obliged to consume (verbrauchen), or wishes to 
 consume it himself at the end of six months. But up till that 
 date he does not need it. This being so he might of course very 
 well allow himself to transfer the use (Gebrauch) of it to some one 
 else for the next six months, if only at the expiry of that time he 
 could get back his good. Say, then, that there is another man 
 who desires the corn, but cannot barter for it or buy it. He 
 will point out that he could not get any use (Nutzung) from 
 the corn, as a perishable good, unless through the consumption 
 ( Verbrauch) of the corn itself, say as seed ; but that he would 
 be able to replace another cwt. from the harvest obtained by 
 means of this use (Nutzung) transferred to him. The owner 
 may find this perfectly satisfactory for his economical interests, 
 since the transaction here refers to a fungible good. 
 
 " In this statement there is not a particle of an idea con- 
 taining anything at all impossible, far-fetched, or artificial. 
 But such a transaction taken by itself that is, the transfer of 
 a cwt. of corn under the condition of the borrower giving back 
 a cwt. of corn at the end of six months belongs undoubtedly to 
 those things that are called loans. ... In conformity with this 
 we put the loan in the category of transfers of a Use (Nutzung) 
 that is, of the use (Nutzung} of fungible goods which pass over 
 into the control and for the use of the owner, and are replaced 
 by a similar quantity. Naturally, in the case of the loan, it is 
 of the greatest consequence to understand clearly that, how- 
 ever liberal the concessions may Le as 'regards the 'bearer of 
 the use, still it is not in the concessions that the principle of 
 the transaction lies. Rather are these concessions always 
 determined in conformity with the overruling necessity of obtain- 
 ing the use at the time. And just on this account, in the. case 
 of a perishable good, they are extended so far as to give the 
 owner the power of consumption, while all the same there is 
 even here no other principle in the matter than the trans- 
 fer of a use. In the loan, therefore, the transfer of the right 
 of property is unavoidable, but still only as an accompanying 
 circumstance." 
 
 I admit at once that these analyses are calculated to make 
 an entirely convincing impression on one who does not look very 
 closely into them. Not only has Knies shown unusual skill 
 in drawing the analogy which the old opponents of the can- 
 
 E
 
 242 THE INDEPENDENT USE: UNPROVED BOOK m 
 
 onists used to draw, between lease and hire on the one side 
 and the loan on the other, but he has enriched it by a new and 
 effective feature. For by the allusion he makes to the un- 
 avoidable concessions, in regard to the " bearer of the use," 
 that are made in the case of all transfers of use, he has managed 
 to change the element that seemed completely to destroy the 
 analogy between the loan and the hire (the complete transfer 
 of the property in the goods lent) into a further support of it. 
 
 If, however, we do not allow ourselves to be carried away 
 by these brilliant analogies, but begin to reflect critically 
 on them, we shall easily see that their admissibility, and 
 witli it the strength of the proof, depends on an affirmative 
 answer being given to a previous question. The previous 
 question is, Whether in perishable goods there is any independ- 
 ent use to transfer by way of loan ? And we shall look more 
 exactly at the kind of evidence that Knies specially brings for- 
 ward as regards this question a question that is the key to 
 his whole theory of the loan. 
 
 At this point I think we shall make the astonishing dis- 
 covery that Knies has not said a word in proof of the existence, 
 or even the conceivableness of an independent use, but has 
 evaded the great difficulty of his theory by using the word 
 Nutzung in a double sense. 
 
 I shall try to show how he does so. On p. 61 he himself 
 identifies the Nutzung of a good with its G-ebroMch. He knows 
 besides (p. 61 again) that in perishable goods there is no 
 other possible Gebrauch but a Verbrauch. He must, therefore, 
 also know that in perishable goods the Nutzung is identical 
 with the Ver'brauck. But, on the other hand, he uses the word 
 Nutzung in stating the problem, and then in the concluding 
 sentence " In conformity with this we put the loan in the 
 category of transfers of a Nutzung " he evidently uses the word 
 in a sense that is not identical with Vcrlrauch, but means a dur- 
 able Nutzung. In the course of the passage quoted he mixes 
 up step by step the Nutzung in the first sense with the Nut- 
 zung in the second sense, till he arrives at this concluding 
 sentence, where, from a number of propositions that are only 
 correct if they refer to Nutzung in the first sense, is drawn the 
 conclusion that there is a Nutzung in the second sense. 
 
 The first proposition runs : " The owner, in certain circum-
 
 CHAP, vii BY KNIES 243 
 
 stances, cannot part with this cwt., and is not inclined to ex- 
 change it, or sell it, perhaps because he is obliged to consume 
 (verlrauchcn), or wishes to consume it himself at the end of 
 six months. But up till that date he does not need it." 
 
 In this proposition the kind of use that is thought of, 
 and, in the nature of things, the only kind that can be thought 
 of, is quite correctly indicated as the Vcrbrauch of the good. 
 Then he continues : " He might of course very well allow him- 
 self to transfer the Gebraucli of it to some one else for the next 
 six months, if only at the expiry of that time he could get 
 back his good." 
 
 Here begins the ambiguity. What is the meaning of 
 Gebrauch here ? Does it mean Vcrbrauch ? Or does it mean 
 a kind of Nutzung that lasts over a period of six months ? 
 Obviously the Gebrauch is conceivable only as the Vcrbrauch, 
 but the words " Gebrauck for the next six months " are calcu- 
 lated to suggest a durable Gebrauch, and with this begins the 
 quid pro quo. 
 
 Now follows the third proposition : " Say then that there 
 another man who desires the corn, but cannot barter for it 
 or buy it. He will point out that he could not get any Nut- 
 zung from the corn, as a perishable good, unless through the 
 Verbraucli of the corn itself, say as seed ; but that he would 
 be able to replace another cwt. from the harvest obtained by 
 means of this Nutzung transferred to him. The owner ma}' 
 find this perfectly satisfactory for his economical interests, since 
 the transaction here refers to a fungible good." 
 
 This proposition contains the crowning confusion. Kaies 
 makes the suitor for the loan point out distinctly that a 
 Nutzung of perishable goods cannot be anything else than 
 identical with their Vcrbrauch, but in the same breath he 
 uses and places the words Nutzung and Vcrbrauck in such a 
 way that the two conceptions are kept separate from one 
 another, and appear not to be identical. He thus smuggles 
 into his argument and the oftener he does it the less likely is 
 it to be noticed the suggestion of a durable Nutzung in perish- 
 able goods. Thus when it is said that the harvest is " obtained 
 by means of this Nutzung transferred," one might quite well 
 imagine that the Nutzgebrauch of the seed is here again only 
 the same thing as the Nutzvcrbrauch which obtained the
 
 244 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 harvest. But, thanks to the agreement of the " Nutzung trans- 
 ferred " with the " transfer of the Nutzung" which we have 
 been constantly hearing about, and which had meant the 
 opposite of the " transfers of the bearer of the Nutzuny" we 
 are forced involuntarily to think of a durable Nutzuny after 
 the analogy of the Nutzung of durable goods. Any scruple 
 we may have about the conceivableness of such a Nutzn.ng is 
 the more easily silenced that we are told, at the same time, 
 that through it the harvest is obtained that is, that 
 something very real indeed is accomplished a proof of the 
 existence of a Nutzuny which the reader, once caught in the 
 tangle, naturally puts to the account of the " durable Nutzuny."' 
 
 And now from this confused argument Knies draws hi? 
 conclusions. After saying that " in this statement there is 
 not a particle of an idea containing anything at all impos- 
 sible, far-fetched, or artificial" which, indeed, if we grant his 
 assumptions, is quite correct, but admits of no conclusion 
 in favour of his thesis if, for the words Gcbrauch or Nntzung. 
 we substitute in each ambiguous passage the word Nutzvcr- 
 Irauch he draws the conclusion, Therefore the loan belongs 
 to the class of transfers of a simple Nutzuny. 
 
 This conclusion is simply fallacious. The thing he had to 
 prove has not been proved. Nay, more ; the thing that was 
 to be proved is introduced quietly in the deduction, as some- 
 thing that had been assumed ; the Nutzung, in the peculiar sense 
 attached to it, is spoken of as if it were a familiar fact, with- 
 out one word being said in support of what was to be proved, 
 the existence of such a Nutzung. But the difficulty of 
 discovering this fundamental flaw in the argument is very 
 much aggravated by two circumstances : first, that the false 
 Nutzuny sails under the flag of the true Nutzung, and we for- 
 get to protest against the existence of the so-called Nutzung, 
 because, thanks to the dialectical skill of the author, we do not 
 keep it separate and distinct from the true Nutzung, which 
 unquestionably does exist ; and second, through the very naiveti- 
 of the suggestion. That is to say, without in point of fact once 
 entering on the problem whether a durable Nutzung in perish- 
 able goods is conceivable or not, Knies represents the owner 
 and the suitor for the loan as negotiating over the transfer of 
 the Nutzung in a tone of certainty, which implies that the
 
 CHAP, vn BY ANY USE THEORIST 245 
 
 existence of the Nutzuny is beyond question, and the reader 
 almost involuntarily shares in the certainty ! 
 
 If we look back and compare the efforts that the writers 
 of the Say -Hermann school have made to prove their 
 peculiar Use of capital, we shall perceive, among all their 
 difference of detail, a substantial agreement which is very 
 suggestive. 
 
 All the authors of that school, from Say to Knies, when 
 they begin to speak of the use of capital, first of all allude to 
 the material services which capital actually renders. Then 
 under cover of this they get the reader to admit that the " use 
 of capital " does really exist ; that it exists as an independent 
 economic element, and even possesses an independent eco- 
 nomical value. That this independence is not the independ- 
 ence of a second whole beside the good itself, but only that 
 of an independent and separable part of the content of the 
 good, the rendering of the service being always attended by a 
 diminution in the value of the good itself; and that the 
 remuneration of this service is a gross interest all this is 
 kept in the background. 
 
 But no sooner have they got the length of recognising 
 the " independent use of capital " than they substitute, for the 
 true material services of capital (under cover of which they 
 arrived at the independent use), the imaginary use of their own 
 making, impute to it an independent value outside the full 
 value of the good, and end by drawing away the true use that 
 had served as a ladder for the false. This way of working is 
 seen in Say and Schaffle only in a hasty and abbreviated form, 
 in quietly changing what is the substance of gross interest 
 into what is the substance of net interest; but Hermann 
 and Knies work it out in complete detail before our eyes. 
 Blunders like these show us how urgent is the necessity that 
 the " revision of fundamental conceptions," so much desiderated, 
 should even at this late date be applied to the apparently 
 insignificant conception of the Use of goods. I have tried to 
 do my part in giving a first contribution to it, and I believe 
 that in the present chapter I have proved my first pro- 
 position, that in all the reasoning by which the Use theorists 
 of the Say-Hermann school thought they had proved the
 
 246 THE INDEPENDENT USE: UNPROVED BOOK in 
 
 existence of the asserted use, an error or a misunderstanding 
 has crept in. 
 
 Not only, however, is the assumption of that independent 
 use absolutely unproved, but, as I mean to show in the next 
 chapter, it leads necessarily to internal contradictions and 
 untenable conclusions.
 
 CHAPTEE VIII 
 
 THE INDEPENDENT USE : ITS UNTENABLE CONCLUSIONS 
 
 IT is customary among the Use theorists, and even among 
 others, 1 to make a distinction between a gross Nutzung, which 
 is the basis of gross interest (rent or hire), and a net Nutzung, 
 which is the basis of net interest. It is singular enough that 
 we have all been in the habit of innocently repeating this 
 distinction, without it ever occurring to any one that there 
 was in it an irreconcilable contradiction. 
 
 If we are to believe the unanimous assurance of our 
 theorists, Nutzung should be taken as synonymous with 
 Gebrauch in the objective sense of the word. Now, if there 
 is a net and a gross Nutzung, are we to understand that there 
 are two Nutzungen, two Gebrauche of- the same good not, it 
 must be remembered, two successive or two alternative kinds 
 of Gebrauch, but two simultaneous cumulative Gebrauche that 
 
 1 It is as well to put it in so many words that, in this polemic on the concep- 
 tion of Use, I am in opposition, not only to the Use theorists properly so called, 
 but to almost the entire literature of political economy. The conception of 
 the Use of capital which I dispute is that commonly accepted since the 
 day of Salmasius. Even writers who explain the origin of interest by quite 
 different theories e.g. Roscher, by the Productivity theory ; or Senior, 
 by the Abstinence theory ; or Courcelle - Seneuil or Wagner, by the Labour 
 theory always conceive of loan interest as a remuneration for a transferred Use 
 or Usage of capital, and occasionally they conceive even of natural interest as 
 a result of the same use or usage. The only distinction between them and the 
 Use theorists properly so called is this, that the former employ these expressions 
 naively, using terms that have become popular, and do not trouble them- 
 selves as to the premises and conclusions of the Use conception, which 
 sometimes entirely contradict the rest of their interest theory ; while the 
 Use theorists build their distinctive theory on the conclusions of that concep- 
 tion. The almost universal acceptance of N the error I am opposing may further 
 justify my prolixity.
 
 248 THE INDEPENDENT USE: UNTENABLE BOOK in 
 
 are obtained beside or in each other in every transaction, 
 however elementary, where a Gebrauch enters ? 
 
 That one good gives off two uses, the one after the other, 
 can be understood. That one good permits of two kinds of 
 use alternatively as wood for building and for burning can 
 also be understood. It is quite conceivable even that one 
 good should permit of two kinds of use simultaneously, the one 
 beside the other, and that these furnish two distinct utilities ; 
 e.g. that a picturesque rustic bridge should at once serve as 
 medium of traffic, and as object of aesthetic satisfaction. 
 
 But when I hire a house or a lodging, and make use of it for 
 purposes of habitation, to imagine that in one and the same 
 series of acts of use I am receiving and profiting by two 
 different uses, a wider one for which I pay the whole hire, 
 aud a narrower one for which I pay the net interest contained 
 in the hire ; or to imagine that in every stroke of the pen that 
 I put om paper, in every look that I throw on a picture, in 
 every cut that I make with my knife, in short, in every use, 
 however simple, that I get from a good, I get always two uses, 
 in or beside each other ; this is in contradiction alike with the 
 nature of things and with healthy common sense. If I look 
 at a picture, or live in a house, I make one use of the picture 
 or house ; and if in this connection I speak of two things, 
 whether Gebrauch or Nutzung, I am giving a wrong name to 
 one of them. 
 
 To which of them do I give the wrong name ? 
 
 On this point, again, the current view is a very strange one. 
 The theorists we are speaking of certainly appear to have felt 
 in some degree the impropriety of assuming two uses to exist 
 alongside each other. For although as a rule they employ the 
 word Nutzung to express two things, they sometimes make an 
 attempt to put one of them out of sight. Indeed, the gross 
 Nutzung is eliminated when it is split up into net Nutzung plus 
 partial replacement of capital. Thus Koscher, whom we are 
 justified in quoting as the representative of the current opinion, 
 says : l " The Nutzung of a capital must not be confounded 
 with its partial replacement. In house rent, for instance, 
 over and above the payment for the Gebrauch of the house, 
 there must be contained a sufficient sum for repairs, indeed 
 
 1 Grundlagen, tenth edition, p. 401, etc.
 
 CHAP, viir GKOSS AND NET USE 249 
 
 enough for the gradual accumulation of capital sufficient to put 
 up a new building." It follows that the thing for which we 
 pay net interest is in truth a Gebrauch, and it is erroneous and 
 inaccurate to apply the name to that for which we pay gross 
 interest. I do not believe that it would be possible to put the 
 representatives of this wonderful view in a more embarrassing 
 position than by challenging them to define what they mean 
 by Gebi-auch, What else can it mean than the receiving or, 
 if we like to give it an objective significance, the proffering of 
 the Material Services of which a good is capable ? Or, if there 
 is any objection to my expression, let us say " useful services " 
 with Say, or "releasing of a use from material goods" or 
 " receiving of useful effects " with Schaffle, or however else we 
 like to put it. But define the word as we may, one thing 
 appears to my mind beyond dispute. When A makes over to 
 B a house for temporary habitation, and B inhabits it, then A 
 has given over to B the Gebrauch of the house, and B has 
 taken the Gebrauch of the house ; and if B pays anything for 
 the Gebrauch, he does not pay a single penny of hire or rent 
 for anything else than this ; that he may avail himself of the 
 useful properties and powers of the house. In other words, he 
 has paid for the Gebi-auch transferred to him, 
 
 It may be said, Yes, perhaps so ; but has not B consumed 
 a portion of the value of the house itself ? and if so, did he not 
 get transferred to him a part of the value of the house itself, 
 in addition to the use of the house ? One who would argue 
 thus might be expected to hold the somewhat singular view 
 that two aspects of one event are two events. The truth of 
 the matter is that the hirer lias received the Gebrauch of the 
 house, and only the Gebrauch ; but in using it, and through 
 using it, he has diminished its value. He has received a 
 " store of energies," from which he is at liberty to " release " so 
 many ; he has done nothing but " release " or use them ; but, 
 naturally, the value of the remainder of the energies has been 
 diminished thereby: To construe that as meaning that the hirer 
 has received two things alongside each other, Gebrauch and 
 partial value of capital, appears to me very much as if, in buy- 
 ing a fourth horse to match three he had already, a man were 
 to consider it an acquisition of two separate things first, a 
 horse, and second, the complement of the team of four ; and as
 
 250 THE INDEPENDENT USE : UNTENABLE BOOK in 
 
 if he were then to maintain that, of the 50 he paid, only one 
 portion, say 25, was the price of the horse, while the remaining 
 2 5 was the price of the complement of the team ! It is the 
 same thing as if one were to say of a workman who had put 
 up the cross on the steeple and thereby finished the building 
 of the steeple, that he had performed two acts first, had put 
 up the cross, and second, had finished the building of the 
 steeple ; and were further to say that, if the workman took an 
 hour to do the whole job, not more than three-quarters of an 
 hour were needed for the erection of the cross, since a part of 
 the whole time expended, say a quarter of an hour, must be 
 put to the account of the second act, the completion of the 
 building of the steeple ! 
 
 But if, notwithstanding all this, some one thinks that he 
 sees in Gebrauch, not the gross Nutzung, but another something 
 which is ill to define, let him say in what the Gebrauch of a 
 meal consists. In eating ? It cannot be so, for that is a 
 gross Nutzung, that swallows up the whole value of the capital, 
 and of course we cannot confuse that with the true Gebrauch. 
 But in what then does it consist ? In an aliquot part of 
 eating ? or in something entirely different from eating ? I 
 am glad to think that the duty of answering this question does 
 not fall to me, but to the Use theorists. 
 
 If, then, we are not to give the words Getoauch and Nutzung 
 a meaning that is equally opposed to language and to life, to 
 the representations of practice and of science, we cannot deny 
 the gross Nutzung the property of being a true Nutzung. But if 
 there cannot be two Nutzungen, and if in any case the gross 
 Nutzung must be recognised as that which correctly conveys 
 the conception of Nutzung, then there is no need to argue 
 further against the net Nutzung of the Use theorists. 
 
 But let us leave all that on one side, and confine our 
 attention to the following. Whether the gross Nutzung be a 
 true Nutzung or not, at any rate it is undoubtedly something. 
 And the Use theorists would like to make out the net Nutzung 
 to be something likewise. Now these two quantities, if they 
 both actually exist, must at all events stand in some relation to 
 each other. The net Nutzung must either be part of the gross 
 Nutzung or it is no part of it ; there is no third course. Now 
 let us see. If we look at durable goods it seems probable
 
 CHAP, vni GROSS AND NET USE 251 
 
 that the net Nutzung is a part of the gross ; for since the 
 remuneration of the former, the net interest, is contained in 
 the remuneration of the latter, the gross interest, so must also 
 the first object of purchase be contained in the second, and be 
 a part of it. This indeed even the Use theorists themselves 
 maintain when they analyse the one sum of the gross Nutzung 
 into net Nutzung plus partial replacement of capital. But 
 look now at perishable goods. The net interest I pay in this 
 case is not paid for their consumption ( Verbrauch}, for if, on the 
 moment of the consumption, I replace the perishable goods by 
 their fungible equivalent, I do not require to pay any interest. 
 What I pay interest for is only the delay in the replacement of 
 the equivalent ; that is, I pay it for something that is not 
 contained in the consumption that most intense form of gross 
 use but stands quite outside it. Are we to conclude then 
 that the net Nutzung is at once part and not part of the gross 
 Nutzung? How can the Use theorists explain this contradiction ? 
 I might draw out to much greater length the number of 
 riddles and contradictions into which the assumption of the 
 independent Nutzung leads us. I might ask the Use theorists 
 what, for instance, I should represent to myself as the ten 
 years' Nutzung, or the ten years' Gebrauck, of the bottle of 
 wine that I drank on the first day of the first year ? An 
 existence it must have, for I can buy or sell it on a loan of 
 from one to ten years. I might point out what a singular 
 assumption it is, even verging on the ludicrous, that, on the 
 moment when a good by its complete consumption actually 
 ceases to be of use, it should really be only beginning to afford 
 a perpetual use ; that one debtor, who at the end of a year 
 pays back a bottle of wine he borrowed, has consumed less 
 than another who only returns the bottle of wine at the end of 
 ten years, inasmuch as the former has consumed the bottle of 
 wine and its one year's use, the latter the bottle of wine and 
 its ten years' use ; while all the time it is evident to everybody 
 that both parties have obtained the same use from the bottle of 
 wine, and that the obligation that emerges, to pay back another 
 bottle of wine sooner or later, has absolutely nothing to do 
 with the shorter or longer duration of the objective uses of the 
 first bottle. But I think that more than enough has been said 
 to carry conviction.
 
 252 THE INDEPENDENT USE: UNTENABLE BOOK in 
 
 To sum up, I consider that three things have been here proved. 
 I think it has been proved, firstly, that the nature of goods, as 
 material bearers of useful natural powers, precludes the con- 
 ceivability of any Nutzung that does not consist in the forth- 
 putting of their useful natural powers that is, any Nutzung 
 that is not identical with what I have called the Material 
 Services of goods those services being the basis not of net, 
 but of gross interest ; or, in the case of perishable goods, their 
 entire capital value. 
 
 I think that it has been proved, secondly, that all attempts 
 on the part of the Use theorists to demonstrate the existence 
 or the conceivability of a net Nutzung different from the 
 material services, are erroneous or based on a misunderstanding. 
 
 I think it has been proved, thirdly, that the assumption of 
 the net Nutzung postulated by the Use theorists necessarily 
 leads to absurd and contradictory conclusions. 
 
 I think, therefore, that I am entirely justified in maintaining 
 that the net Nutzung, on the existence of which the Use 
 theorists of the Say-Hermann school base their explanation of 
 interest, does not in truth exist, but is only the product of a 
 misleading fiction. 
 
 But in what way did this remarkable fiction enter into our 
 science ? And how came it to be taken for reality ? By 
 recurring for a little to the history of the problem I hope to 
 dispel any doubts that may linger in the minds of my readers ; 
 and, in particular, I trust we may get an opportunity of estimat- 
 ing at its true value any prejudice that might still linger as 
 a consequence of the former victory of Salmasius's theory.
 
 CHAPTEE IX 
 
 THE INDEPENDENT USE: ITS ORIGIN IN LEGAL FICTION 
 
 WE have here to deal with one of those not uncommon 
 cases where a fiction, originating in the sphere of law and 
 originally used for practical legal purpose by people who were 
 fully conscious of its fictitious character, has been transferred 
 to the sphere of economics, and the consciousness of the fiction 
 has been lost in the transfer. Jurisprudence has at all times 
 required fictions. To make comparatively few and simple 
 principles of law suffice for the whole varied actuality of legal 
 life, jurisprudence is often compelled to look upon cases as 
 quite similar with each other that in reality are not similar, 
 but may be appropriately dealt with in practice as if they 
 were so. It was in this way that the formulae fictitiac of the 
 Roman civil process originated ; thus also the legal " persons." 
 the res incorporates, and innumerable other fictions of the 
 science of law. 
 
 Now it sometimes happened that a fiction which had 
 grown very venerable became in the end petrified into a 
 thoroughly credited dogma. If for hundreds of years people 
 had been accustomed to treat a thing, both in theory and 
 practice, as if it really were essentially the same as something 
 else, then, other circumstances being favourable, it might end 
 in their quite forgetting that there was a fiction. So it is, as 
 I have pointed out in another place, with the res incorporates 
 of Roman law ; and so too it has been with the independent 
 Nutzung of perishable and fungible goods. Let us follow, step 
 by step, the course whereby the fiction became petrified into a 
 dogma. 
 
 There are some goods the individuality of which is of no
 
 254 THE INDEPENDENT USE: ITS ORIGIN BOOK in 
 
 importance, goods that are only taken account of by their 
 kind and amount, quae fwndcre, nuviero, mcnsura cotisistunt. 
 These are called in law fungible goods. 1 Since no importance 
 attaches to their individuality, the replacing goods perfectly 
 supply the place of the replaced goods. For certain purposes of 
 practical legal life these goods could be treated without difficulty 
 as identical. Particularly was this the case in such legal 
 transactions as related to the giving away and getting back of 
 fungible goods. Here it suggested itself as convenient to 
 conceive of the giving back of an equal amount of fungible 
 goods as a giving back of the very same goods ; in other words, 
 to feign identity between the fungible goods given back and 
 those given away. 
 
 So far as I know, the old Koman sources of law do not put 
 this fiction formally. They say quite correctly of it that, in 
 the loan, tantundetn or idem genus, not simply idem is given 
 back. But at any rate the fiction is there. If, e.g. the so-called 
 depositum irregulare, where the depositary was allowed to 
 employ on his own account the sum of money given over to 
 his safe keeping, and to replace the deposit in other pieces of 
 money, was treated as a depositum, 2 this construction can only 
 be explained by supposing that the lawyers invoked the 
 assistance of the fiction whereby the pieces of money replaced 
 were considered identical with those given in for safe keeping. 
 Modern jurisprudence has occasionally gone farther, and spoken 
 explicitly of a " legal identity " between fungible goods. 3 
 
 From this first fiction it was but a step to a second. If it 
 once came to be thought that, in the loan and in similar trans- 
 actions, the same goods were given back that the debtor had 
 received, the further idea was logically bound to follow, that 
 the debtor had retained the goods lent him during the whole 
 period of the loan, had kept them unbroken, and had used 
 them unbroken ; that the use obtained from them was therefore 
 a durable use; and that where interest was paid it was paid 
 .just for this durable use. 
 
 1 The common German word is vertrctbar, which might be loosely translated 
 here by "representative" or "replaceable." But the word "fungible" is per- 
 haps worth adopting in English economics. "W. S. 
 
 2 See L. 31, Dig. loc. 19, 2, and L. 25, 1, Dig. dep. 16, 3. 
 
 3 Goldschmidt, Handbueh des Handelsrechtes, second edition, Stuttgart, 1883, 
 vol. ii. part. i. p. 26 in the note.
 
 CHAP, ix IN LEGAL FICTION 255 
 
 This second step in the fiction the jurists did make. 
 They knew quite well, to begin with, that they were only 
 dealing with a fiction. They knew quite well that the goods 
 given back are not identical with the goods received ; that the 
 debtor does not hold and possess these goods during the whole 
 period of the loan ; the fact being that, to attain the purpose 
 of the loan, the debtor must, as a rule, very soon entirely part 
 with the goods. Lastly, they knew quite well that, for the 
 same reason, the debtor does not get any durable use out of 
 the goods lent. But for the practical purposes and require- 
 ments of both parties it was the same as if everything 
 actually were what it pretended to be, and therefore the jurists 
 could employ the fiction. They gave expression to this 
 fiction in the sphere of their science when, on the ground of 
 it, they confirmed the expression for loan interest that 
 had already found a home in the speech of the people, usura, 
 money paid for use ; when they taught that interest was 
 paid for the use of the sum lent ; and when they made out a 
 usufruct even in perishable goods. This usufruct of course was 
 only a quasi-usufruct, the lawyers being quite aware that they 
 were only dealing with a fiction. On one occasion they even 
 expressed this pointedly, in correcting a legislative act that had 
 given the fiction too realistic an expression. 1 
 
 Finally, after many centuries of teaching that the usura 
 was money paid for use, and in an age when the better part of 
 the living spirit of classical jurisprudence had fled, and had 
 consequently been replaced by a greater reverence for trans- 
 mitted formulas, the justification of loan interest was sharply 
 attacked by the canonists. One of their strongest weapons was 
 the discovery of this fiction in regard to the uses of perish- 
 
 1 Ulpian, it is well known, in Dig. vii. 5, L. 1, De usufructu carum rerum 
 quae usu consumuntur vcl minuntur, quotes a decree of the Senate which established 
 the bequeathing of a usufruct in perishable goods. On this Gaius remarks : 
 " Quo senatus consulto non id effectum est, tit pecuniae ustifructus proprie esset ; 
 nee enim naturalis ratio auctoritate senatus commutari potuit ; sed, remedio 
 introducto, caepit quasi usufructus haberi." I do not agree with Knies (Geld, 
 p. 75) that Gaius took exception simply to the formal flaw that there could only be 
 a regular usufruct in goods belonging to another person, while the legatee holds 
 the perishable goods left him as his own property, res suae. The appeal to the 
 naturalis ratio could hardly have been made in order to rehabilitate a defective 
 formal definition of usufruct ; it is infinitely more probable that it was made on 
 behalf of a truth of nature that was seriously violated by the decree.
 
 256 THE INDEPENDENT USE : ITS ORIGIN BOOK in 
 
 able goods. For the rest, their argument appeared so convincing 
 that one could scarcely see how loan interest was to be 
 saved, if the premiss were granted that there is no such thing 
 as an independent use of perishable goods. Thus the fiction 
 all at once attained an importance it never had before. 
 To believe in the actual existence of the usus was the same 
 thing as to approve of interest ; not to believe in it seemed to 
 force one to condemn it. To save interest in this dilemma, 
 people were inclined to give the legal formula more honour 
 than it deserved; and Salmasius and his followers exerted 
 themselves to find reasons which would allow them to take 
 the formula for the fact. The reasons they did find were 
 just good enough to convince people eager to be convinced, 
 as already won over by a demonstration that was in other 
 respects excellent, that Salmasius, on the whole, had right 
 on his side ; while his opponents, who were evidently wrong as 
 regards the chief point, were suspected even on those points 
 where they were occasionally right. So it happened not for 
 the first, and certainly not for the last time that under the 
 pressure of practical exigencies an abortive theory was born, 
 and the old fiction of the lawyers proclaimed as fact. 
 
 Thus it has remained ever since, at least in political 
 economy. While the newer jurisprudence drew back for the 
 most part from the doctrine of Salmasius, modern political 
 economy has held by the old stock formula taken from the 
 legal repertoire. In the seventeenth century the formula had 
 served to support the practical justification of interest ; in the 
 nineteenth it did as good service in affording a theoretical 
 explanation of it, which people would have been embarrassed 
 to get otherwise. This puzzling " surplus value " had to be 
 explained. It appeared to hang in the air. Something was 
 wanted to hang it from. And there, in the most welcome 
 way, the old fiction offered itself. As beseemed its rising 
 claims as a theory, it was dressed out in all sorts of new 
 accessories, and so was worthy at last, under the name of 
 Nutzung, to take the highest place of honour, and become the 
 foundation stone of a theory of interest as distinctive as it is 
 comprehensive. 
 
 It may be the good fortune of these pages to break the 
 spell under which the custom of centuries has laid our con-
 
 CHAP, ix IN LEGAL FICTION 257 
 
 ception. It may be that the net Nutzung of capital will 
 be relegated finally to that domain from which it never should 
 have emerged the domain of fiction, of metaphor, which, as 
 Bastiat once remarked with only too much truth, has so often 
 turned the science from the right path. With it many a 
 deeply rooted conviction will have to be given up not the 
 Use theory only, in the narrower and proper sense of the 
 word, which makes the Nutzung the chief pillar in the 
 explanation of interest, but a number of other convictions also, 
 which are commonly accepted outside the rank of the Use 
 theorists, and which employ that conception along with others. 
 Among other things will go the favourite construction of the loan 
 as a transfer of uses, as having its analogue in rent and hire. 
 
 But what is to be put in its place ? 
 
 To answer that does not, strictly speaking, belong to our 
 present critical task ; it is a matter for the positive statement 
 which I have reserved for the second volume of this work. 
 It may, however, with some justice be expected that, when 
 I assume the doctrine of the canonists as regards one of its 
 principal points, I should at least indicate how we are to 
 escape the obviously false conclusions of the canonists. 
 Consequently I shall briefly indicate my own view on the 
 nature of the loan ; of course under the reservation of return- 
 ing to more exact treatment of it in my next volume, and 
 meantime asking my readers to postpone their final verdict on 
 my theory till such tune as I have stated it in detail, and 
 connected it with the entire theory of interest. 
 
 I may best take up the subject at the old canonist 
 dispute. In my opinion the canonists alone were wrong in 
 their conclusions, while both parties were wrong in the 
 reasoning which led them to their conclusions. The canonists 
 remained in the wrong, because they made only one mistake 
 in their reasoning. Salmasius made two mistakes, but of 
 these the second cancelled the harm done by the first, so that 
 after a very tumultuous course his argument ended in reaching 
 the truth. I explain this as follows : 
 
 Both parties agree in regarding it as an axiom that the 
 capital sum replaced on the expiry of the loan contract is the 
 equivalent, and, indeed, is the exact and full equivalent, of the 
 capital sum originally lent. Now this assumption is so false 
 
 s
 
 258 THE INDEPENDENT USE: ITS ORIGIN BOOK in 
 
 that the wonder is how it has not long ago been exposed as a 
 superstition. Every economist knows that the value of goods 
 does not depend simply on their physical qualities, but, to a 
 very great extent, on the circumstances under which they 
 become available for the satisfaction of human needs. It is 
 well known that goods of the same kind, e.g. grain, have a 
 very different value in varying circumstances. Among the 
 most important of the circumstances that influence the value 
 of goods, outside of their physical constitution, are the time 
 and place at which they become available. It would be very 
 strange if goods of a definite kind had exactly the same value 
 at all places where they might be found. It would be strange, 
 for instance, if a cwt. of coal at the pit-brow had exactly the 
 same value as a cwt. of coal at the railway terminus, and if 
 that again had exactly the same value as a cwt. of coal at 
 the fireside. Now it would be quite as strange if 100 which 
 are at my disposal to-day should be exactly equivalent to 100 
 which I am to receive a year later, or ten or a hundred years 
 later. On the contrary it is clear that, if one and the same 
 quantity of goods falls to the disposal of an economical subject 
 at different points of time, its economical position will, as a 
 rule, come under a different influence, and, in conformity with 
 that, the goods will obtain a different value. It is impossible 
 to agree with Salmasius and the canonists, and assume it as a 
 self-evident principle that there is a complete equivalence 
 between the present goods given in loan and the goods of like 
 number and kind returned at some distant period. Such an 
 equivalence, on the contrary, can only be a very rare and 
 accidental exception. 
 
 It is very evident from what source both parties obtained 
 the quite unscientific view of the equivalence between the sum 
 of capital given out and that received back. It is from the 
 old legal fiction of the identity between fungible goods of similar 
 kind and number. If, on the strength of this fiction, the loan 
 is conceived of as if it meant that the same 100, which the 
 creditor advances to the debtor, is given back by the debtor to 
 the creditor on the expiry of the loan, then of course this 
 replacement must be looked on as entirely equivalent and just. 
 It was the common mistake of the canonists and of their 
 opponents that they fell into this trap laid for them in the
 
 CHAP, ix IN LEGAL FICTION 259 
 
 first part of the legal fiction. It was the sole mistake of the 
 canonists and the first mistake of Salmasius. The further 
 development was simply this : 
 
 The canonists remained in error because this was their 
 only mistake. Once they had made it they began at the 
 wrong time to be sharp-sighted, and to expose the assumed 
 independent use of the loaned goods as a fiction. With that 
 fell away every support that could properly have been given 
 to interest, and they were bound falsely, but logically to 
 pronounce it wrong. But the first error that Salmasius had 
 made, in the fiction of the identity between the capital 
 received and the capital paid back, he rectified by a second ; 
 he retained that fiction as regards the loan of money, and held 
 that in this case the borrower possessed the " use " of the 
 loaned goods all the time of the loan. 
 
 The truth is in neither reading. The loan is a real 
 exchange of present goods against future goods. For reasons 
 that I shall give in detail in my second volume, present 
 goods invariably possess a greater value than future goods of 
 the same number and kind, and therefore a definite sum of 
 present goods can, as a rule, only be purchased by a larger sum 
 of future goods. Present goods possess an agio in future goods. 
 This agio is interest. It is not a separate equivalent for a 
 separate and durable use of the loaned goods, for that is incon- 
 ceivable ; it is a part equivalent of the loaned sum, kept 
 separate for practical reasons. The replacement of the capital 
 + the interest constitutes the full equivalent. 1 
 
 1 The germs of this view, which I consider the only correct one, are to be 
 found in Galiani (see above, p. 49), in Turg^t (see above, p. 56), and latterly in 
 Knies, who, however, has since expressly withdrawn it as erroneous.
 
 CHAPTER X 
 
 MENGER'S CONCEPTION OF USE 
 
 UP till now my analyses have gone to prove that there is 
 no independent use of goods of the kind conceived of by the 
 Say-Hermann side of the Use theory, and by nearly all the 
 economists of the present day in their train. It still remains 
 to be proved that there cannot be an independent use even in 
 that essentially different shape that Menger sought to give the 
 conception. 
 
 While the Say-Hermann school represented the " net use " 
 as an objective element of use, separating itself from goods, 
 Menger explains it as a Disposal ; indeed, as " a disposal over 
 quantities of economical goods within a definite period of 
 time." l This disposal being for economic subjects a means to 
 better and more complete satisfaction of their wants, it acquires, 
 according to Menger, the character of an independent good, 
 which, on account of its relative scarcity, will usually be at 
 the same time an economical good. 2 
 
 Now, to go no farther, it seems to be putting a very daring 
 construction on things to say that the disposal over goods, that 
 is, a relation to a good, is itself a good. I have on another 
 occasion 3 stated at length the reasons for which I consider it 
 
 1 Grundsatze, p. 132, etc. - Ibid. p. 132, etc. 
 
 3 See my JKcchlc und Vcrhdltnissc, particularly p. 124. Sec also the acute 
 remarks of H. Dietzel in the tract Dcr Ausgangspunkt der Sozialwirthschafts- 
 Ichre und ihr Grundbcgriff (Tiibiuycr Zeitschrift fur die gcsammtc Staatswis- 
 scnschaft, Jahrgany, 39), p. 78, etc. On the other hand, I cannot agree with 
 Dietzel in some further criticisms that he makes on Menger on p. 52, etc. He 
 has two objections to Monger's fundamental definition of economical goods as 
 " those goods the available quantity of which is less than human need." 
 First, he says, in trade generally we must recognise "the tendency to assimilate 
 need and available quantity," on account of which "in every normal case " a
 
 CHAP, x DISPOSAL OVER GOODS 261 
 
 theoretically inadmissible to recognise relations as real Goods, 
 in the sense given to that term by economic theory. These 
 reasons, I believe, have the same validity as regards this 
 " disposal " over goods. 
 
 To maintain its position in face of these weighty deductive 
 objections Monger's hypothesis must have some very strong 
 and positive support. I doubt if it has sufficient support of 
 this kind. The special character of my present contention 
 prevents us from the first from obtaining any direct evidence, 
 such as might be given by the senses, that " disposal " really 
 is a good. The only thing we have to consider is whether 
 the hypothesis is accredited by a consensus of sufficiently 
 numerous and significant indirect supports. And this I must 
 doubt. 
 
 It appears to me that there is, distinctively, only one 
 indirect support for it, and that is, the existence of a surplus 
 value which is unexplained otherwise. As astronomers, from 
 certain otherwise unexplained disturbances in the orbits of 
 known planets, have concluded for the existence of disturbing 
 and as yet unknown planetary bodies, so does Menger postulate 
 
 number of the most important economical objects must fall out of the circle of 
 economical goods. And second, he says, Monger's definition of his conception is 
 not definite enough, and leaves room for all sort of things that have not the 
 character of economical goods, such, for instance, as useful "technical knowledge." 
 I onsider that both objections are based on a misunderstanding. As a matter 
 of fact trade can never quite assimilate the available quantity of economical 
 goods to the need for them ; it can of course meet the demand that has power 
 to pay, but never the need. However commerce may flood a market with 
 exchangeable goods, while it will very soon succeed in supplying the amount that 
 people can buy, it will never supply all they wish to possess for the purpose 
 of supplying their wants to the saturation point that point where the last and 
 most insignificant wish is gratified. As to the second objection, Monger's 
 definition seems to me to mark out the circle of economic goods both correctly 
 and sufficiently. We must not overlook the fact that what determines the con- 
 ception of the " good " has a share in determining the conception of the 
 "economical good." Things like qualities, skill, rights, relations, cannot, I 
 admit, be economical goods, even if tluy are only to be had in insufficient quantity, 
 but that is because they are not true goods that is to say, they are not really 
 effectual means of satisfying human wants, and at best can only be called so by 
 a metaphor. But where we have true goods, such of them as are insufficient in 
 quantity are at the same time economical goods. If, therefore, Menger, in some 
 individual cases, does come into collision witli truth as I maintain he does in 
 regard to the economical good "disposal" it is not because he has made a 
 mistake in defining the attribute "economical," but only because he has occasion- 
 ally treated the conception of the "good " a little too loosely.
 
 262 MENGER'S CONCEPTION OF USE BOOK in 
 
 the existence of a " bearer " of the surplus value which other- 
 wise is unexplained. And since the disposal over quantities of 
 goods for definite periods of time appears to him to stand in 
 a regular connection with the emergence and the amount of 
 surplus value, he does not hesitate to put forward the hypo- 
 thesis that this disposal is the "bearer" sought for, and, as such, 
 an independent good of independent nature. If the possibility 
 of any other explanation had ever occurred to this distinguished 
 thinker, I am persuaded that he would have withdrawn his 
 hypothesis at once. 
 
 Now is this one indirect point of support sufficient to 
 prove that " disposal " is an independent good ? 
 
 There are two reasons for answering this in the negative. 
 The one is that the phenomena of surplus value can be ex- 
 plained in an entirely satisfactory way without this hypothesis, 
 and indeed can be explained on lines that Menger himself has 
 laid down in his now classical theory of value ; the proof of 
 this I hope to give in my next volume. But the following 
 consideration is of itself, in my opinion, quite convincing. 
 
 According to Monger's theory the loan is looked upon as 
 a transference of disposal over goods. The longer then the 
 period of the loan, the greater of course is the quantity of the 
 transferred good, the disposal. In a loan for two years more 
 disposal is transferred than in a loan for one year ; in a three 
 years' loan more disposal than in a two years' loan ; in a 
 hundred years' loan almost an unlimited amount of disposal is 
 transferred. Finally, if the replacement of the capital is not 
 only postponed for a very long time, but is altogether dispensed 
 with, surely a quite infinite amount of disposal is transferred 
 to the borrower. This, for instance, will be the case if goods 
 are not lent, but given. 
 
 We now ask in such a case, How much value is received 
 by the one to whom the gift is made ? There can be no 
 doubt that he receives as much value in capital as is possessed 
 by the tiling given. And the value of the permanent disposal 
 that inheres in the thing, and is presented along with it? 
 Is evidently contained in the capital value of the thing itself. 
 From which I draw the conclusion and I do not think I 
 am perpetrating any fallacy in so concluding that if the 
 plus, viz. the value of the permanently inhering disposal,
 
 CHAP, x DISPROVED 263 
 
 is contained in the capital value of the good itself, the 
 minus contained in it, the temporary disposal over a good, 
 must be contained in the value of the good itself. The 
 temporary disposal, therefore, cannot be, as Menger assumes, 
 an independent bearer of value alongside the value of the 
 good in itself. 1 
 
 1 If we put the illustration a little differently it may show more forcibly 
 that the value of the disposal is contained in the value of the good. Suppose 
 that A first lends B a thing for twenty years without interest presents 
 him therefore with the good called " disposal for twenty years," and then, 
 a couple of days after the loan contract is concluded, presents him with 
 the thing itself. Here he has in two actions given away the twenty years' 
 disposal and the thing itself. If the " disposal " were a thing of independent value 
 in addition to the thing itself, the total value of the gift would obviously be 
 greater than the value of the thing itself, which just as obviously is not the 
 case.
 
 CHAPTEK XI 
 
 FINAL INSUFFICIENCY OF THE USE THEORY 
 
 IN Chapter III. I indicated that I proposed to maintain two 
 theses. The first of these I think I may regard as proved, 
 viz. that the use assumed by the Use theory as having an 
 independent existence has really no existence at all. But 
 even if it had, the actual phenomena of interest would not be 
 sufficiently explained thereby. The proof of this second thesis 
 will not require many words. 
 
 The Use theory, in virtue of its special line of explanation, 
 is led to make a distinction between a value which goods have 
 in themselves, and a value which the use of goods has. In 
 this it starts with the tacit assumption that the usual 
 estimated value, or selling value of real capital, represents the 
 value of the goods themselves, exclusive of the value of their 
 use ; the explanation of surplus value being based on this very 
 circumstance, that the value of the use joins itself, as a quite 
 new element, to the value of the substance of capital, and that 
 the two together make up the value of the product. 
 
 But this assumption contradicts the actual phenomena of 
 the economical world. 
 
 It is well known that a bond only obtains a price equiva- 
 lent to its full course value if it is provided with all the 
 coupons belonging to it ; in other words, if the disposal over 
 all its future "uses" to adopt the language of a Use theorist 
 is transferred to the buyer at the same time with the bond. 
 But if one of the coupons is missing, the buyer will always 
 make a corresponding reduction in the price that he pays 
 for the bond. An analogous experience occurs with all 
 other goods. If, in selling an estate that otherwise would
 
 CHAP, xi USE WOULD NOT EXPLAIN INTEREST 265 
 
 have fetched 10,000, I retain the use of the estate for one 
 or more years, or, if I sell another such estate which is 
 burdened, perhaps in virtue of a legacy, with so many years' 
 claim by a third party to its produce, there is no doubt that 
 the price obtainable for the estate will fall below the amount 
 of 10, 000 by a sum that corresponds to the "uses" retained, 
 or claimed by the third party. 
 
 These facts, which may be multiplied at will, in my 
 opinion admit of being interpreted in only one way, that the 
 usual estimated value or selling value of goods embraces not 
 only the value of the "goods in themselves," but also that of 
 their future " uses," supposing there are any such. 
 
 But if this is so, then the " use " fails to explain the very 
 thing which it was intended by the Use theory to explain. 
 That theory would explain the fact that the value of a capital 
 of 100 expands in its product to 105, by saying that a new 
 and independent element of the value of 5 had been added 
 to it. This explanation falls to the ground, as the Use theory 
 must recognise, the moment it is seen that, in the capital value 
 of 100, the future use itself has been considered and is 
 contained. However unreservedly one may admit the existence 
 of such uses, the riddle of surplus value is not read by them ; 
 the form of the question is only a little changed. It will now 
 run : How comes it that the value of the elements of a product 
 of capital, viz. substance of capital and uses of capital, which 
 before were worth together 100, expands in the course 
 of the production to 105 ? The fact is, that instead 
 of one riddle we have now two. The first, that given 
 by the nature of the phenomena of every interest theory, 
 runs : Why does the value of the elements expand by the 
 amount of the surplus value ? To this the Use theory has 
 added a second riddle of its own, In what way do the future 
 " uses " of a good and the value of the " good in itself " together 
 make up the present capital value of the good ? and no Use 
 theorist has faced the difficulties of such a problem. 
 
 Thus the Use theory ends by putting more problems than 
 it started with. 
 
 But if it has not had the good fortune to solve the 
 interest problem, the Use theory has contributed more than 
 any other to prepare the way towards it. While many other
 
 266 FINAL INSUFFICIENCY OF USE THEORY BOOK in 
 
 theories went wandering in ways that were quite unfruitful, 
 the Use theory managed to gather together many an important 
 piece of knowledge. I might compare it with some of the 
 older theories of natural science ; with that combustion theory 
 of ancient times that worked with the mystical element 
 Phlogiston ; or with that older theory of heat that worked with 
 a Warm Fluid. Phlogiston and warm fluid turned out to be 
 fabulous essences, just as the " net use " turns out to be. But 
 the symbol which in the meantime our theorists put in the 
 place of the unknown something, helped in the same way as 
 the x of our equations to discover a number of valuable 
 relations and laws revolving about that unknown something. 
 It did not point out the truth, but it helped to bring about its 
 discovery.
 
 BOOK IV 
 
 THE ABSTINENCE THEORY
 
 CHAPTEE I 
 
 SENIOR'S STATEMENT OF THE THEORY 
 
 N. W. SENIOR must be regarded as the founder of the 
 Abstinence theory. It appeared first in his lectures delivered 
 before the University of Oxford, and later in his Outlines of 
 the Science of Political Economy* 
 
 Rightly to estimate Senior's theory we must for a moment 
 recall the position which the doctrine of interest held in 
 England about the year 1830. 
 
 The chief writers of the modern school of political economy, 
 Adam Smith and Ricardo the former with less, the latter 
 with greater distinctness had pronounced labour to be the only 
 source of value. Logically carried out, this could leave no room 
 for the phenomenon of interest. All the same, interest existed 
 as a fact, and exerted an undeniable influence on the relative 
 exchange value of goods. Adam Smith and Ricardo took notice 
 of this exception to the " labour principle," without seriously 
 trying either to reconcile the disturbing exception with the 
 theory, or to explain it by an independent principle. Thus 
 with them interest forms an unexplained and contradictory 
 exception to their rule. 
 
 This the succeeding generation of economical writers began 
 to perceive, and they made the attempt to restore harmony 
 between theory and practice. They did so in two different 
 ways. One party sought to accommodate practice to theory. 
 They held fast by the principle that labour alone creates value, 
 and did their best to represent even interest as the result and 
 wage of labour, in which, naturally, they were not very 
 
 1 Extracted from the Encyclopaedia Metropolitana, London, 1836. I quote 
 from the fifth edition, London, 1863.
 
 270 THE ABSTINENCE THEORY BOOK i 
 
 successful. The most important representatives of this party 
 are James Mill and M'Culloch. 1 
 
 The other party with more propriety tried to accommodate 
 theory to fact. This they did in various ways. Lauderdale 
 pronounced capital, as well as labour, to be productive, but his 
 views found little acceptance among his countrymen. Ever 
 since the time of Locke English economists were much too 
 thoroughly acquainted with the idea that capital itself is the 
 result of labour to be willing to recognise in it an independent 
 productive power. Others again, with Malthus at their head, 
 found a way of escape in explaining profit as a constituent part 
 of the costs of production alongside of labour. Thus, formally 
 at least, was the phenomenon of interest brought into harmony 
 with the ruling theory of value. Costs, they said, regulate 
 value. Interest is one of the costs. Consequently the value 
 of products must be high enough to leave a profit to capital 
 after labour has received its remuneration. 
 
 It must be admitted that this explanation left substantially 
 everything to be desired. It was too evident that profit was a 
 surplus over the costs, and not a constituent part of them ; a 
 result and not a sacrifice. 
 
 Thus neither of the economic positions which were then 
 taken on the theory of interest was quite satisfactory. Each 
 had some adherents, but more opponents ; and these opponents 
 found a welcome opening for attack in the sensible weaknesses 
 of the doctrine. The opportunity was amply utilised. The 
 one party was forced to see its assertion translated into the 
 ridiculous statement that the increment of value which a cask 
 of wine gets through lying in a cellar can be traced to labour. 
 The other party was forced, by inexorable logic, to confess that a 
 surplus is not an outlay. And while the two parties were thus at 
 variance over the proper foundation of interest, a third party 
 began to make itself heard, if only modestly at first, a party 
 which explained interest as having no economical foundation, 
 as being merely an injury to the labourer. 2 
 
 Amid this restless and barren surging of opinions came 
 Senior, proclaiming a new principle of interest, viz. that interest 
 is a reward for the capitalist's Abstinence. 
 
 1 See above, p. 97, and below, book vii. 
 
 2 Ever since Hodgskin's writings (1825). See below, book vi.
 
 CHAP, i NEBENIUS, SCROPE 271 
 
 Isolated statements expressing the same idea had indeed 
 appeared frequently before Senior's time. We may see it fore- 
 shadowed in the often recurring observation of Adam Smith 
 and Kicardo that the capitalist must receive interest, because 
 otherwise he would have no motive for the accumulation and 
 preservation of capital ; as also in the nicfc opposition of " future 
 profit" to "present enjoyment" in another part of Adam Smith's 
 writings. 1 More distinct agreement is shown by Nebenius in 
 Germany and Scrope in England. 
 
 Nebenius found the explanation of the exchange value of 
 the services of capital, among other things, in this, that capitals 
 are only got through more or less painful privations or exertions, 
 and that men can only be induced to undergo these by getting 
 a corresponding advantage. But he does not discuss the idea 
 any further, and shows himself in the main an adherent of a 
 Use theory which shades into the Productivity theory. 2 
 
 Scrope puts the same idea still more directly. 3 After 
 having explained that, over and above the replacement of 
 the capital consumed in production, there must remain to 
 the capitalist some surplus, because it would not be worth his 
 while to spend his capital productively if he were to gain 
 nothing by it, he explicitly declares (p. 146): "The profit 
 obtained by ,the owner of capital from its productive employ- 
 ment is to be viewed in the light of a compensation to him for 
 abstaining for a time from the consumption of that portion of 
 his property in personal gratification." In what follows it 
 must be confessed that he treats the idea as if it was peculiarly 
 " time " that was the object of the capitalist's sacrifice ; argues 
 in a lively way against M'Culloch and James Mill, who had 
 declared " time " to be only a word, an empty sound, which 
 could do nothing, and was nothing ; and does not even hesitate 
 to declare that time is a constituent part of the costs of pro- 
 duction : " The cost of producing any article comprehends 
 (1) the labour, capital, and time required to create and bring 
 it to market" (p. 188), a strange falling off, which scarcely 
 need be seriously discussed. 
 
 Now this same idea, which his predecessors 'merely touched 
 on, Senior has made the centre of a well-constructed theory of 
 
 1 See above, p. 71. 2 See above, p. 192. 
 
 3 Principles of Political Economy, London, 1833.
 
 272 THE ABSTINENCE THEORY BOOK iv 
 
 interest : and whatever we may think of the correctness of its 
 conclusions, we cannot deny it this credit that, among the con- 
 fused theories of that time, it was remarkable for its systematic 
 grasp, its consistent logic, and the thorough manner in which 
 it puts its materials to the best advantage. An epitome of the 
 doctrine will confirm this judgment. 
 
 Senior distinguishes between two " primary " instruments 
 of production, labour and natural agents. But these cannot 
 attain to complete efficiency if they are not supported by a 
 third element. This third element Senior calls Abstinence, by 
 which he means " the conduct of a person who either abstains 
 from the unproductive use of what he can command, or 
 designedly prefers the production of remote to that of immediate 
 results" (p. 58). 
 
 His explanation why he does not take the usual course of 
 pronouncing capital to be the third element in production 
 is rather ingenious. Capital is, he says, not a simple original 
 instrument ; it is in most cases itself the result of the 
 co-operation of labour, natural agents, and abstinence. Con- 
 sequently, if. we wish to give a name to the peculiar element 
 the element separate from the productive powers of labour and 
 nature which becomes active in capital, and stands in the same 
 relation to profit as labour stands to wage, we cannot name 
 anything but abstinence (p. 59). 
 
 Of the manner in which this element takes part in the 
 accumulation of capital, and at the same time, indirectly, in 
 the results of production, Senior repeatedly gives ample illus- 
 trations. I give one of the shortest in his own words : 
 
 " In an improved state of society the commonest tool is 
 the result of the labour of previous years, perhaps of previous 
 centuries. A carpenter's tools are among the simplest that 
 occur to us. But what a sacrifice of present enjoyment must 
 have been undergone by the capitalist who first opened the 
 mine of which the carpenter's nails and hammer are the 
 product ! How much labour directed to distant results must 
 have been employed by those who formed the instruments 
 with which the mine was worked ! In fact, when we consider 
 that all tools, except the rude instruments of savage life, are 
 themselves the product of earlier tools, we may conclude that 
 there is not a nail among the many millions annually fabricated
 
 CHAP, i SENIOR'S STA TEMENT 273 
 
 in England which is not to a certain degree the product of 
 some labour for the purpose of obtaining a distant result, or, 
 in our nomenclature, of some abstinence undergone before the 
 conquest, or perhaps before the Heptarchy" (p. 68). 
 
 Now the " sacrifice, " which lies in the renunciation or 
 postponement of enjoyment, demands indemnification. This 
 indemnification consists in the profit of capital. But admitting 
 this one must ask, In the economical world is the capitalist 
 able to enforce what may be called his moral claim on indemni- 
 fication ? To this important question Senior gives the answer 
 in his theory of price. 
 
 The exchange value of goods depends, according to Senior, 
 partly on the usefulness of the goods, partly on the limitation 
 of their supply. In the majority of goods (exception being 
 made of those in which any natural monopoly comes into play) 
 the limit of supply consists only in the difficulty of finding 
 persons who are willing to submit to the costs necessary for 
 making them. In so far as the costs of production determine the 
 amount of supply they are the regulator of exchange value; 
 and indeed chiefly in this way, that the costs of production of 
 the buyer that is, the sacrifice with which the buyer could him- 
 self produce or procure the goods constitute the " maximum 
 of price," and the cost of production of the seller the " minimum 
 of price." But these two limits approximate each other in the 
 case of that majority of goods which come under free com- 
 petition. In their case therefore the costs of production simply 
 make up a sum that determines the value. 
 
 But the costs of production consist of the sum of tlie labour 
 and abstinence requisite for the production of goods. In this 
 sentence we come to the theoretical connection between the 
 doctrine of interest and that of price. If the sacrifice 
 Abstinence is a constituent part of the costs of production, and 
 these costs of production regulate value, the value of goods 
 must always be great enough to leave a compensation for the 
 abstinence. In this way the surplus value of products of 
 capital, and with it natural interest on capital, is fornially 
 explained. 
 
 To this last exposition Senior adds a criticism of the interest 
 theory of several of his predecessors which almost deserves to 
 be called classical. He exposes among other things in a forcible 
 
 T
 
 274 THE ABSTINENCE TtfEORY BOOK iv 
 
 way the blunder which Malthus had committed in putting 
 profit among costs. But not content with criticising, he ex- 
 plains very beautifully how Malthus had fallen into the mistake. 
 Malthus had rightly perceived that, beyond the sacrifice of 
 labour, there is another sacrifice made in production. But since 
 there was no term by which to designate it, he had called the 
 sacrifice by the name of its compensation, in the same way as 
 many people call wage of labour (which is the compensation 
 for the sacrifice of labour) a constituent part of cost, instead 
 of calling the labour itself by that name. Torrens, again, who 
 had already blamed Malthus for his mistake, had himself 
 committed a sin of omission. He had rightly eliminated 
 " profit " from the costs of production, but was himself quite 
 unable to fill the gap.
 
 CHAPTER II 
 
 CRITICISM OF SENIOR 
 
 SINCE the first formulation which the Abstinence theory 
 received from Senior is still the best, we shall be able to 
 form a critical judgment on the whole subject most suitably 
 by taking up Senior's theory. Before stating my own views, I 
 think it advisable to mention certain other criticisms which 
 have obtained a wide currency in our science, and in which, I 
 believe, Senior's doctrine has been judged much too harshly. 
 To begin with a late critique. Pierstorff, in his able Lehre 
 vom Unternehrnerg&mnn, expresses himself in terms of extreme 
 disapprobation of Senior's theory. He goes so far as to 
 declare that Senior's way of looking at things, in contrast to 
 that of his predecessors, indicates a degeneration, a renunciation 
 of earnest scientific research; and charges him with having 
 "substituted for the economical basis of phenomena an 
 economical and social theory cut to suit his purpose " (p. 47). 
 
 I must confess that I scarcely understand this expression 
 of opinion, particularly as coming from a historian of theory 
 who should know how to estimate excellence even when it is 
 purely relative. Senior's theory of interest is infinitely superior 
 to that of his predecessors in depth, systematic treatment, 
 and scientific earnestness. The words " renunciation of earnest 
 scientific research " into the interest problem might apply to 
 the methods of such men as Eicardo or Malthus, M'Culloch 
 or James Mill These writers sometimes do not put the 
 problem at all ; sometimes solve it by an obvious petitio princi- 
 pii ; sometimes solve it by peculiarly absurd methods. Even 
 Lauderdale, whom Pierstorff unfortunately has not discussed, 
 notwithstanding an earnest attempt at its solution, remains
 
 276 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 standing in the outer courts of the problem, and by a gross mis- 
 understanding entirely fails to explain the interest phenomenon 
 by his value theory. Unlike him, Senior, with deep insight, 
 has recognised not only that there is a problem, but also the 
 direction in which it is to be solved, and where the difficulties 
 of the solution lie. Setting aside all sham solutions, he goes 
 to the heart of the matter, to its foundation in the surplus 
 value of products over expenditure of capital ; and if he has 
 not found the whole truth, it certainly is not for want of 
 scientific earnestness. One would have thought that the 
 pointed and well weighed critical observations which Senior 
 so plentifully intersperses with his text should have protected 
 him from so harsh a judgment. 
 
 Just as wide of the mark seem to me the well-known 
 words in which Lassalle, twenty years ago, in his tumultu- 
 ously eloquent but absurdly rhetorical way, jeered at Senior's 
 doctrine: "The profit of capital is the 'wage of abstinence.' 
 Happy, even priceless expression ! The ascetic millionaires of 
 Europe ! Like Indian penitents or pillar saints they stand : on 
 one leg, each on his column, with straining arm and pendu- 
 lous body and pallid looks, holding a plate towards the people 
 to collect the wages of their Abstinence. In their midst, 
 towering up above all his fellows, as head penitent and ascetic, 
 the Baron Eothschild ! This is the condition of society ! how 
 could I ever so much misunderstand it ! " l 
 
 This brilliant attack notwithstanding, I believe that there 
 is a core of truth in Senior's, doctrine. It cannot be denied 
 that the making, as well as the preservation of every capital, 
 does demand an abstinence from or postponement of the 
 gratification of the moment ; and it appears to me to admit 
 of as little doubt that this postponement is considered in, 
 and enhances the value of those products that, under capitalist 
 production, cannot be obtained without more or less of such 
 postponement. If, e.g. two commodities have required for their 
 production exactly the same amount of labour, say 100 days, 
 and that one commodity is ready for use immediately that 
 the labour is finished, while the other say new wine must 
 lie for a year ; experience certainly shows that the commodity 
 which becomes ready for use later will stand higher in price 
 
 1 Kapital und Arbeit, Berlin, 1864, p. 110.
 
 CHAP, ii SACRIFICE OF POSTPONEMENT 277 
 
 than that which is ready at once, by something like the 
 amount of interest on the capital expended. 
 
 Now I have no doubt that the reason of this enhance- 
 ment is nothing else than that there must be in this case 
 a postponement of the gratification obtainable from the. labour 
 performed. For if the commodity immediately ready for 
 use and that ready later on were to stand equally high in 
 value, everybody would prefer to employ his 100 days in that 
 labour which pays its wages immediately. This tendency is 
 bound to call forth an increased supply of the goods 
 immediately ready for use, and this again must bring down 
 their price as compared with that of the goods ready later 
 on. And as the wages of labour have a tendency to equalise 
 themselves over all branches of production, in the end there 
 is assured to the producers of these later goods a plus over the 
 normal payment of labour ; in other words, an interest on 
 capital 
 
 But it is just as certain and on this ground Lassalle is for 
 the most part right as against Senior that the existence and the 
 height of interest by no means invariably correspond with the 
 existence and the height of a " sacrifice of abstinence." Interest, 
 in exceptional cases, is received where there has been no indi- 
 vidual sacrifice of abstinence. High interest is often got where 
 the sacrifice of the abstinence is very trifling as in the case 
 of Lassalle's millionaire and low interest is often got where 
 the sacrifice entailed by the abstinence is very great. The 
 hardly saved sovereign which the domestic servant puts in the 
 savings bank bears, absolutely and relatively, less interest than 
 the lightly spared thousands which the millionaire puts to 
 fructify in debenture and mortgage funds. These phenomena 
 fit badly into a theory which explains interest quite universally 
 as a " wage of abstinence," and in the hands of a man who 
 understood polemical rhetoric so well as Lassalle they only 
 furnished so many pointed weapons of attack against that 
 theory. 
 
 After much consideration I am inclined to think that the 
 actual defects from which Senior's theory suffers may be reduced 
 to three. 
 
 First, Senior has made too sweeping a generalisation on an 
 idea quite right in itself, and has used it too much as a type.
 
 278 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 There is no doubt in my mind that the element, postponement 
 of gratification, which Senior puts in the foreground, does as a 
 fact exert a certain influence on the origination of interest. 
 But that influence is neither so simple, nor so direct, nor so 
 exclusive as to permit of interest being explained as merely 
 a " wage of abstinence." More exact proof of this is not pos- 
 sible here, and must be left for my second volume. 
 
 Second, Senior has expressed that part of his theory which 
 is substantially correct in a fashion at all events open 
 to attack. I consider it a logical blunder to represent the 
 renunciation or postponement of gratification, or abstinence, as 
 a second independent sacrifice in addition to the labour sacri- 
 ficed in production. 
 
 Perhaps the best way of treating this somewhat difficult 
 subject will be to put it in the form of a concrete example, 
 and then try to grasp the principle. 
 
 Take the case of a man living in the country who is con- 
 sidering in what kind of labour he should employ his day. 
 There are, perhaps, a hundred different courses open to him. 
 To name only some of the simplest he could fish, or shoot, or 
 gather fruit. All three kinds of employment agree in this, 
 that their result follows immediately, even by the evening of 
 the same work-day. Suppose that our country friend decides 
 on fishing, and brings home at night three fish. What sacri- 
 fice has it cost him to obtain them ? 
 
 If we leave out of account the trifling wear and tear of the 
 fishing gear, it has cost him evidently one day's work, and noth- 
 ing else. It is possible, however, that he looks at this sacrifice 
 from another point of view. It is possible that he measures 
 it by the gratification he might have got if he had spent his 
 work-day otherwise, which gratification he must now do with- 
 out. He may calculate thus : If I had spent to-day in shoot- 
 ing instead of fishing I might have shot three hares, and I 
 must now do without the gratification obtainable from these. 
 
 I believe that this way of reckoning sacrifice is not in- 
 correct. Here the man simply looks at work as a means to 
 an end, and taking no notice of the mean the primary sacri- 
 fice of work fixes his attention on the end which was sacri- 
 ficed through the mean. It is a method of calculation 
 very common in economic life. Say that I have definitely set
 
 CHAP, n THE ALTERNATIVE SACRIFICE 279 
 
 aside 30 for expenditure, but am hesitating between two 
 modes of spending it. In the end I make up my mind to 
 spend it on a pleasure trip instead of the purchase of a Persian 
 carpet. Evidently the real sacrifice which the pleasure trip 
 will cost me may be represented under the form of the Persian 
 carpet which I have to do without. 
 
 In any case it appears to me obvious that, in reckoning 
 the sacrifice made for any economic end, the direct sacrifice 
 in means that sacrifice which is first made and the indirect 
 sacrifice, which takes the shape of other kinds of advantage 
 that might have been obtained in other circumstances by the 
 means sacrificed, can be calculated only alternatively and never 
 cumulatively. I may consider the sacrifice of my pleasure trip 
 to be either the 30 which it has directly cost me, or the 
 Persian carpet which it has indirectly cost me, but never as 
 the 30 and the carpet. Just in the same way our rustic 
 may consider, as the sacrifice which the catching of the three 
 fish costs him, either the day's work directly expended, or the 
 three hares indirectly sacrificed (or, say, the gratification he 
 gets from eating them), but never the day's work and the 
 
 gratification obtained through shooting the hares. 
 I think is clear. 
 
 But besides these occupations, which recompense him for 
 his day's work at the end of the day, there are others open to 
 our labourer which produce a result that cannot be enjoyed 
 till a later date. He might, e.g. sow wheat, getting the produce 
 of it after a year's time ; or he might plant fruit trees, from 
 which he could have no return for ten years. Suppose he 
 chooses the latter. If we again leave out of account the laud 
 and the trifling wear and tear of tools, what has he sacrificed 
 to obtain the fruit trees ? 
 
 To me there seems no doubt about the answer. He has 
 sacrificed a day's work, and nothing more. Or, if the indirect 
 way of computation be preferred, instead of the day's work he 
 may calculate the other kinds of gratification that might have 
 been got by spending the day in other ways say the immediate 
 enjoyment of three fish, or of three hares, or of a basket of fruit. 
 But at all events it seems to me obvious in this case also, that, 
 if the gratification which might have been got through the work 
 is reckoned as sacrifice, then not the smallest portion of the work
 
 280 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 itself can be reckoned in the sacrifice ; while, if the work is 
 reckoned as sacrifice, there cannot be added to that in the 
 calculation the smallest fragment of the other kinds of enjoy- 
 ment that were renounced. To do otherwise would be to 
 make a double reckoning, which would be just as false as if 
 the man in our former illustration had reckoned the cost of 
 the pleasure trip as the 30 actually paid, and besides as the 
 Persian carpet which he might have bought with the 30. 
 
 It is a double calculation of this kind that Senior has 
 made. He has not done so, I admit, in the gross way of 
 calculating, in addition to the labour, the entire gratification 
 he might have had from the labour; but in reckoning the 
 postponement or abstinence from gratification independently 
 of the labour he has gone farther than was allowable. For 
 it is clear that in the sacrifice of labour is already included 
 the sacrifice of the whole advantage that might have been got 
 from employing the labour in other ways, the whole advantage, 
 containing all the partial or secondary shades of advantage that 
 may depend on the principal advantage. The man who sacri- 
 fices 30 on a pleasure trip sacrifices, not in addition to but 
 in the 30, both the Persian carpet that he might have bought 
 with it and the satisfaction which he might have found in its 
 possession ; sacrifices too, among other things, the special advan- 
 tage he might have had in the durability of this possession, and 
 the length of time over which the gratification was spread. And 
 just in the same way the labourer who sacrifices one day of 
 work of the year 1889 in the planting of trees, makes a saoii- 
 fice, in and not in addition to, 'this day of work, not only of the 
 three fish which he might have caught by the day's labour, but 
 also of the peculiar enjoyment which he has, say, in a fish- 
 dinner ; as also of the advantage which springs from the fact 
 that he might have had this gratification in the year 1889. 
 The special reckoning of the postponement of gratification, 
 therefore, contains a double calculation. 
 
 It is not perhaps too much to hope that most of my 
 readers will agree with the foregoing arguments. Nevertheless 
 I cannot consider the subject yet threshed out. There is no 
 doubt that Senior's way of putting the matter has something 
 very fascinating and persuasive about it, and if the case made 
 use of in our illustration is put in a certain light favourable to
 
 CHAP, ii A DOUBLE CALCULATION 281 
 
 Senior's conception, the argument against me may appear 
 absolutely convincing. This argument I have still to reckon 
 with. 
 
 Put parallel cases as follows. If I employ to-day in 
 catching fish, these fish cost me one day of labour. That is 
 clear. But if I employ to-day in planting fruit trees, which 
 will not bear fruit for ten years' time, then not only have I 
 " taken it out " of myself (to use a significant colloquialism) 
 for a whole day, but, over and above that. I have to wait for 
 ten years for any result from my labour, although that waiting 
 perhaps costs me much self-denial and mental pain. Therefore 
 it would seem that in this latter act I make a sacrifice which 
 is more than a day of labour; it is the exertion and toil of 
 one day, and besides that, the burden of postponing the result 
 of my work for ten years. 
 
 Plausible as this argument is, its basis is none the less 
 fallacious. Let me first show, by following it out to some 
 of its conclusions, that there is a fallacy, and then point out 
 the source of the fallacy. Later on I shall have another 
 opportunity of reviewing all that has been said and reducing 
 it to principles. 
 
 Imagine the following case. I work for a whole day at 
 the planting of fruit trees in the expectation that they will 
 bear fruit for me in ten years. In the night following comes 
 a storm and entirely destroys the whole plantation. How 
 great is the sacrifice which I have made, as it happens, in 
 vain ? I think every one will say a lost day of work, and 
 nothing more. And now I put the question, Is my sacrifice 
 in any way greater that the storm does not come, and that 
 the trees, without any further exertion on my part, bear fruit in 
 ten years ? If I do a day's work and have to wait ten years 
 to get a return from it, do I sacrifice more than if I do a 
 day's work, and, by reason of the destructive storm, must wait 
 to all eternity for its return ? It is impossible to make such 
 an assertion. And yet Senior would have it so ; for while in 
 the first case the sacrifice is stated to be a day's work and 
 nothing more, in the second case it is a day's work plus a ten 
 years' abstinence from its result ! What a singular position 
 too, according to Senior's view, must the progression of sacrifice 
 attain as the time of use recedes ! If labour immediately pays
 
 282 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 its own wages the sacrifice is only the labour expended. If 
 it pays them in a year, the sacrifice is labour plus a year's 
 abstinence. If it pays them in two years, the sacrifice is 
 labour plus two years' abstinence. If it pays them twenty 
 years afterwards, then the sacrifice grows to labour plus 
 twenty years' abstinence. And if it never pays them at all ? 
 Must not, then, the sacrifice of abstinence reach its highest 
 conceivable point, infinity, and form the climax of the upward 
 progression ? Oh no ! Here the sacrifice of abstinence sinks 
 to zero ; the labour is the only thing counted as sacrifice, and 
 the total sacrifice is not the greatest, but the least in the 
 entire series ! 
 
 I think that these conclusions plainly indicate that in all 
 cases the only real sacrifice consists in the labour put forth, and 
 that, if we thought ourselves compelled to acknowledge a second 
 sacrifice besides that, viz. the postponement of gratification, we 
 must have been misled by a specious presentation of the case. 
 
 But I must confess that the mistake is one we are very 
 apt to fall into. What is it that misleads us ? 
 
 The source of it is simply this, that the element of Time is 
 not really indifferent ; only it exerts its influence in a some- 
 what different way from that imagined by Senior and by people 
 generally. Instead of affording material for a second and inde- 
 pendent sacrifice, its importance rather lies in determining the 
 amount of the one sacrifice actually made. To make this 
 quite clear I must run the risk of being a little tedious. 
 
 The nature of all economic sacrifices that men make 
 consists in some loss of wellbeing which they suffer ; and the 
 amount of sacrifice is measured by the amount of this loss. 
 It may be of two kinds : of a positive kind, where we inflict 
 on ourselves positive injury, pain, or trouble ; or of a negative 
 kind, where we do without a happiness or a satisfaction which 
 we otherwise might have had. In the majority of economical 
 sacrifices which we make to gain a definite useful end, the 
 only question is about one of these kinds of loss, and here the 
 calculation of the sacrifice undergone is very simple. If I lay 
 out a sum of money, say 30, for any one useful end, my 
 sacrifice is calculated simply by the gratification which I 
 might have got by spending the 30 in other ways, and 
 which I must now do without.
 
 CHAP, ii TWO WAYS OF CALCULATING SACRIFICE 283 
 
 It is otherwise with the sacrifice of labour. Labour 
 presents two sides to economical consideration. On the one 
 hand it is, in the experience of most men, an effort connected 
 with an amount of positive pain, and on the other, it is a 
 mean to the attainment of many kinds of enjoyment. There- 
 fore the man who expends labour for a definite useful end 
 makes on the one hand the positive sacrifice of pain, and on 
 the other, the negative sacrifice of the other kinds of enjoy- 
 ment that might have been obtained as results of the same 
 labour. The question now is, Which is the correct way, in 
 this case, of calculating the sacrifice made for the concrete 
 useful end ? 
 
 The point we have to consider is, What would have been 
 the position as regards our pleasure and pain if we had not 
 expended the labour with a view to this particular end, but 
 had disposed of it in some other reasonable way ? The 
 difference between the two evidently shows the loss of well- 
 being which the attainment of 'our useful purpose costs us. If 
 we make use of this method of estimating difference, we may 
 very soon convince ourselves that the sacrifice made by labour 
 is sometimes to be measured by the positive pain, sometimes 
 by the negative loss of gratification, but never by both at once. 
 
 The question then comes to this, Whether, if we had put 
 forth the day's labour otherwise, we could have got a satisfaction 
 greater than the pain which the one day's labour causes us, 
 or not ? Suppose we feel the pain of a day's labour as an 
 amount which may be indicated by the number 10. We 
 actually employ the day in catching three fish, and these fish 
 give us a gratification expressed by the number 15. And we 
 ask what is the amount of sacrifice which the catching of the 
 three fish costs us. What we shall have to decide is, whether, if 
 we had not gone fishing, it would have been possible to us to 
 get by a day's work another kind of satisfaction greater than 
 the number 10. If no such possibility is open to us say 
 that shooting would only bring us a gratification represented 
 by the number 8, while the labour-pain was, as before, 10 
 then evidently we should either fish or remain idle. What our 
 three fish cost us in this case is the labour-pain indicated by 
 the number 10, which pain we have undergone for the sake of 
 the fish, and which pain we would otherwise not have under-
 
 284 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 gone. There is no question here of any loss of other kinds of 
 enjoyment, for the simple reason that we could not have got 
 them. If, on the other hand, it is possible, by labouring for a 
 day at other kinds of work, to get a gratification greater than 
 the pain represented by the number 10 if we could, e.g. by 
 a day's shooting obtain three hares of the value of 12, then it is 
 quite reasonable to expect that we should not in any case 
 remain idle, but possibly go shooting instead of fishing. What 
 our fish really cost us now is not the positive labour-pain 
 expressed by the number 10 for this we should have under- 
 gone at any rate but the negative loss of an enjoyment 
 which we might have had, indicated by the number 12. 
 But of course we must never calculate the want of enjoyment 
 and the pain of labour cumulatively; for if we had not 
 preferred catching fish, we could not have spared ourselves the 
 pain of labour and yet have had the gratification of shooting. 
 And just as little, if we choose to fish, do we by that choice 
 make a double sacrifice. 
 
 What has been said gives us the materials for a general rule 
 which practical men are in the habit -of applying with perfect 
 confidence. It may be put in the following words. 
 
 If we apply labour to a useful end, the sacrifice made in 
 doing so is always to be reckoned to the account of that one of 
 the two kinds of loss of wellbeing which is the greater in 
 amount ; to labour-pain, if there is no kind of gratification in 
 prospect which outweighs it; to gratification, where there is 
 the possibility of such ; but never in both at the same time. 
 
 And further, since in the economic life of to-day we have 
 an infinite number of possibilities of turning our work to fruit- 
 ful account, the first of these two cases almost never occurs. 
 At the present time, then, we estimate by far the greater 
 number of cases not by the pain of work, but by the profit 
 or advantage we have renounced. 
 
 Here we huve at last reached the point where we see the 
 real influence of the element Time on the amount of the sacri- 
 fice. It is a fact the grounds on which it rests do not con- 
 cern us here that in circumstances otherwise equal we prefer 
 a present enjoyment to a future. Consequently, if we have 
 to choose between applying a means of satisfaction, say labour, 
 to the satisfaction of a present want, and applying it towards
 
 CHAP, ii TRUE CALCULATION OF SACRIFICE 286 
 
 the satisfaction of a future want, the attraction of the immediate 
 gratification will make it difficult to decide in favour of the 
 future use. If, however, we do decide for the future use, in 
 measuring the amount of sacrifice made for it by the greatness 
 of the use foregone, the attraction of the moment which adheres 
 to the use foregone will weigh down the scale, and make our 
 sacrifice appear harder than it would otherwise have appeared. 
 It is not that we make a second sacrifice in this. Whether we 
 have to choose between two present or two future uses, or 
 between a present and a future use, we always make the one 
 sacrifice only, labour. But since, according to our analysis, 
 we usually measure the amount of the sacrifice by the amount 
 of the use foregone, the attraction of the earlier satisfaction 
 is considered and has its influence on this valuation, and 
 helps to make the calculation of the one, sacrifice higher than 
 it would otherwise have been. This is the true state of the 
 facts to which Senior in his theory gave a faulty construction. 1 
 
 The reader will, I trust, pardon me keeping him so long 
 at this abstract discussion. From the point of theory, how- 
 ever, it contains the weightiest arguments against a doctrine 
 that must be taken seriously, a- doctrine which up till now 
 has often been rejected, but never, in my opinion, refuted. 
 For myself, I hold it the lesser evil to be over-scrupulous in 
 inquiry before passing sentence, than to pass sentence without 
 full inquiry. 
 
 Lastly, the third fault of Senior's theory seems to me that 
 he has made his interest theory part of a theory of value in 
 which he explains the value of goods by their costs. 
 
 Now, even admitting the correctness of this theory, the "la\\T 
 of costs " avowedly holds only as regards one class of goods, 
 those which can be reproduced in any quantity at will. In so 
 
 1 Even in that minority of cases where the sacrifice of labour is measured in 
 pain of labour, the time element of postponement of gratification cannot form a 
 second and independent sacrifice. For the pain of labour only enters into the 
 valuation, as we have seen, when the pain in question is greater than any kind of 
 use which can be got out of the labour, inclusive of all the attractions of the 
 moment that may happen to be in it ; and when, consequently, the choice can 
 only reasonably be thought of as lying between the concrete future uses, towards 
 which the labour would actually be directed, and entire cessation from labour. 
 Since there is here no question of any other kind of earlier enjoyment of goods, 
 such an enjoyment cannot of course be, in any way, an element in the valuation 
 of sacrifice.
 
 286 THE ABSTINENCE THEORY: CRITICISM BOOK iv 
 
 far, then, as Senior makes his theory of interest an integral part 
 of a value theory which is merely partial, it can only be, in the 
 most favourable circumstances, a partial interest theory. It 
 might explain those profits that are made in the production of 
 goods reproducible at will, but logically every other kind of 
 profit would escape it altogether. 
 
 Senior's Abstinence theory has obtained great popularity 
 among those economists who are favourably disposed to 
 interest. It seems to me, however, that this popularity has 
 been due, not so much to its superiority as a theory, as that it 
 came in the nick of time to support interest against the severe 
 attacks that had been made on it. I draw this inference from 
 the peculiar circumstance that the vast majority of its later 
 advocates do not profess it exclusively, but only add elements 
 of the Abstinence theory in an eclectic way to other theories 
 favourable to interest. This is a line of conduct which points, 
 on the one hand, to a certain undervaluing of the strength of 
 its position as a theory ; its advocates do not hesitate to dis- 
 credit it rather rudely by piling up along with it a great many 
 heterogeneous and contradictory explanations. And, on the other 
 hand, it points to a preference for that practical and political 
 standpoint which is satisfied if only a sufficient number of 
 reasons are brought forward to prove the legitimacy of interest, 
 although it should be at the expense both of unity and logic. 
 
 Thus we shall meet the majority of the followers of Senior 
 among the eclectics. I may name, provisionally, among 
 English economists, John Stuart Mill and the acute Jevons; 
 among French writers, Rossi, Molinari, and Josef Gamier; 
 among Germans, particularly Eoscher and his numerous follow- 
 ing ; then Schiiz and Max Wirth. 
 
 Among those writers who hold by the Abstinence theory 
 pure and simple, I merely name the most prominent. Cairnes 
 places himself essentially at Senior's standpoint in his spirited 
 treatment of the costs of production. 1 The Swiss economist 
 Cherbuliez 2 explains interest to be a remuneration for the 
 " efforts of abstinence," and so stands on the boundary line 
 
 1 Some Leading Principles of Political Economy, 1874, chap. iii. 
 Precis de la Science Economique, Paris, 1862 ; particularly vol. L pp. 161, 
 402, etc.
 
 CHAP, ii 77^ ECLECTIC FOLLOWERS 287 
 
 between the Abstinence theory and a peculiar variety of those 
 Labour theories which we have to discuss in the next book. 
 In Italian literature Wollemborg has lately followed the lead 
 of Senior and Cairnes in acute inquiry into the nature of costs 
 of production. 1 Among the Germans is Karl Dietzel, who, 
 however, touches on the problem only occasionally and 
 cursorily. 2 
 
 None of these writers have added any essentially new 
 feature to Senior's Abstinence theory, and it is not necessary 
 to go minutely into what they have said on the subject But 
 I must make more careful mention of a writer whose theory 
 made a great stir in its day, and maintains an important 
 influence even yet ; I mean Frede'ric Bastiat. 
 
 1 Interne al Costo Relative di Produzione, etc., Bologna, 1882. 
 
 2 System der Staatsanleihen, Heidelberg, 1855, p. 48 : " The lender of capital 
 bases his claim on compensation for the using of the capital transferred by him, 
 first, on the fact that he has given up the chance of giving value to his own 
 labour power by embodying it in the object ; and second, that he has refrained 
 from consuming it, or its value, at once, in immediate enjoyment. This is the 
 ground on which interest on capital rests ; the subject, however, has no further 
 concern for us in this place." 
 
 W- 
 
 V ~-
 
 CHAPTER III 
 
 BASTIAT'S STATEMENT 
 
 BASTIAT'S much discussed theory of interest may be characterised 
 as a copy of Senior's Abstinence theory forced into the forms 
 of Bastiat's Value theory, and thereby much deteriorated. 
 The fundamental thought in each is identical. The post- 
 ponement of gratification, which Senior calls Abstinence, 
 and Bastiat calls sometimes Delay, sometimes Privation, is 
 a sacrifice demanding compensation. But beyond this they 
 diverge from each other in some respects. 
 
 Senior, who deduces the value of goods from their cost of 
 production, simply says that this sacrifice is a constituent 
 element of the costs, and is done with it. Bastiat, who bases 
 the value of goods on " exchanged services," elevates the 
 postponement also to the rank of a service. " Postponement 
 in itself is a special service, since on him who postpones it 
 imposes a sacrifice, and on him who desires it confers an 
 advantage." l This service, according to the great law of 
 society, which runs " service for service," must be specially 
 paid. The payment takes place where the capitalist has 
 borrowed his capital from another person by means of loan 
 interest (inUret). 
 
 But even outside of loan interest this service must be 
 compensated ; for, speaking generally, every one who receives 
 a satisfaction must also bear the collective burdens which its 
 production requires, including the postponement. This post- 
 ponement is looked upon as an " onerous circumstance," and 
 
 1 Harmonics Economiqncs (vol. vi. of complete works), third edition, Paris, 
 1855, p. 210. See also the pages immediately preceding, 207-209, and generally 
 the whole of Chapter VII.
 
 CHAP, in BASTIATS STATEMENT 289 
 
 forms therefore, quite universally, an element in the valuation 
 of the service, and at the same time in the formation of the 
 value of goods. This is, in a few words, the substance of 
 what Bastiat says with rhetorical diffuseness and copious 
 repetitions. 
 
 I called this doctrine a deteriorated copy of Senior's. 
 If we put on one side all those defects that belong 
 to Bastiat's interest theory not as such, but only in virtue 
 of its being embodied in his value theory which to my 
 mind is exceedingly faulty the deterioration shows itself 
 chiefly in two respects. 
 
 The first is that Bastiat confines his attention and his 
 arguments almost entirely to a secondary point, the explanation 
 of contract interest, and for that neglects the principal thing, 
 the explanation of natural interest. Both in his Harmonies 
 Ec&n&miques and in the monograph which he specially devoted 
 to the interest problem, Capital et Rente, he is never tired of 
 discoursing by the page on the interpretation and justification 
 of loan interest. 
 
 But he applies his theory to the explanation of natural 
 interest only once, and then only in passing, in the passages 
 already quoted (Harmonies, third edition, p. 213); and these 
 leave a great deal to be desired in point of clearness and 
 thoroughness. 
 
 The results of this negligence make themselves felt 
 principally in this, that the chief thing in the exposition of 
 interest, the sacrifice of postponement, is not nearly so clearly 
 put by Bastiat as by Senior; for when Bastiat opposes the 
 owner of capital to the borrower of capital, the sacrifice which 
 lie speaks of as made by the owner is generally that of doing 
 without the productive use that meantime might have been 
 made of the capital lent. 1 This has quite a good signification 
 
 1 "Si Ton penetre le fond des choses, on trouve qu'en ce cas le cedant se 
 prive en faveur du cessionaire on d'une satisfaction immediate qu'il recule de 
 plusieure annees, ou d'tm instrument de travail qui aurait augmente ses forces, 
 fait concourir les agents naturels, et augmente, a sou profit, le rapport des 
 satisfactions aux efforts" (vii. p. 209). "II ajourne la possibilite d'une 
 production. . . . Je 1'emploierai pendant dix ans sous une forme productive " 
 (xv. p. 445). So often in the tract Capital et Rente, e.g. p. 44. James, who has 
 made a plane, and has now lent it to William for a year, makes this the ground 
 for his claim of interest : " I expected some advantage from it, more work done and 
 better paid, an improvement in my lot. I cannot lend you all that for nothing." 
 
 U
 
 290 THE ABSTINENCE THEORY BOOK iv 
 
 if it means nothing more than what Salmasius had once tried 
 to prove against the canonists, that, if by employing capital 
 a man can make a natural profit, there is both reason and 
 justification for claiming an interest on the capital when loaned. 
 But to point to that sacrifice is evidently quite* inappropriate 
 as an explanation of natural interest, and the phenomenon of 
 interest in general is not satisfactorily explained thereby, the 
 existence of natural interest being already assumed in it as a 
 given fact. 
 
 For the deeper explanation of interest it is evident that 
 that other sacrifice on which Senior dwells is the only one that 
 has any importance, the sacrifice that consists in postponing 
 the satisfaction of needs. Now Bastiat of course speaks of 
 this sacrifice also, but by confusing it with the former sacrifice 
 he gets his doctrine into a tangle ; indeed it seems to me that 
 he not only confuses his readers, but himself. At least there 
 are to be found in his writings, especially in his Capital et 
 Rente, not a few passages in which he starts with his Abstinence 
 theory, but comes suspiciously near the standpoint of the Naive 
 Productivity theorists. The course of explanation suggested, 
 in the often quoted passage in the Harmonies, was to show 
 how under capitalist production the surplus value of the 
 product arises from the necessity of buyers of the product 
 paying for the " onerous circumstance " of the postponement 
 of gratification, as well as for the labour embodied in the 
 product Instead of following out this line of explana- 
 tion, he not unfrequently looks upon it as self-evident that 
 capital, in virtue of the productive power that resides in it, 
 must give its owner an " advantage," a " gain," an enhanced 
 price, and a bettering of his lot ; in a word, a profit. 1 But 
 that, as we know already, is not to explain interest, but to 
 assume it. 
 
 1 Thus Bastiat in Capital et Rente, p. 40, assumes that the borrowed sack 
 of corn puts the borrower in a position to produce a valeur superieurc. On p. 
 43 lie calls the reader's attention, in italics, to the fact that the "principle that 
 is to solve the interest problem " is the power that resides in the tool to increase 
 the productivity of labour. Again he says, on p. 46, " Nous pouvons conclure 
 qu'il est dans la nature du capital de produire un interet." On p. 54, " L'outil 
 met 1'emprunteur a nieme de faire des profits." Indeed it is the aim of the 
 brochure, as we gather from the introduction to it, to defend the " productivity 
 of capital " against the attacks of the socialists.
 
 CHAP, in BASTIATS STATEMENT 291 
 
 As a fact, Bastiat has often been accused of having 
 entirely missed the chief point, the explanation of natural 
 interest ; the accusation is not, I think, quite justified, but, as 
 we can see, it is very easily explained. 1 
 
 This is the first point in which Bastiat's theory does not 
 improve on Senior's. The second consists in a wonderful 
 addition he makes. Besides the explanation of interest just 
 stated, he gives another of so different a nature, and at the 
 same time so evidently mistaken, that I cannot even make a 
 guess as to how Bastiat saw any relation between it and his 
 principal explanation. 
 
 Every branch of production, he explains, is an aggregate 
 of efforts. But between various efforts an important distinc- 
 tion is to be drawn. One category of efforts is connected 
 with services which we are presently engaged in rendering. 
 A second category of efforts, on the other hand, is connected 
 with an indefinite series of services. To the first category, for 
 instance, belong the daily efforts of the water-carrier, which are 
 directed immediately to the fetching of water ; or, in the sphere 
 of agriculture, the labours of sowing, weeding, ploughing, 
 harrowing, reaping, threshing, which are collectively directed 
 to obtain a single harvest. To the sdcond category belongs 
 the labour which the water-carrier expends in making his 
 barrow and water cask ; which the farmer expends on his 
 hedging, harrowing, draining, building, improvements generally : 
 all those labours which, as the economists say, go to the 
 formation of a fixed capital, and result in benefit to a whole 
 series of consumers, or a whole series of harvests. 2 
 
 Bastiat now raises the question, How, according to the 
 great law of " service for service," are these two categories of 
 efforts to be estimated or rewarded ? As regards the first 
 category, he finds this very simple. These services must be 
 compensated, on the whole, by those who profit by them. But 
 that does not apply in the case of the second category, those 
 services which lead to the formation of a fixed capital ; for the 
 number of those who profit by this capital is indefinite. If 
 the producer were to get paid by the first consumers it would 
 not be just ; for, in the first place, it is unreasonable that the 
 
 1 See, e.g. Rodbertus, Zur Seleuchtung, L p. 116, etc. ; Pierstorff, p. 202. 
 
 2 P. 214.
 
 292 THE ABSTINENCE THEORY BOOK iv 
 
 first consumers should pay for the last ; and in the second 
 place, there must come a point of time when the producer 
 would have at once the stock of capital not yet consumed, and 
 also his compensation, which again involves an injustice. 1 
 Consequently, Bastiat concludes with a mighty logical salto 
 mortale, the distribution among the indefinite series of con- 
 sumers is only managed thus : the capital itself is not 
 distributed, but the consumers are burdened with the interest 
 of the capital instead a way of getting out of it which 
 Bastiat explains to be the only conceivable one for the solution 
 of the problem in question, 2 and one which, offered spon- 
 taneously by the " ingenious natural mechanism of society," 
 saves us the trouble of substituting an artificial mechanism 
 in its place. 3 Thus Bastiat explains interest as the form in 
 which an advance of capital is redistributed over a sum of 
 products : " C'est la, c'est dans la repartition d'une avance sur 
 la totalit^ des produits, qu'est le principe et la raison d'etre de 
 1'Interet" (vii. p. 205). 
 
 It must have occurred to every one while reading these 
 lines that, in this analysis, Bastiat has fallen into some errors 
 almost inconceivably gross. It is, first, an error to say that it 
 is not possible to distribute the capital itself over the 
 purchasers. Every business man knows that it is possible ; 
 and knows too that it is done, and how it is done. He simply 
 calculates the probable duration of the capital laid out, and, 
 on the basis of this calculation, charges every single period 
 during which the capital is employed, and every single product, 
 with a corresponding quota for wear and tear and replacement 
 of the capital sum. When the purchasers pay the quota for 
 replacement of the fixed capital in the price of the finished 
 commodities, "the capital itself" is of course distributed over 
 them. Perhaps not with absolute "justice," because there 
 may be an error in the calculated duration of the capital, 
 and in the calculated quota for wear and tear which is 
 based on that ; but, on the average, the prices successively 
 
 1 P. 216. 
 
 2 ". . . et je dene qu'on puisse imaginer une tello repartition en dehors du 
 mecanisme de 1'interet" (p. 217). 
 
 3 ' ' Reconnaissons done que le mecanisme social naturel est assez ingenieuz pour 
 que nous puissions nous dispenser do lui substituer un mecanisme artificiel " (p. 
 216, at end).
 
 CHAP, in BASTIAT S STATEMENT 293 
 
 paid will, in any case, cover the capital sum that is to be 
 replaced. 
 
 And it is a second gross error to assume that the 
 producers receive interest instead of receiving back the capital 
 itself, which, he says, cannot be distributed. The fact is, as 
 every one knows (1), that, in the quota for replacement, they 
 receive back the capital itself, and (2) so long as a part of this 
 capital lasts they receive interest besides. Interest, therefore, 
 rests on an entirely distinct foundation from the replacement of 
 capital. It is really difficult to understand how Bastiat could 
 make a mistake in such simple and well-known matters. 
 
 In conclusion, I may note in passing that Bastiat has 
 borrowed his practical law of interest from Carey : the law 
 that with the increase of capital the absolute share obtained 
 by the capitalist in the total product increases, and the relative 
 share diminishes. 1 In his attempts to prove this law 
 which from the point of view of theory are quite worthless 
 like Carey he carelessly confuses the conception of " percentage 
 of total product " with the conception of " percentage on 
 capital " (rate of interest). 
 
 On the whole, Bastiat's interest theory seems to me to be 
 quite unworthy of the reputation which ' it has, at least in 
 certain circles, so long enjoyed. 
 
 1 P. 223.
 
 BOOK V 
 
 THE LABOUR THEORIES
 
 CHAPTER I 
 
 THE ENGLISH GKOUP 
 
 UNDER the title of the Labour theories I group together a 
 number of theories which agree in explaining interest as a 
 wage for labour rendered by the capitalist. 
 
 As to the nature of the "labour" which furnishes the 
 basis for the capitalist's claim of wage there is very material 
 divergence among the various views. Thus I am compelled 
 to distinguish three independent groups of Labour theories, and 
 as it happens that their respective circles -of adherents are 
 marked out very much by nationality, I shall call them the 
 English, the French, and the German group. 
 
 The English writers, chiefly represented by James Mill and 
 M'Culloch, explain interest by tracing it to that labour through 
 which real capital itself comes into existence. 
 
 James Mill l chances on the interest problem in his doc- 
 trine of price. He has put down the proposition that the 
 costs of production regulate the exchange value of goods 
 (p. 93). At the first glance capital and labour are seen to be 
 constituents of the cost of production. But on looking closer 
 Mill sees that capital itself comes into existence through 
 labour, and that all costs of production may be traced therefore 
 to labour alone. Labour then is the sole regulator of the 
 value of goods (p. 97). 
 
 With this proposition, however, the well-known fact, dis- 
 cussed already by Eicardo, that postponement also has an 
 influence on the price of goods, does not appear to agree. If, 
 for instance, in one and the same season a cask of wine and 
 
 1 Elements of Political Economy, third edition, London, 1826. I was not 
 able, unfortunately, to get sight of the first edition of 1821.
 
 298 ENGLISH LABOUR THEORIES BOOK v 
 
 twenty sacks of meal L.ve been produced by the same amount 
 of labour, they will of course, at the end of the season, have an 
 equal exchange value. But if the owner of the wine lays it in 
 a cellar and keeps it for a couple of years, the cask of wine will 
 have more value than the twenty sacks of meal indeed, more 
 value by the amount of two years' profit. 
 
 Now, James Mill gets rid of this disturbance of his law by 
 explaining profit itself as a wage of labour ; as a remuneration 
 for indirect labour. " It is no solution to say that profits 
 must be paid, because this only brings us to the question, Why 
 must profits be paid ? To this there is no answer but one, 
 that they are the remuneration for labour, labour not applied 
 immediately to the commodity in question, but applied to it 
 through the medium of other commodities, the produce of 
 labour." 
 
 This idea is more exactly elucidated by the following 
 analysis. " A man has a machine, the produce of a hundred 
 days' labour. In applying it the owner undoubtedly applies 
 labour, though in a secondary sense, by applying that which 
 could not have been had but through the medium of labour. 
 This machine, let us suppose, is calculated to last exactly ten 
 years. One-tenth of the fruit of a hundred days' labour is 
 thus expended every year, which is the same thing in the 
 view of cost and value as saying that ten days' labour has 
 been expended. The owner is to be paid for the hundred 
 days' labour which the machine costs him at the rate of so 
 much per annum, that is, by an annuity for ten years equiva- 
 lent to the original value of the machine. 1 It thus appears ('.) 
 that profits are simply remuneration for labour. They may, 
 indeed, without doing any violence to language (!), hardly even 
 by a metaphor, be denominated wages ; the wages of that 
 labour which is applied, not immediately by the hand, but 
 mediately, by the instruments which the hand has produced. 
 And if you may measure the amount of immediate labour by 
 the amount of wages, you may measure the amount of secondary 
 labour by that of the return to the capitalist." 
 
 In this way James Mill thinks that he has satisfactorily 
 
 1 The author (as is evident from a parallel passage on p. 100) means annuities 
 which replace the original value of the machine in ten years, and at the same 
 time pay interest at the rate fixed by the condition of the market.
 
 CHAP, i JAMES MILL 299 
 
 explained interest, and at the same time maintained in its 
 integrity his law that labour alone determines the value of 
 goods. It is pretty obvious, however, that he has not 
 succeeded in doing either. 
 
 It may be allowed to pass that he calls capital " hoarded " 
 labour ; that he calls the employment of capital employment 
 of a mediate secondary labour; and that he considers the 
 wearing out of the machine as a giving out of the hoarded 
 labour by instalments. But why then is every instalment of 
 hoarded labour paid by an annuity which contains more than 
 the original value of that labour, namely, the original value 
 plus the usual rate of interest thereon? Allowing that the 
 remuneration of capital is the remuneration of mediate labour, 
 why is the mediate labour paid at a higher rate than the 
 immediate ; why does the latter receive the bare rate of wages 
 while the former receives an annuity higher by the amount of 
 the interest ? Mill does not solve this question. He takes 
 the fact that a capital, according to the state of competition in 
 the market, has equal value with a certain number of annual 
 payments that already include the interest, and uses this fact as 
 a fixed centre, as if he had not taken upon himself to explain 
 the profit, and therefore also the extra profit, that is contained 
 in the annuity. 
 
 He says, I admit, in an explanatory tone, Profit is wage 
 of labour. But he has a very false idea of the explanatory 
 power of this phrase. It might perhaps be satisfactory if Mill 
 could show that there is here a labour which has not yet 
 received its normal wage, and will only receive it in the 
 profit ; but it is in no way satisfactory to explain profit as an 
 extra wage for a labour that has already been paid at the 
 normal rate by means of the sum for amortisation contained in 
 the annuities. It is always open to ask, Why should mediate 
 labour be more highly paid than immediate labour ? And this 
 is a question towards the solution of which Mill has given 
 not the slightest hint. Moreover by this artificial construc- 
 tion he even loses the advantage of remaining consistent 
 with his Labour theory; for evidently the law that the 
 amount of labour determines the price of all goods is rudely 
 upset if a part of the price is traceable, not to the amount 
 of the labour expended, but to the greater height of the wage
 
 300 FRENCH LABOUR THEORIES BOOK v 
 
 that it receives ! In this respect, therefore, Mill's theory 
 comes considerably short of its professed object. 
 
 A very similar theory was put forward by M'Culloch, 
 in the first edition of his Principles of Political Economy 
 (1825), but omitted in later editions. I have stated it 
 already on an earlier occasion, and need add nothing more 
 to that statement. 1 Finally, the same idea was given out 
 cursorily by Read in England and Gerstner in Germany, but 
 these writers we shall have to consider later on among the 
 eclectics. 
 
 THE FRENCH GROUP 
 
 A second group of Labour theorists pronounce interest to 
 be the wage of that labour which consists in the saving of 
 capital (Travail tfEpargne). This theory is carried out most 
 thoroughly by Courcelle-Seneuil. 2 
 
 According to Courcelle-Seneuil, there are two kinds of 
 labour muscular labour and the labour of Saving (p. 85). 
 The latter conception he expounds as follows. In order that 
 a capital once made should be conserved, there is need of a 
 continual effort of foresight and saving, in so far as, on the 
 one hand, one looks to future needs, and, on the other hand, 
 refrains from present enjoyment of capital with the view of 
 being able to satisfy future needs by means of the capital 
 thus saved. In this "labour" lies an act of intelligence 
 the foresight, and an act of will the saving that " refrains 
 from enjoyment for a given period of time." 
 
 Of course, at the first glance, it appears singular to give 
 to saving the name of Labour. But this impression, in the 
 author's opinion, only arises from our usually looking too much 
 at the material side of things. If we reflect dispassionately 
 for a moment we will recognise that it is just as painful to a 
 man to refrain from the consumption of an article when made, 
 as to labour with his muscles and his intellect to obtain an 
 article that he wishes ; and that it really requires a special 
 un-natural exertion of intellect and will to maintain capital in 
 
 1 See above, p. 97. The doubtful honour of priority in this theory belongs to 
 James Mill. 
 
 2 Trait^ thtorique et pratique d" Economic Politiqiie, i. Paris, 1858.
 
 CHAP, i COURCELLE-SENEUIL 301 
 
 existence an act of will which is contrary to the natural bias 
 toward pleasure and idleness. 
 
 After attempting to strengthen this line of argument by 
 pointing to the habits of savages, the author concludes with 
 this formal deliverance : " We consider then that saving is 
 really, and not simply metaphorically, a form of industrial 
 labour, and consequently a productive power. It demands an 
 exertion which, it is true, is purely of a moral kind, but it is 
 all the same painful. It has therefore as much right to the 
 character of labour as an exertion of the muscles has." 
 
 Now the labour of saving demands remuneration in the 
 same way as muscular labour. While the latter is paid by the 
 scdaire, the former obtains its payment in the shape of 
 interest. The following passage explains the necessity of this, 
 and shows in particular why the wage of the labour of saving 
 must be a permanent one : " The desire, the temptation to con- 
 sume, is a permanent force; its action can only be suspended by 
 combating it with another force which, like itself, is permanent. 
 It is clear that every one would consume as much as possible 
 if he had no interest (sfl n'avait pas int^rSt) to abstain from 
 consuming. He would cease to abstain from the moment that 
 he ceased to have this interest, so that it must continue with- 
 out interruption, in order that capitals may always be con- 
 served. That is why we say that interest " (Pintttret : note the 
 play upon words) " is the remuneration of this labour of saving 
 and of conservation; without it capitals, whatever be their 
 form, could not continue ; it is a necessary condition of 
 industrial life" (p. 322). 
 
 The height of this wage is regulated " according to the 
 great law of supply and demand " ; it depends, on the one side, 
 on the wish and the ability to expend a sum of capital 
 reproductively ; and on the other, on the wish and the ability 
 to save this sum. 
 
 To my mind all the pains which its author has taken to 
 represent the Labour of Saving as a real labour cannot efface 
 the stamp of artificiality which this theory bears on its very 
 face. The non- consuming of wealth a labour; the pocket- 
 ing of interest by those who toil not nor spin, a suitable wage 
 for work ; what a chance for any Lassalle who cares to play 
 upon the impressions and emotions of the reader ! But,
 
 302 FRENCH LABOUR THEORIES BOOK v 
 
 instead of stating rhetorically that Courcelle is wrong, I prefer 
 to show on rational grounds why he is wrong. 
 
 First of all, it is clear that Courcelle's theory is only 
 Senior's Abstinence theory clad in a slightly different dress. 
 As a rule, where Senior says " abstinence," or " sacrifice of 
 abstinence," Courcelle says " labour of abstinence," but really 
 both writers make use of the one fundamental idea in the same 
 way. Thus at the outset Courcelle's Labour theory is open to 
 a great many of those objections raised to Senior's Abstinence 
 theory, on the ground of which objections we have already 
 pronounced that theory to be unsatisfactory. 
 
 But further, the new form which Courcelle gives it is 
 open to special objections of its own. 
 
 It is quite correct to say that foresight and saving do 
 cost a certain moral pain. But the presence, of labour in 
 anything by which an income is obtained is far from justify- 
 ing us in explaining that income as a wage of labour. To 
 do so we must be able to show that the income is really 
 obtained for the labour, and only in virtue of the labour. 
 Now this will be best shown if we find that the income 
 emerges where labour has been expended ; that it is wanting 
 where there has been no labour ; that it is high where much of 
 the labour has been expended, and low where little has 
 been expended. But of any such harmony between the 
 alleged cause of interest and the actual emergence of interest, 
 it would be difficult to discover a trace. The man who 
 carelessly cuts the coupons of 100,000, or gets his 
 secretary to cut them, draws a "wage of labour" of 4000 or 
 5000. The man who, with actual pain of foresight and 
 saving, has scraped together 50, and .put them in the savings 
 bank, scarcely gets a couple of pounds for his " labour " ; while 
 the man who, with as much pain, has saved 50, but cannot 
 risk them out of his hand because of some claim that may be 
 made on him at any moment, gets absolutely no wage at all. 
 
 What is the reason of this ? Why are wages apportioned 
 so differently differently as between individual classes of 
 saving labourers ; differently as compared with the wage 
 payment of muscular labour? What is the reason that the 
 owner of 100,000 gets 5000 for his "year's labour"; that 
 the manual labourer, who suffers pain and saves nothing, gets
 
 CHAP, i COURCELLE-SENEUIL 303 
 
 50 ; that the artisan, who suffers pain and saves 50 
 thereby, gets the sum of 52 for "muscular labour" and 
 " labour of saving " together ? A theory which pronounces 
 interest to be wages of labour must undertake to make its 
 explanation more exact. Instead of this, the nice question 
 of the rate of interest is simply dismissed by Courcelle with 
 a general reference to the great law of supply and demand. 
 
 Without meaning to be ironical, one might say that 
 Courcelle would have had almost as much justification, 
 theoretically speaking, if he had pronounced the bodily labour 
 of pocketing the interest, or of cutting the coupons, to be the 
 ground and basis of interest. These also are " labours " which 
 the capitalist performs, and if it should be thought strange that, 
 according to the law of supply and demand, this sort of labour 
 is paid at such an unusually high rate, it is scarcely more 
 strange than the fact we have just been considering that the 
 intellectual labour of inheriting a million of money is annually 
 paid by so many thousands of pounds. One might say of this 
 latter kind of labour, So few people have the " wish and the 
 ability " to lay up millions of capital, that, in the existing 
 demand for capital, the wages of such people must be very 
 high; and similarly it might be said of the former, So very few 
 people have the " wish and the ability " to pocket thousands 
 of pounds in interest. Of " wish " there will be no lack in 
 either case; but of ability well, that rests in both cases 
 principally on the fact of a person being so fortunate as to 
 possess a million of capital ! 
 
 If after what has been said a direct refutation of 
 Courcelle's Labour theory still seems necessary, let me put the 
 following case. A capitalist lends a manufacturer 100,000 at 
 5 per cent for a year. The manufacturer employs the 1 00,000 
 productively, and by doing so receives a profit of 6000. 
 From this he deducts 5000 as interest due to the 
 capitalist, and keeps 1000 as undertaker's profit to himself. 
 According to Courcelle the 5000 which the capitalist 
 receives are the wage for providing for future wants, and for 
 the act of will which resists the temptation to consume the 
 100,000 immediately an act of will directed to the 
 refraining from enjoyment. But has not the manufacturer 
 performed exactly the same, or even a greater labour ? Was
 
 304 FRENCH LABOUR THEORIES BOOK v 
 
 the manufacturer, when he had the 100,000 in his hands, 
 not tempted to consume it immediately ? Could he not, for 
 instance, have squandered the capital, and gone through the 
 bankruptcy court ? Has he then not also withstood the tempta- 
 tion and asserted his will in refraining? Has he not by 
 prudence and foresight done more than the capitalist to 
 provide for future needs, in as much as he not only thought 
 of future needs in general, but gave his stock of materials 
 that positive treatment which changed them into products, 
 and thus actually fitted them to satisfy human wants? 
 And yet the capitalist for the labour of conserving his 
 100,000 receives 5000, and the manufacturer, who has 
 performed the same intellectual and moral labour on the same 
 100,000 in still greater degree, gets nothing; for the 
 1000 which constitute his undertaker's profit are payment 
 for quite another kind of activity. 
 
 It may be objected that the manufacturer would not 
 have dared to use the 100,000, seeing that it was not his 
 property ; in his saving, therefore, there is no merit to deserve 
 payment. But in this theory merit has nothing to do with 
 the case. The wage of saving is great if only the sum saved 
 and conserved be great, without the slightest consideration 
 whether the conservation has demanded much moral striving 
 or little. But that the debtor has actually conserved the 
 100,000, and has overcome the temptation to consume it, 
 admits of no denial. Why then does he get no " wage of 
 saving " ? To my mind there can be no doubt about the 
 explanation of these facts. It is that people get interest, not 
 because they work for it, but simply because they are owners. 
 Interest is not an income from labour/but an income from 
 ownership. 
 
 Quite recently Courcelle-SeneuiTs theory has been, some- 
 what timidly, followed by Cauwes. 1 
 
 This writer states it, but not as his sole interest theory, 
 and not without certain clauses and turns of expression 
 which show that he finds this conception of the " labour of 
 saving " not quite beyond question. " Since the conservation 
 of a capital presupposes an exertion of the will, and in many 
 1 Pricis du Cours d' Economic Politique, second edition, Paris, 1881, 1882.
 
 CHAP, i CAUWES 305 
 
 cases even industrial or financial combinations of some 
 difficulty, one might say that it represents a veritable labour 
 such as has sometimes, and not without justification, been 
 called Travail cTJSpargne" (i. p. 183). And in another place 
 Cauwes meets the doubt whether interest be due to the 
 capitalist, since the loan costs no labour to justify the claim 
 of interest, in the words : " In the loan, it may be, there is no 
 labour; but the labour consists in the steadfast will to preserve 
 the capital, and in the protracted abstinence from every act 
 of gratification or consumption of the value represented by it. 
 It is, if the expression does not seem too bizarre, a labour 
 of saving that is paid by interest." * But besides this Cauwes 
 brings forward other grounds for interest, particularly a state- 
 ment of the productivity of capital, and thus we shall meet 
 him again among the eclectics. 
 
 A slight approach to Courcelle's Labour theory is to be 
 found in a few other French writers ; as in Cherbuliez, 2 who 
 pronounces interest to be wage for the " efforts of abstinence " ; 
 and in Josef Gamier,' who gives a very parti-coloured explana- 
 tion, in the course of which he uses the catchword " labour of 
 saving." 3 But these last named do not carry the conception 
 any farther. 
 
 THE GERMAN GROUP 
 
 The idea that in France afforded material for a very 
 artificial and elaborate theory of interest has been made 
 use of of course on freer lines by a prominent school of 
 German economists, the Katheder Socialists, to use a term 
 which has been acclimatised. 4 The Labour theory of the 
 German Katheder Socialists is, however, only loosely connected 
 with the French theory in having the same fundamental idea. 
 Both in origin and in manner of development it is entirely 
 independent. 
 
 The origin of the German Labour theory may be found in 
 a somewhat incidental remark that occurs in one of the 
 
 1 ii. p. 189 ; also i. p. 236. a See above, p. 286. 
 
 8 Traitt <f Economic Politique, eighth edition, Paris, 1880. P. 522: " Le 
 loyer remunere et provoque lea efforts ou le travail d'epargne et de conservation." 
 
 4 The name they themselves use is the "Social Political-School of National 
 Economy." 
 
 X
 
 306 GERMAN LABOUR THEORIES BOOK v 
 
 writings of Rodbertus-Jagetzow. There he speaks of a con- 
 ceivable state of society where there should be private property, 
 but no rent-bearing private property ; in which, therefore, all 
 existing income would be income from labour in the shape 
 of salary or wages. Such would be the state of things if the 
 means of production, land and capital, were the common 
 property of the whole society, private rights of property being 
 still recognised over the income which each one would receive 
 in goods only in proportion to his labour. 
 
 On this Rodbertus remarks in a note that, in economical 
 respects, property in the means of production must be looked 
 upon in an essentially different light from property in an 
 income that accrues only in the shape of goods. As regards 
 income-goods, all that is required is that the owner consume 
 them economically. But property in land and capital is, 
 besides, a kind of office that carries national economic functions 
 with it, functions which consist 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 most favourable view 
 then that one can take of rent from this standpoint land- 
 rent and capital rent alike is that it represents the salaries 
 of such officers ; that it represents a form of salary where the 
 officer is strongly, even pecuniarily interested in the proper 
 use of his functions. 1 
 
 Everything points to the belief that Rodbertus in no way 
 intended in these words to put forward a formal theory of 
 interest. 2 But the idea latent in them was seized on and 
 developed by some of the prominent Katheder Socialists. 
 
 It was first taken up by Schaffie. As early as the third 
 edition of his older work, the Gesellschaftliche System, 1873, he 
 embodied the idea, that interest is a remuneration for services 
 
 1 Zur Erklarung und Alhiilfc der hcutigen Kreditnoth des Grundbesitzes, 
 second edition, 1876, ii. p. 273, etc. 
 
 2 This follows from the tone of the passage, which suggests a simile and a 
 comparison rather than a strict explanation ; from its position in a note ; from 
 the fact of Rodbertus having another and a different theory ; finally, from an 
 explicit explanation which he makes in stating this other theory, that interest in 
 the present day has not the character of (indirect) salary, but that of an 
 immediate share in the national product (Zur Beleuchtung, p. 75).
 
 CHAP, i RODBERTUS, SCHAFFLE 307 
 
 rendered by the capitalist, iu his formal definition of interest. 
 " Profit," he says, " is to be looked upon as the remuneration that 
 the undertaker may claim for a national economic function 
 inasmuch as, independently of any national organisation, he 
 binds together the productive powers economically by means of 
 the speculative use of capital." 1 This conception turns up 
 repeatedly in different connections in the same book, and as 
 a rule it occurs in those passages where interest is looked 
 at from a broader point of view. Schaffie even defends it in 
 one place as the only warrantable theory 7 , and rejects in its 
 favour the other interest theories in a body. 2 But, singularly 
 enough, when he deals with the nicer details of the doctrine, 
 the height of the interest rate and so on, he does not avail 
 himself of this fundamental idea, but makes use of the technical 
 machinery of the Use theory ; although it must be admitted 
 that he brings the Use theory very near to the Labour theory 
 by the subjective colouring he gives to the conception of Use. 3 
 In his later work, the Ban und Leben, the conception of 
 interest as the compensation for a " functional performance " 
 on the part of the capitalist comes out more distinctly. This 
 conception makes it possible for Schaffle to justify interest at 
 least in the present day, and in so far as we are not able to 
 replace the costly services of private capital by a more suitable 
 organisation, 4 But even here the details of the phenomena of 
 interest are not explained by means of this conception, and we 
 still find reminiscences of the Use theory, although the con- 
 ception of Use has now become objective. 5 Thus Schaffle, as 
 it were, struck the key-note, but only the key-note, of a Labour 
 theory; he has not carried it out in detail like Courcelle-Seneuil. 
 
 1 ii. p. 458. . 2 it p. 459, etc. 3 See above, p. 206. 
 
 4 " Thus I cannot, in any case, agree with the absolute condemnation of 
 capital and of profit as ' pure appropriation of surplus value ' ; it is a function of 
 cardinal importance which private capital, whatever be its motives, now 
 performs when it assists what Rodbertus called 'business left to itself,'" 
 (second edition, iii. p. 386). "Historically then even capitalism maybe fully 
 warranted and profit justified. To remove the latter without having found 
 a better organisation of production would be senseless." "We may therefore 
 practically condemn profit as appropriation of 'surplus value' only if we are 
 able to replace the economic service of private capital by a public organisation 
 positively established, more complete, and less greedy of surplus value " (Mehrwcrth 
 schluckende), iii. p. 422. 
 
 5 See above, p. 207.
 
 308 GERMAN LABOUR THEORIES BOOK v 
 
 Wagner goes a little farther, but still only a little farther. 
 With him too the capitalists are " functionaries of the whole 
 community for the accumulation and employment of that 
 national fund which consists of the instruments of production," 1 
 and profit is an income they draw for this function, or, at least, 
 in this function (p. 594). But the work of the capitalist, 
 as consisting in the " accumulation and employment of private 
 capitals," in " disposing activities and saving activities," he 
 characterises more distinctly than Schaffle as " labours " (iii. 
 pp. 592, 630) which form a part of the total costs expended 
 in the production of goods, and in so far form a " constitutive 
 element of value" (p. 630). In what way this element 
 contributes to the formation of value in goods ; how, from 
 its efficacy, are derived the proportion between interest and 
 sums of capital, the height of interest, and so on, Wagner tells 
 us as little as Schaffle. He too has only struck the key- 
 note of the Labour theory, though perhaps a little more 
 distinctly. 
 
 This being the case, I should not venture to say positively 
 whether the Katheder Socialists by this line of thought intended 
 to give a theoretical explanation of interest, or only a justifica- 
 tion of interest from the social-political side. In favour of the 
 first view, there is (1) the embodying of the labour motive in 
 the formal definition of interest; (2) the circumstance that 
 Wagner at least has declared himself so positively against all 
 other interest theories that, if he has not adopted the Labour 
 theory, he has left interest, theoretically, quite unexplained ; 
 (3) that Wagner expressly pronounces the "labour of the 
 capitalist " to be a constituent of the costs of production, and a 
 " constitutive element of value " a phrase which it is difficult 
 to interpret otherwise than as meaning that the theoretical 
 cause of the phenomenon of "surplus value" is the compensation 
 demanded as return for the labour expended by the capitalist. 
 
 In favour of the second view, that the Katheder Socialists 
 have pointed to the " capitalists' services " only as a ground for 
 justifying the present existence of interest without meaning 
 thereby to explain its existence, there is (1) the absence of any 
 theoretical detail ; (2) the circumstance that Schaffle, at least so 
 
 1 Allgemeine oder theorctische Volkwirthschaftslehrc, part i. Grundlegung, 
 second edition. Leipzig and Heidelberg, 1879, pp. 40, 594.
 
 CHAP, i EXPLANATION OR JUSTIFICATION? 309 
 
 far as he gives any explanation of details, makes use of another 
 theory of interest ; and (3) the great preponderance which, 
 in the writings of the Katheder Socialists, is generally laid on 
 the political element as against the theoretical. 
 
 In the circumstances it may be best to put my criticism 
 hypothetically. 
 
 If it is the case that the Katheder Socialists, in pointing to 
 the capitalists' "labours," wished to justify the existence of 
 interest only from the social-political side, what they have said 
 is, in the highest degree, worthy of attention. To go farther 
 into this side of the question, however, is beyond my present 
 task. 
 
 If it is the case, however, that the Katheder Socialists, in 
 pointing to the capitalists' " labours," intended to explain 
 interest theoretically, I should have to pass the same judgment 
 on them that I passed on the French version of the Labour 
 theory, viz. that the explanation is entirely inadequate. 
 
 It has so often been the case in the historical development 
 of dogma that justification of interest from the social-political 
 side is confused with theoretical explanations of interest, that 
 it may be worth while to bring out very clearly and once for 
 all the difference between the two. For this purpose let me 
 put a parallel case which may at the same time give me an 
 opportunity of showing at a glance the inadequacy of the 
 Labour theory. 
 
 With the first acquisition of land there is generally con- 
 nected a certain exertion or labour of the acquirer. Either it 
 is that he must first make the ground productive, or that he 
 must take a certain amount of trouble to gain possession of it ; 
 and this latter, in certain circumstances, may not be trifling, 
 as, e.g. when it is preceded by a prolonged search for a 
 locality suitable for settlement. The land now bears to its 
 acquirer a rent. Can the existence of rent be explained by the 
 fact of the labour originally expended ? With the exception of 
 Carey, and some few writers who share his perverse views, no 
 one has ventured to maintain this. No one can maintain it 
 who is not entirely blind to the connection of things. It is 
 perfectly clear that, when a fruitful carse bears rent, it is not 
 because its occupation has at one time or other cost labour. It 
 is perfectly clear that if a rocky hillside bears no rent it is not
 
 310 GERMAN LABOUR THEORIES BOOK v 
 
 because it has been occupied without trouble. It is, again, 
 beyond doubt that two equally fruitful and equally well-situated 
 pieces of land bear equal rents, even if the one that is fruitful by 
 nature is simply taken occupation of at a trifling expenditure 
 of labour, while the other has to be made productive by a great 
 expenditure of labour. Further, it is clear that, if 200 acres 
 bear twice as much rent as 100 acres, it is not because their 
 first occupation was twice as troublesome. And finally, every 
 one can see that, if rent rises with increasing population, the 
 rising rent has nothing in the world to do with the original 
 expenditure of labour. In short, it is clear that the emergence 
 and the amount of rent do not in the least correspond with 
 the emergence and amount of the labour originally expended 
 in the occupation. It is impossible, then, that the principle 
 which will explain the phenomenon of rent can be found in 
 the original expenditure of labour. 
 
 Essentially different, however, is the question whether the 
 existence of rent cannot be justified by this expenditure of 
 labour. In this case one may quite well take up the position 
 that he who makes a piece of ground productive, or even does 
 no more than occupy it as the first pioneer of civilisation, has 
 merited a wage as lasting as the advantage that thereby 
 accrues to human society; that it is just and reasonable that he 
 who has put a piece of ground under cultivation for all time 
 should for all time receive a part of its productiveness in the 
 shape of rent. I shall not maintain that this way of looking at 
 the institution of private property in land, and of private land- 
 rents based on that institution, must be conclusive in all 
 circumstances, but it certainly may be so in some circumstances. 
 It is, e.g. very probable indeed that a colonial government, 
 anxious to expedite the settling of its territory, does wisely 
 when it offers, as premium for the labour of cultivation and of 
 first occupation, the ownership of lands brought into cultivation, 
 and with that the right to a permanent rent. In this way the 
 consideration of the labour put forth by the first occupant may 
 furnish quite a plausible justification, and a conclusive social- 
 political motive for the introduction and retention of rent, while 
 none the less it is an entirely insufficient explanation of it. 
 
 It is exactly the same with the relation in which the cap- 
 italists' " saving and disposing activities " stand to interest.
 
 CHAP, i JUSTIFICATION NOT EXPLANATION 311 
 
 In so far as, in those activities, we see the most effectual means 
 to the accumulation and proper employment of a sufficient 
 national capital, and in so far as we could not expect that these 
 activities would be forthcoming from private persons in suffi- 
 cient amount, if such persons were not led to expect permanent 
 advantages, these services may furnish a very substantial 
 justification and a conclusive legislative reason for the intro- 
 duction aud maintenance of interest. But it is an entirely 
 different question whether the existence of interest can also be 
 theoretically explained by pointing to that "labour." If it 
 can be so explained, then 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 inter- 
 est, 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. 
 Schaffle 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 harmonise with them accidentally." ] 
 
 But if experience shows that interest stands outside of 
 any relation to the labour performed by the capitalist, how 
 in reason can the principle of its explanation be found there ? 
 I believe the truth is too plainly told in the facts to need any 
 long demonstration. Just as surely as interest bears no propor- 
 tion to the labour put forth by the capitalist, does it stand in 
 exact proportion to the fact of possession and to the amount of 
 possession. Interest on capital, to repeat my former words, is 
 not an income from labour, but an income from ownership. 2 
 
 1 Bau und Leben, iii. p. 451. 
 
 2 It is much to be regretted that of Wagner's theoretical political economy
 
 312 GERMAN LABOUR THEORIES BOOK v 
 
 Thus the Labour theory of interest in all its varieties is 
 seen to be incapable of giving a theoretical explanation that 
 will stand examination. No unbiassed person indeed could 
 expect any other result. No one but a person who takes 
 particular delight in far-fetched explanations could for a 
 moment doubt that the economic power of capital has some 
 other ground behind it than a " capacity for labour " on the 
 part of the capitalist. It is impossible to doubt that interest, 
 not in name only but in reality, is something different from a 
 wage of labour. 
 
 That economists should fall into various kinds of Labour 
 theories can only be explained by the custom prevalent 
 ever since Adam Smith and Ricardo of tracing all value to 
 labour. To enable them to force interest also into the unity of 
 this theory, and ascribe to it the origin which they supposed to 
 be the only legitimate one, they did not hesitate at the most 
 far-fetched and artificial explanations. 1 
 
 the part which specially deals with the theory of interest has not yet appeared. 
 It may be that this distinguished thinker would have given such explanations as 
 make my present polemic, which I have been careful to make hypothetical, 
 superfluous. 
 
 1 As appendix to this chapter I should like, shortly, to refer to J. G. Hoff- 
 mann. He also interprets interest as wage for certain labours. "Even those 
 rents," he says, meaning rents from capital, "are only a wage for labour, and indeed 
 for labour of great public benefit ; for with the obtaining of this wage is bouud 
 up, essentially and peculiarly, the duty of free activity in the public welfare, in 
 science and skill, in everything that lightens, ennobles, and adorns human life " 
 ( Ueber die wahre Natur und Bestimmung der Renten aus Boden und Kapital- 
 eigenthum, Sammlung der kleiner Schriften staatswirthschaftlichen Inhalts, 
 Berlin, 1843, p. 566). As regards Hoffmann, even more than as regards the 
 Katheder Socialists, we are justified in doubting whether the words quoted were 
 meant as a theoretic explanation of interest. If they were so, his theory is 
 unquestionably more inadequate than all the other Labour theories ; if they were 
 not, it lies outside my task to question their justification.
 
 BOOK VI 
 
 THE EXPLOITATION THEOEY
 
 CHAPTER I 
 
 HISTORICAL SURVEY 
 
 WE comet now to that . remarkable theory the enunciation of 
 which, if not the most agreeable among the scientific events of 
 our century, certainly promises to be one of the most serious in 
 its consequences. It stood at the cradle of modern Socialism 
 and has grown up along with it; and to-day it forms the 
 theoretical centre around which move the forces of attack and 
 defence in the struggle of organising human society. 
 
 This theory has as yet no short distinctive name. If I 
 were to give it one from a characteristic of its chief professors, 
 I should call it the Socialist theory of interest. If I were to 
 try to indicate by the name the theoretic purport of the doc- 
 trine itself, which to my mind would be more appropriate, 
 no name seems more suitable than that of the Exploitation 
 theory. This accordingly is the name I shall use in the 
 sequel. Condensed into a few sentences, the essence of the 
 theory may be provisionally put thus. 
 
 All goods that have value are the product of human labour, 
 and indeed, economically considered, are exclusively the product 
 of human labour. The labourers, however, do not retain the 
 whole product which they alone have produced; for the cap- 
 italists take advantage of their command over the indispensable 
 means of production, as secured to them by the institution 
 of private property, to secure to themselves a part of the 
 labourers' product. The means of doing so are supplied by the 
 wage contract, in which the labourers are compelled by hunger 
 to sell their labour-power to the capitalists for a part of what 
 they, the labourers, produce, while the remainder of the pro- 
 duct falls as profit into the hands of the capitalists, without
 
 316 HISTORICAL SURVEY BOOK vi 
 
 any exertion on their part. Interest is thus a portion of the 
 product of other people's labour, obtained by exploiting the 
 necessitous condition of the labourer. 
 
 The way had been prepared for this doctrine long beforehand; 
 indeed it had become all but inevitable, owing to the peculiar 
 turn taken by the economic doctrine of value since the time of 
 Adam Smith, and particularly since the time of Eicardo. It 
 was taught and believed that the value of all, or at least of 
 by far the greater part of economical goods, is measured by 
 the quantity of labour incorporated in them, and that this 
 labour is the cause and source of the value. This being the 
 case, it was inevitable that, sooner or later, people would begin 
 to ask why the worker should not receive the whole value of 
 which his labour was the cause. And whenever that question 
 was put it was impossible that any other answer could be 
 given, on this reading of the theory of value, than that one 
 class of society, the drone-like capitalists, appropriates to itself 
 a part of the value of the product which the other class, the 
 workers, alone produce. 
 
 As we have seen, this answer is not given by the founders of 
 the Labour- value theory, Adam Smith and Eicardo. It was even 
 evaded by some of their first followers, such as Soden and Lotz, 
 who laid great emphasis on the value-creating power of labour, 
 but, in their total conception of economic life, kept close to the 
 footsteps of their master. But this answer was none the less in- 
 volved in their theory, and it only needed a suitable occasion and 
 a logical disciple to bring it sooner or later to the surface. Thus 
 Adam Smith and Eicardo may be regarded as the involuntary 
 godfathers of the Exploitation theory. They are indeed treated 
 as such by its followers. They, and almost they, alone, are 
 mentioned by even the most pronounced socialists with that 
 respect which is paid to the discoverers of the " true " law of 
 value, and the only reproach made them is that they did not 
 logically follow out their own principles, and so allowed 
 themselves to be prevented from developing the Exploitation 
 theory out of their theory of value. 
 
 Any one who cares to hunt up ancient pedigrees of 
 theories might discover in the writers of past centuries many* 
 an expression that fits in with the line of thought taken by 
 the Exploitation theory. Not to speak of the canonists, who
 
 CHAP, i OF EXPLOITATION THEORY 317 
 
 arrived at the same results more by accident than anything 
 else, I may mention Locke, who on one occasion points very 
 distinctly to labour as the source of all wealth, 1 and at another 
 time speaks of interest as the fruit of the labour of others ; 2 
 James Steuart, who expresses himself less distinctly, but takes 
 the same line ; 3 Sonnenfels, who occasionally describes capital- 
 ists as a class who do no labour, and thrive by the sweat of 
 the labouring classes ; 4 or Btisch, who also, treating indeed 
 only of contract interest, regards it as " a return to property 
 obtained by the industry of others." 
 
 These are instances which could very likely be multiplied 
 by careful examination of the older literature. The birth of 
 the Exploitation theory, however, as a conscious and coherent 
 doctrine, must be assigned to a later period. 
 
 Two developments preceded and prepared the way for it. 
 First, as mentioned above, it was the development and popu- 
 larising of the Eicardian theory of value which supplied the 
 scientific soil out of which the Exploitation theory could 
 naturally spring and grow. And, secondly, there was the 
 triumphant spread of capitalist production on a large scale ; 
 for this large production, while creating and revealing a wide 
 gulf of opposition between capital and labour, placed in the 
 foremost rank of great social questions the problem of interest 
 as an income obtained without personal labour. 
 
 Under those influences the time seems to have become 
 ready for the systematic development of the Exploitation theory 
 
 1 Civil Government, book ii. chap. v. 40 : "Nor is- it so strange, as perhaps 
 before consideration it may appear, that the property of labour should be able to 
 overbalance the community of land ; for it is labour indeed that put the difference 
 of value on everything ; and let any one consider what the difference is between 
 an acre of land planted with tobacco or sugar, sown with wheat or barley, and an 
 acre of the same land lying in common without any husbandry upon it, and he 
 will find that the improvement of labour makes the far greater part of the value. 
 I think it will be but a very modest computation to say that of the products of 
 the earth useful to the life of man nine-tenths are the effect of labour, nay, if we 
 will rightly estimate things as they come to our use, and cast up the several ex- 
 penses about them, what in them is purely owing to nature, and what to labour, 
 we shall find that in most of them ninety-nine hundredths are wholly to be put 
 on the account of labour." 
 
 2 Considerations of the Consequences of the Lowering of Interest, 1691, p. 24. 
 See above, p. 45. 3 See above, p. 46. 
 
 4 Handlungswissenschaft, second edition, p. 430. 
 
 5 Geldumlauf, book iii. p. 26.
 
 318 HISTORICAL SURVEY BOOK vi 
 
 about the twentieth year of this century. Among the first to 
 give it explicit statement in a history of theory I leave out 
 of account the " practical " communists, whose efforts, of course, 
 were based on similar ideas were Hodgskin in England and 
 Sismondi in France. 
 
 Hodgskin's writings a little known Popular Political 
 Economy and an anonymous publication under the significant 
 title " Labour defended against the Claims of Capital " T do 
 not seem to have had any extensive influence. Thus Sismondi 
 becomes all the more important in the development of the 
 theory. 
 
 In naming Sismondi as representative of the Exploitation 
 theory, I must do so with a certain reservation. It is that, 
 although his theory contains all the other essential features 
 of that system, he expresses no condemnatory opinion on 
 interest. He is the writer of a transition period. Though 
 really acquiescing in the new theory, he has not yet broken 
 with the old so completely as to accept all the very extreme 
 conclusions of the new position. 
 
 For our purpose the book which we have chiefly to consider 
 is his great and influential Nowoeaux, Principes tfEwnomie 
 Politiqiw? In it Sismondi connects with Adam Smith. He 
 accepts with warm approval (p. 51) Adam Smith's proposition 
 that labour is the sole source of all wealth ; 3 complains that 
 the three kinds of income, rent, profit, and wages, are fre- 
 
 1 I may give a few characteristic passages: "All the benefits attributed to 
 capital arise from coexisting and skilled labour." After stating that, by the 
 help of tools and machines, more products and better products can be created 
 than without them, he adds the following consideration : ' ' But the question 
 then occurs, What produces instruments and machines, and in what degree do 
 they aid production independent of the labourer, so that the owners of them are 
 entitled to by far the greater part of the whole produce of the country ? Are 
 they or are they not the product of labour ? Do they or do they not constitute 
 an efficient means of production separate from labour ? Are they or are they not 
 so much inert, decaying, or dead matter of no utility whatever, possessing no 
 productive power whatever, but as they are guided, directed, and applied by 
 skilful hands ? " (p. 14) 
 
 The numerous writers with socialistic tendencies mentioned by Held in the 
 second book of his Zur sozialen Geschichte Englands (Leipzig, 1881) have little 
 direct concern with the theory of interest. 
 
 2 First edition, 1819. Second edition, Paris, 1827. I quote from the latter. 
 8 A proposition, however, which Adam Smith himself did not always very 
 
 consistently adhere to. Besides labour he not seldom mentions land and capital 
 as sources of goods.
 
 CHAP, i OF EXPLOITATION THEORY 319 
 
 quently ascribed to three different sources, land, capital, and 
 labour, while in reality all income springs from labour alone, 
 these three branches being only so many different ways of 
 sharing in the fruits of human labour (p. 85). The labourer, 
 by whose activity all goods are produced, has not been able 
 " in our stage of civilisation " to obtain possession of the means 
 necessary to production. On the one hand, land is generally 
 in the possession of some other person who requires from the 
 labourer a part of the fruit of his labour as compensation for 
 the co-operation of this " productive power." This part forms 
 the land-rent. On the other hand, the productive labourer does 
 not as a rule possess a sufficient stock of the means of sub- 
 sistence upon which to live during the course of his labour. 
 Nor does he possess the raw materials necessary to production 
 or the often expensive tools and machines. The rich man who 
 has all these things thus obtains a certain command over the 
 labour of the poor man, and, without himself taking part in 
 that labour, he takes away, as compensation for the advantages 
 which he places at the disposal of the poor man, the better part 
 of the fruits of his labour (la part la plus importante des fruits 
 de son travail). This share is the profit on capital (pp. 86, 
 87). Thus, by the arrangements of society, wealth acquires 
 the capacity of reproducing itself by means of the labour of 
 others (p. 82). 
 
 But although the labourer produces by his day's labour 
 very much more than the day's needs, yet, after the division with 
 the landowner and the capitalist, there seldom remains to him 
 much more than his absolutely necessary maintenance, and 
 this he receives in the form of wages. The reason for this 
 lies in the dependent position in which the labourer is placed 
 in relation to the undertaker who owns the capital. The 
 labourer's need for maintenance is much more urgent than 
 the undertaker's need for labour. The labourer requires his 
 maintenance in order to live, while the undertaker requires his 
 labour only to make a profit. Thus the transaction turns out 
 almost invariably to the disadvantage of the labourer. He is 
 in nearly all cases obliged to be satisfied with the barest 
 'maintenance, while the lion's share in the results of a 
 productivity which is increased by the division of labour 
 falls to the undertaker (p. 91, etc.)
 
 320 HISTORICAL SURVEY BOOK vi 
 
 Any one who has followed Sismondi thus far, and has 
 noticed among others the proposition that "the rich spend 
 what the labour of others has produced" (p. 81), must expect 
 that Sismondi would end by condemning interest, and declaring 
 it to be an unjust and extortionate profit. This conclusion, 
 however, Sismondi does not draw, but with a sudden swerve 
 wanders into some obscure and vague observations in favour 
 of interest, and finishes by entirely justifying it. First of all 
 he says of the landowner that, by the original labour of culti- 
 vating, or even by occupation of an unowned piece of land, he 
 has earned a right to its rent (p. 110). By analogy he ascribes 
 to the owner of capital a right to its interest, as founded on 
 the " original labour " to which the capital owes its existence 
 (p. 111). Both branches of income, which, as income due to 
 ownership, form a contrast to the income due to labour, he 
 finally manages to commend as having precisely the same 
 origin as the income of labour, except that their origin goes back 
 to another point of time. The labourer earns yearly a new right 
 to income by new labour, while the owner has acquired at an 
 earlier period of time a perpetual right in virtue of an original 
 labour which the yearly labour renders more profitable (p. 
 112). 1 "Every one," he concludes, "receives his share in 
 the national income only according to the measure of what he 
 himself or his representative has contributed, or contributes, 
 towards its origin." How this statement can be said to agree 
 with the former one, where interest appears as something taken 
 from the fruits of the labour of other people, must remain a 
 mystery. 
 
 The conclusions that Sismondi did not venture to draw 
 from his own theory were soon very decidedly drawn by others. 
 Sismondi forms the bridge between Adam Smith and Ricardo on 
 the one side, and the Socialism and Communism that succeeded 
 on the other. The two former had, by their theory of value, 
 given occasion for the appearance of the Exploitation theory, 
 but had in no way themselves developed it. Sismondi has, 
 substantially, all but arrived at this theory, but has not given 
 it any social or political application. After him comes the great 
 mass of Socialism and Communism following the old theory of 
 
 1 In these words one may find a very condensed statement of James Mill's 
 labour theory (see above, p. 298).
 
 CHAP, i OF EXPLOITATION THEORY 321 
 
 value into all its theoretical and practical consequences, and 
 coming to the conclusion that interest is plunder, and ought 
 therefore to cease. 
 
 It would not be interesting from the point of theory were I 
 to excerpt, from the mass of socialist literature produced in 
 this century, all expressions in which the Exploitation theory 
 is suggested or implied. I should only weary the reader with 
 innumerable parallel passages, scarcely varying in words, and 
 exhibiting in substance a dull monotony ; passages, moreover, 
 which for the most part only repeat the cardinal propositions 
 of the Exploitation theory, without adding to its proof more 
 than a few commonplaces and appeals to the authority of 
 Eicardo. In fact the majority of socialists have exercised 
 their intellectual powers, not so much in laying the foundations 
 of their own theory, as in bitterly criticising the theories of 
 their opponents. 
 
 Out of the mass of writers with socialist tendencies I 
 content myself therefore with naming a few who have become 
 specially important in the development and spread of this theory. 
 
 Among those the author of the Contradictions Economiques, 
 P. J. Proudhon, is pre-eminent for honesty of intention and 
 brilliant dialectic ; qualities which rendered him the most 
 efficient apostle of the theory in France. As we are more 
 concerned with substance than with form, I shall not give any 
 detailed example of his style, but content myself with con- 
 densing his doctrine into a few sentences. It will be seen 
 at once that, with the Exception of a few peculiarities of 
 expression, it differs very little from the general scheme of the 
 theory as given at the beginning of this chapter. 
 
 At the outset Proudhon takes it for granted that all value 
 is produced by labour. Thus the labourer has a natural claim 
 to the possession of his whole product. In the wage contract, 
 however, he waives this claim in favour of the owner of capital, 
 and gets in return a wage which is less than the product 
 he gives up. Thereby he is defrauded, for he does not know 
 his natural rights, nor the extent of what he gives up, nor yet 
 the meaning of the contract which the owner concludes 
 with him. And thus the capitalist avails himself of error 
 and surprise, if not cunning and fraud (erreur et surprise si 
 mme on ne doit dire dol ct fraud}. 
 
 Y
 
 322 HISTORICAL SURVEY BOOK vi 
 
 So it comes that at the present day the labourer can- 
 not buy his own product. In ' the market his product costs 
 more than he has received in wage; it costs more by the 
 amount of many profits, which are made possible by the 
 existence of the right of property ; and these profits under 
 the most various names, such as profit, interest, rent, hire, 
 tithe, and so on, form just so many tolls (aubaines) laid 
 upon labour. For example, what twenty million labourers 
 have produced for a year's wage of twenty milliards of francs is 
 sold for the price (including these profits, and on account of 
 them) of twenty-five milliards. But this is equivalent to saying 
 that the labourers who are compelled to purchase back these 
 same products are forced to pay five for that which they have 
 produced for four ; or that in -every five days they must go 
 without food for one. Thus interest is an additional tax on 
 labour, a something kept back (r&enue) from the wages of 
 labour. 1 
 
 Equal to Proudhon in the purity of his intentions, and far 
 surpassing him in depth of thought and judgment, though 
 certainly behind the impetuous Frenchman in power of state- 
 ment, is the German Rodbertus. 
 
 As regards the history of theory Rodbertus is the weightiest 
 personage we have to mention in this chapter. His scien- 
 tific importance was long misunderstood, and that, strangely 
 enough, precisely on account of the scientific character of his 
 writings. Not addressing himself, like others, to the people, 
 but restricting himself for the most part to the theoretical 
 investigation of the social problem ; moderate and reserved 
 in those practical proposals which, with the great majority, are 
 the chief objects of concern ; his reputation for a while lagged 
 behind that of less important writers who accepted his in- 
 tellectual wares at second hand, and made them acceptable 
 by appealing to popular interests. It is only in recent times 
 that full justice has been done to this most amiable socialist, 
 and that he has been recognised as what he is the spiritual 
 father of modern scientific Socialism. Instead of fiery attacks 
 
 1 See Proudhon's numerous writings passim, particularly Qu'est ce que la 
 propritU? (1840 : in the Paris edition of 1849, p. 162), Philosophic de la Misere 
 (pp. 62, 287 of the German translation), Defence before the Assizes at Besan^on on 
 3d February 1842 (collected edition, Paris, 1868, ii.)
 
 CHAP, i OF EXPLOITATION THEORY 323 
 
 and rhetorical antitheses, by which most socialists are fond of 
 drawing a crowd, Eodbertus has left behind him a profound, 
 honestly thought-out theory of the distribution of goods, which, 
 erroneous as it may be in many points, contains enough that 
 is really valuable to ensure its author an abiding rank among 
 the theorists of political economy. 
 
 Reserving meanwhile his formulation of the Exploitation 
 theory to return to it later on in detail, I turn to two of his 
 successors, who differ from each other as widely as they 
 differ from their predecessor Eodbertus. One of these is 
 Ferdinand Lassalle, the most eloquent, but, as regards substance, 
 the least original among the leaders of Socialism. I only- 
 mention him here because his brilliant eloquence exerted a 
 great influence on the spread of the Exploitation theory ; to its 
 theoretical development he contributed almost nothing. His 
 doctrine is substantially that of his predecessors, and I may 
 therefore pass on without reproducing it in quotations or 
 extracts, and merely refer to some of the most -characteristic 
 passages in a note. 1 
 
 While Lassalle is an agitator and nothing else, Karl Marx 
 is a theorist, and indeed, after Eodbertus, the most important 
 theorist of Socialism. His doctrine is certainly founded in 
 many respects on the pioneering work of Eodbertus, but it is 
 built up with some originality and a considerable degree of 
 acute logical power into an organic whole. This theory also 
 we shall consider in detail later on. 
 
 If the perfecting of the Exploitation theory has been, par 
 excellence, the work of socialist theorists, the ideas peculiar to 
 it have nevertheless found admittance into other circles, though 
 in different ways and in different degrees. Many adopted the 
 
 1 Among his numerous writings, the one in which he expresses his opinions 
 on the interest problem most fully, and which most brilliantly displays his 
 agitator genius, is fferr Bastiat-Schulze von Delitzsch, dcr okonomischc Julian, oder 
 Kapital und Arbeit (Berlin, 1864). The principal passages are these : Labour is 
 "source and factor of all values" (pp. 83, 122, 147). The labourer does not 
 receive the whole value, but only the market price of labour considered as a 
 commodity, this price being equal to its costs of production, that is, to bare 
 subsistence (p. 186, etc.) All surplus falls to capital (p. 194). Interest is 
 therefore a deduction from the return of the labourer (p. 125, and very scathingly 
 p. 97). Against the doctrine of the Productivity of capital (p. 21, etc.) 
 Against the Abstinence theory (p. 82, etc., and particularly p. 110, etc.) See 
 also Lassalle's other writings.
 
 324 HISTORICAL SURVEY BOOK vi 
 
 Exploitation theory in its entirety, and, at the most, only refused 
 to acknowledge its last practical consequences. Guth, for 
 example, takes this position. 1 He accepts all the essential pro- 
 jsitions of the socialists, and accepts them in their entire extent. 
 Labour is to him the sole source of value. Interest arises from 
 the fact that, in virtue of the unfavourable circumstances of 
 competition, the wages of labour are always less than the pro- 
 duct of labour. Indeed Guth does not scruple to introduce 
 the harsh expression Ausbeutung for this fact as terminus 
 teehnicus. Finally, however, he draws back from the practical 
 consequences of the doctrine by introducing some saving clauses. 
 " Far be it from us to declare that the Aiisbeutung of the 
 labourer, which is the source of profit, is unjustifiable from a legal 
 point of view. It rests rather on a free alliance between the 
 employer and the labourer, which takes place under circum- 
 stances of the market that are, as a rule, unfavourable to the 
 latter." The sacrifice which the exploited labourer suffers is 
 rather an " advance against replacement." For the increase of 
 capital is always increasing the productivity of labour ; con- 
 sequently the products of labour grow cheaper, the labourer is 
 able to buy more of these products with his wages, and thus 
 his real wages rise. At the same time the labourer's sphere 
 of employment is enlarged " on account of greater demand, and 
 his money wage also rises." Thus the Ausbeutung is equivalent 
 to an investment of capital, which, in its indirect consequences, 
 yields the labourer a rising percentage of interest. 2 
 
 Dlihring also in his theory of interest takes an entirely 
 socialistic position. " The nature of profit is that of an 
 appropriation of the principal part of the return to labour. 
 The increase of the return and the saving of labour are results 
 of the improved and enlarged means of production. But the 
 circumstance that the hindrances and difficulties of production 
 are lessened, and that bare labour, in furnishing itself with 
 tools, renders itself more productive, does not give the 
 inanimate tool any claim to absorb a fraction more than what 
 is required to reproduce it. The idea of profit therefore is 
 not one that could be evolved from the productivity of 
 
 1 Div Lehre vom Einkommen in dcsscn Gesamintzweigcn, 1869. I <juote from 
 the second edition of 1878. 
 
 - Ibid. pp. 109, etc., 122, etc. See also p. 271, etc.
 
 CHAP, i - OF EXPLOITATION THEORY 325 
 
 labour, or in any system where the economical subject was 
 looked on as an economically self-contained individual. It is 
 a form of appropriation, and is a creation of the peculiar 
 circumstances of distribution." l 
 
 A second group of eclectic writers add the ideas of the 
 Exploitation theory to their other views on the interest problem ; 
 as, for example, John Stuart Mill and Schaffle. 2 
 
 Finally, there are others who have allowed themselves 
 to be swayed by the impression made on them by socialist 
 writers, and while not acknowledging the entire system 
 of these writers, have still accepted individual points of 
 importance. The most noteworthy feature in this direction 
 seems to me the acceptance, by A considerable number of 
 the German Katheder Socialists, of the old proposition that 
 labour is the sole source of all value, the sole value-producing 
 power. 
 
 This proposition, the acceptance or rejection of which has 
 such an enormous weight in determining our judgment of the most 
 important economic phenomena, has had a peculiar fate. It was 
 originally started by the political economy of England, and in the 
 first twenty years or so after the appearance of the Wealth of 
 Nations it had gained a wide circulation along with Adam 
 Smith's system. Later on, under the influence of Say, who 
 developed the theory of the three productive factors, nature, 
 labour, and capital, and then under the influence of Hermann 
 and Senior, it came into disrepute with the majority of political 
 economists, even of the English school For a time the 
 tradition was maintained only by a few socialist writers. 
 Then the Katheder Socialists accepted it from the writings of 
 such men as Proudhon, Rodbertus, and Marx, and it once more 
 gained a firm position in scientific political economy. At the 
 present time it almost looks as if the authority enjoyed by 
 the distinguished leaders of that school was on the eve of 
 starting it for the second time on a triumphant march round 
 the literature of all nations. 
 
 Whether this is to be desired or not will be shown by the 
 
 1 Kursus der National-und Soziulokonomic, Berlin, 1873, p. 183. A little 
 further on (p. 185), evidently borrowing from Proudhon's Drvit d'Aubaine, he 
 explains interest as a " toll " imposed in return for the giving over of economic 
 power, the rate of interest representing the rate at which the toll is levied. 
 
 2 See below, book vii.
 
 326 HISTORICAL SURVEY BOOK vi 
 
 critical examination of the Exploitation theory to which I now 
 address myself. 
 
 In criticising this theory several courses were open to me. 
 I might have criticised all its representatives individually. 
 This would certainly have been the most accurate way, but the 
 strong resemblance between individual statements would have 
 led to superfluous and extremely wearisome repetitions. Or, 
 without going into individual statements, I might have directed 
 my criticism against the general scheme that these individual 
 statements really have in common. In doing so, however, 
 there would have been a double difficulty. On the one hand, 
 I should have encountered the danger of making too little 
 account of certain individual variations in the doctrine, and on 
 the other hand, if this had been avoided, I should certainly 
 not have escaped the reproach of making too light of the 
 subject, and of directing my criticism against a wilful 
 caricature, instead of against the real doctrine. I decided, 
 therefore, to take a third course ; to select those individual 
 statements that appear to me the best and most complete, and 
 to submit them to a separate criticism. 
 
 For this purpose I have chosen the statements of the 
 Exploitation theory given by Rodbertus and Marx. They are 
 the only ones that offer anything like a firm and coherent 
 foundation. While that of Rodbertus is to my mind the best, 
 that of Marx is the one which has won most general acceptance, 
 and the one which may to a certain extent be regarded as the 
 official system of the Socialism of to-day. In subjecting these 
 two to a close examination I think I am taking the Exploita- 
 tion theory on its strongest side, remembering that fine saying 
 of Knies, " He that would be victorious on the field of 
 scientific research must let his adversary advance fully armed 
 and in all his strength." l 
 
 To avoid misunderstandings, one more remark before 
 beginning. The purpose of the following pages is to criticise 
 the Exploitation theory exclusively as a theory ; that is to say, 
 to investigate whether the causes of the economic phenomenon 
 of interest really consist in those circumstances which the Ex- 
 ploitation theory asserts to be its originating causes. It is not 
 
 1 Der Kredit, part ii. Berlin, 1879, p. 7.
 
 CHAP, i OF EXPLOITATION THEORY 327 
 
 my intention to offer an opinion in this place on the practical 
 and social side of the interest problem, whether it is objection- 
 able or unobjectionable, whether it should be retained or 
 abolished. Of course no one would think of writing a book on 
 interest and remaining silent on the most important question 
 connected with it. But I can only speak to any purpose of the 
 practical side of the matter when the theoretical side has first 
 been made perfectly clear, and I must therefore reserve the 
 examination of these questions for my second volume. I 
 repeat, then, that in the present instance I shall merely examine 
 whether interest, be it good or be it bad, comes into existence 
 from the causes asserted by the Exploitation theory.
 
 CHAPTER II 
 
 THE starting-point of Rodbertus's 1 theory of interest is the 
 proposition, introduced into the science by Adam Smith and 
 more firmly established by the Ricardian school, that goods, 
 economically considered, are to be regarded as products of 
 labour alone, and cost nothing but labour. This proposition, 
 which is usually expressed in the words " Labour alone is pro- 
 ductive," is amplified by Rodbertus as follows : 
 
 1. Only those goods are economical goods which have cost 
 labour ; all other goods, be they ever so useful or necessary to 
 mankind, are natural goods, and have no place in economical 
 consideration. 
 
 2. All economic goods are the product of labour and labour 
 only ; for the economic conception they do not count as products 
 of nature or of any other power, but solely as products of labour ; 
 any other conception of them may be physical, but it is not 
 economic. 
 
 3. Goods, economically considered, are the product solely of 
 
 1 A tolerably complete list of the writings of Dr. Karl Rodbertus-Jagetzow 
 is to be found in Kozak's Rodbertus' sozialokonomische Ansichten, Jena, 1882, 
 p. 7, etc. I have made use by preference of the second and third Social Letters to 
 Von Kirchmann in the (somewhat altered) copy published by Rodbertus in 
 1875, under the name of Zur Bdeuchtung der sozialen Fragc ; also of the tract 
 Zur Erklarung und Abhilfe dcr heutigcn Kreditnoth des Grundbesitzcs ; and of 
 the fourth Social Letter to Von Kirchmann (Berlin, 1884), published under 
 Rodbertus's bequest by Adolf Wagner and Kozak under the name Das Kapital. 
 A few years ago Rodbertus's interest theory was subjected to an extremely close 
 and -- conscientious criticism by Knies (Der Kredit, part ii. Berlin, 1879, p. 
 47, etc.), with which in its most important points I fully agree. I feel myself, 
 however, bound to take up the task of criticism independently, my theoretic point 
 of view being so different from that of Knies that I cannot help looking at many 
 things in an essentially different light
 
 CHAP, ii RODBERTU&S FUNDAMENTAL PROPOSITION 329 
 
 that labour which has performed the material operations neces- 
 sary to their production. But to this category belongs not 
 merely that labour which immediately produces the goods, but 
 also that labour which first creates the instrument by which 
 the goods are made. Thus grain is not merely the product of 
 the man who held the plough, but also of him who made the 
 plough, and so on. 1 
 
 The fundamental proposition that all goods, economically 
 considered, are the product of labour alone, has with Eodbertus 
 very much the claim of an axiom. He considers it a proposition 
 about which, " in the advanced state of political economy, there 
 is no longer any dispute ; " it is naturalised among English 
 economists, has its representatives among those of France, and, 
 "what is most important, in spite of all the sophisms of a 
 retrograde and conservative doctrine, is indelibly imprinted upon 
 the consciousness of the people." 5 Only once do I find any 
 attempt in Rodbertus to put this proposition on a rational 
 foundation. He says that " every product that comes to us 
 through labour in the shape of a good ought to be put solely 
 to the account of human labour, because labour is the only 
 original power, and also the only original cost with which 
 human economy is concerned." 3 This proposition also is put 
 down as an axiom, and Rodbertus does not go any farther into 
 the subject. 
 
 The actual labourers who produce the entire product in the 
 shape of goods have, at least "according to the pure idea of 
 justice," a natural and just claim to obtain possession of this 
 entire product. 4 But this with two rather important limita- 
 tions. First, the system of the division of labour, under which 
 many co-operate in the production of one product, makes it 
 technically impossible that each labourer should receive his 
 product in natura. There must therefore be substituted, for 
 the claim to the whole product, the claim to the whole value 
 of the product. 5 
 
 Further, all those who render society useful services with- 
 out immediately co-operating in the material producing of the 
 
 1 Zur Beleuchtung dcr sozialen Fraijc, pp. 68, 69. 
 
 2 Soziale Frage, p. 71. 
 
 3 Erklarung und Abhilfc, ii. p. 160 note. 
 
 4 Soziale Frage, p. 56 ; Erklarung, p. 112. 
 
 5 Soziale Frage, pp. 87 90 ; Erklarung, p. Ill ; Kapital, p. 116.
 
 330 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 goods must have a share in the national product ; such, for 
 example, as the clergyman, the physician, the judge, the scien- 
 tific investigator, and, in Kodbertus's opinion, even the under- 
 takers, who " understand how to employ a number of labourers 
 productively by means of a capital." 1 But such labour, being 
 only " indirect economic labour," may not put in its claim of 
 payment at the " original distribution of goods, " in which the 
 producers alone take part, but only at a " secondary distribution 
 of goods." What then is the claim which the actual labourers 
 have to put forward, according to the pure idea of justice ? It 
 is a claim to receive the entire value of the product of their 
 labour in the original distribution, without prejudice to the 
 secondary claims on salary of other useful members of society. 
 
 This natural claim Rodbertus does not find recognised in 
 present social arrangements. The labourers of to-day receive 
 as wages, in the original distribution, only a part of the 
 value of their product, while the remainder falls as rent to 
 the owners of land and capital. 
 
 Rent is defined by Rodbertus as "all income obtained 
 without personal exertion solely in virtue of possession." 2 It 
 includes two kinds of rent land-rent and profit on capital. 
 
 Rodbertus then asks, As every income is the product of 
 labour alone, what is the reason that certain persons in society 
 draw incomes (and, moreover, original incomes) without stirring 
 a finger in the work of production ? In this question Rodbertus 
 has stated the general theoretical problem of the theory of rent. 3 
 The answer he gives is the following : 
 
 Rent owes its existence to the coincidence of two facts, one 
 economical and one legal The economic ground of rent lies 
 in the fact that, since the introduction of the division of labour, 
 the labourers produce more than they require to support them- 
 selves in life and to allow them to continue their labour, 
 and thus others also are able to live upon the product. The 
 legal ground lies in the existence of private property in land 
 and capital. As, therefore, through the existence of private 
 property the labourers have lost all control over the conditions 
 that are indispensable to production, they cannot, as a rule, do 
 otherwise than produce in the service of the proprietors, and 
 
 1 Soziale Frage, p. 146 ; Erkldrung, ii. p. 109, etc. 
 2 Soziale Frage, p. 32. 3 Ibid. \. 74, etc.
 
 CHAP, ii CONDITIONS OF KENT 331 
 
 that according to an agreement previously made. These pro- 
 prietors impose upon the labourers the obligation of surrendering 
 a part of the product of their labour as rent, in return for the 
 opportunity of using the conditions of production just mentioned. 
 Indeed this surrender even takes an aggravated form, for the 
 labourers have to give up to the owners the possession of their 
 entire product, receiving back from the owners only a part 
 of its value as wage, and a part that is no more than the 
 labourers absolutely require to keep them in life and allow them 
 to continue their labour. The power which forces the labourers 
 to agree to this contract is Hunger. To let Rodbertus speak for 
 himself : 
 
 " As there can be no income unless it is produced by labour, 
 rent rests on two indispensable conditions. First, there can 
 be no rent if labour does not produce more than the amount 
 which is just necessary to the labourers to secure the continu- 
 ance of their labour, for it is impossible that without such a 
 surplus any one, without himself labouring, can regularly 
 receive an income. Secondly, there could be no rent if 
 arrangements did not exist which deprive the labourers of this 
 surplus, either wholly or in part, and .give it to others who do 
 not themselves labour, for in the nature of things the labourers 
 themselves are always the first to come into possession of their 
 product. That labour yields such a surplus rests on economic 
 grounds that increase the productivity of labour. That this 
 surplus is entirely or in part withdrawn from the labourers 
 and given to others rests on grounds of positive law ; and as 
 law has always united itself with force it only effects this 
 withdrawal by continual compulsion. 
 
 " The form which this compulsion originally took was 
 slavery, the origin of which is contemporaneous with that of 
 agriculture and landed property. The labourers who produced 
 such a surplus in their labour-product were slaves, and the 
 master to whom the labourers belonged, and to whom conse- 
 quently the product itself also belonged, gave the slaves only so 
 much as was necessary for the continuance of their labour, and 
 kept the remainder or surplus to himself. If all the land, and at 
 the same time all the capital of a country, have passed into private 
 property, then landed property and property in capital exert a 
 similar compulsion even over freed or free labourers. For, first,
 
 332 RODBERTUS S EXPLOITATION THEORY BOOK vi 
 
 the result will be the same as in slavery, that the product will 
 not belong to the labourers, but to the masters of land and 
 capital ; and secondly, the labourers who possess nothing, in 
 face of the masters possessing land and capital, will be glad to 
 receive a part only of the product of their own labour with 
 which to support themselves in life ; that is to say, again, to 
 enable them to continue their labour. Thus, although the con- 
 tract of labourer and employer has taken the place of slavery, 
 the contract is only formally and not actually free, and Hunger 
 makes a good substitute for the whip. What was formerly 
 called food is now called wage." 1 
 
 Thus, then, all rent is an exploitation,' 2 or, as Rodbertus 
 sometimes calls it still more forcibly, a robbery of the product 
 of other people's labour. 8 This character applies to all kinds of 
 rent equally; to land-rent as well as to profit on capital, and to 
 the emoluments of hire and loan interest derived from them. 
 Hire and interest are as legitimate in connection with the 
 undertakers as they are illegitimate in connection with the 
 labourers, at whose cost, in the last resort, they are paid. 4 
 
 The amount of rent increases with the productivity of 
 labour ; for under the system of free competition the labourer 
 receives, universally and constantly, only the amount necessary 
 for his maintenance that is, a definite quantum of the product. 
 Thus the greater the productivity of labour the less will be the 
 proportion of the total value of the product claimed by this 
 quantum, and the greater will be the proportion of the product 
 and of the value remaining over to the proprietor as his share, 
 as rent. 5 
 
 Although, according to what has been already said, all rent 
 i'orms a homogeneous mass having one common origin in 
 practical economic life, it is divided into two branches, land-rent 
 and profit on capital. Rodbertus then explains the reason and 
 the laws of this division in a most peculiar way. He starts 
 from the theoretical assumption, which he carries through all his 
 investigation, that the exchange value of all products is equal 
 
 1 Sozialc Frage, p. 33 ; similarly and more in detail, pp. 77-94. 
 
 2 Ibid. p. 115, and other places. 
 
 3 Ibid. p. 150 ; Kapital, p. 202. 
 
 4 Sozialv Fragc, pp. 115, 148, etc. See also the criticism of Bastiat, pp. 115- 
 119. 
 
 5 Ibid. p. 123, etc-
 
 CHAP, ii LAND - RENT AND PROFIT 333 
 
 to their labour-costs ; in other words, that all products exchange 
 with each other in proportion to the labour they have cost. 1 
 Rodbertus indeed is aware that this assumption does not exactly 
 correspond with reality. Still lie believes that the deviations 
 amount to nothing more than that " the actual exchange value 
 falls sometimes on the one side, sometimes on the other," in 
 which cases there is at least always a point towards which they 
 gravitate, "that point being the natural as well as the just 
 exchange value." 2 He entirely rejects the idea that goods 
 normally exchange with each other according to any other pro- 
 portion than that of the labour incorporated in them; that 
 deviations from this proportion may be the result, not merely 
 of accidental and momentary fluctuations of the market, but of 
 a fixed law drawing the value in another direction. 3 At this 
 stage I merely t draw attention to the circumstance, and will 
 show its importance later on. 
 
 The total production of goods may, according to Eodbertus, 
 be divided into two branches raw production, which with the 
 assistance of land obtains raw products, and manufacture which 
 works up the raw products. Before division of labour was 
 introduced the obtaining and working up of raw products were 
 performed in immediate succession by one undertaker, who then 
 received without division the whole resulting rent. In this 
 stage of economic development there was no separation of rent 
 into land-rent and profit on capital. But, since the introduction 
 of the division of labour, the undertaker of the raw production 
 and the undertaker of the manufacture which follows it are 
 distinct persons. The preliminary question is, In what pro- 
 portion will the rent that results from the total production now 
 be divided among the producers of the raw material on the one 
 hand and the manufacturers on the other ? 
 
 The answer to this question follows from the character of 
 rent. Rent is a proportion of and deduction from the value of 
 the product. The amount of rent that can be obtained in any 
 branch of production is regulated by the value of the product 
 created in this branch of production. As, however, the amount 
 of the value of the product is regulated here also by the amount 
 
 1 Soziale Fragc, p. 106. 
 
 2 Ibid. p. 107 ; similarly pp. 113, 147. Erklarung, i. p. 123. 
 
 3 Soziale Fraijc, p. 148.
 
 334 RODBERTUS' S EXPLOITATION THEORY BOOK vi 
 
 of the labour spent on it, the total rent will be divided between 
 raw production and manufacture, according to the expenditure 
 of labour in each of these branches. To illustrate this by a 
 concrete example. 1 Say that it requires 1000 days of labour 
 to obtain a certain amount of raw product, and that its 
 manufacture requires 2000 days more; then if rent takes 
 40 per cent of the value of the product as the share of 
 the owners, the product of 400 days of labour will fall as 
 rent to the producers of raw material, and the product of 800 
 days of labour as rent to the manufacturing undertakers. On 
 the other hand, the amount of capital employed in each branch 
 of production is a matter of no consequence as regards this 
 division, for though the rent is estimated in relation to this 
 capital, it is not determined by it, but by the amount of 
 labour supplied. 
 
 Now the very fact that the amount of capital employed 
 has no causal influence on the amount of rent obtainable in 
 any branch of production becomes the cause of land -rent. 
 Rodbertus proves this in the following manner. 
 
 Rent is the product of labour. But it is conditioned by 
 the possession of wealth. Therefore rent is looked on as 
 a return to that wealth. In manufacture this wealth 
 takes the form of capital alone, and not of land. Thus the 
 total rent obtained in manufacture is regarded as return on 
 capital, or profit on capital. And thus by calculating, in the 
 usual way, the proportion between the amount of return and 
 the amount of the capital on which the return is obtained, we 
 come to say that a definite percentage of profit is obtainable 
 from capital engaged in manufacture. In virtue of well-known 
 tendencies of competition this rate of profit will approximate to 
 equality in all branches, and will also become the standard 
 for calculating the profit of capital engaged in raw produc- 
 tion ; for a much greater portion of the national capital is 
 engaged in manufacture than in agriculture, and obviously the 
 return of the greater portion of capital must dictate to the 
 smaller portion the rate at which its profit shall be calculated. 
 Therefore the raw producers must calculate, as profit on their 
 capital, so much of the total rent gained in the raw production 
 
 1 This illustration is not given by Rodbertus ; I only add it to put the difficult 
 line of argument more clearly.
 
 CHAP, ii CAUSE OF LAND -RENT 335 
 
 as corresponds with the amount of capital that has been 
 employed and with the usual rate of profit. The remainder 
 of the rent, on the other hand, must be considered as return 
 from land, and forms the land-rent. 
 
 Now, according to Eodbertus, there must always be such 
 a remainder in raw production, in virtue of the assumption 
 that products exchange in proportion to the amount of labour 
 incorporated in them. He proves this as follows. The 
 amount of rent obtainable in manufacture depends, as we have 
 seen, not on the amount of the capital laid out, but on the 
 quantity of labour performed in the manufacture. This labour 
 is made up of two constituent parts ; on the one side, the 
 immediate labour of manufacture, on the other side, that 
 indirect labour " which must also be taken into calculation as 
 representing the tools and machines used." Therefore of the 
 different constituent portions of the capital laid out, only those 
 portions will affect the amount of rent which consist of wages 
 and expenditure for machines and tools. On the other hand, 
 no such influence affects the capital laid out in raw materials, 
 because this outlay does not express any labour performed in 
 the manufacturing stage. Yet this part of the outlay increases 
 the capital on which the rent obtainable as return is calculated. 
 The existence of a portion of capital which increases the 
 manufacturing capital on which the share of the rent that falls 
 to it as -profit is calculated, while it does not increase this profit 
 itself, must evidently lower the proportion of the profit to 
 the capital ; in other words, it must lower the rate of profit on 
 capital engaged in manufacture. 
 
 Now the profit on capital engaged in raw production also 
 will be calculated at this reduced rate. But here (in raw pro- 
 duction) the circumstances are generally more favourable. For 
 as agriculture begins production ab ovo, and does not work 
 up material derived from a previous production, its outlay 
 of capital has no constituent "value of material." The 
 analogue of material is simply land, and land in all theories is 
 assumed to cost nothing. Hence no portion of capital has any 
 share in the division of the profit which does not also have an 
 influence upon its amount, and hence also the proportion 
 between the rent gained and the capital employed must be 
 more favourable in agriculture than in manufacture. As
 
 336 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 however, in agriculture also, the profit on capital is calculated 
 at the reduced rate determined by manufacture, there must 
 always remain a surplus of rent, which falls to the landowner 
 as land-rent. This, according to Eodbertus,. is the origin of 
 land-rent, and its distinction from profit on capital. 1 
 
 I may shortly supplement this by remarking that, notwith- 
 standing the very severe theoretical judgment that he pro- 
 nounces on profit in describing it as plunder, Eodbertus will 
 not hear of abolishing either private property in capital or 
 profit on capital. Nay, he ascribes to property in land and 
 capital " an educating power " which we cannot spare ; a 
 " kind of patriarchal power that could only be replaced after a 
 completely altered system of national instruction, for which at 
 present we have not got even the conditions." 2 Property in 
 land and capital appear to him in the meanwhile to have "a 
 
 1 Soziale Fragc, p. 94, etc. ; particularly pp. 109-111. Erkldrung, i. p. 123. 
 
 It may be advisable, in the interest of the English reader, to put this theory 
 of land-rent in a different way. 
 
 According to Rodbertns, all rent is a deduction from product, and an exploita- 
 tion of the labour that produces the product. Both land-rent then and capital- 
 rent (profit) must be accounted for by this deduction, and only by this deduction. 
 Now rent cannot emerge at all unless the necessary resources are provided. The 
 owners give these resources ; the labourer works with them ; the owner takes 
 his rent from the product, and, naturally enough, calculates it as a percentage 
 on the amount of the resources he provides. In reality, however, rent does not 
 depend on the amount and duration of these resources, but on the amount of 
 labour employed and exploited. 
 
 But. resources are of two kinds, land and capital. In manufacturing the 
 resources consist of capital alone. The profit exploited from the manufacturing 
 labourers is calculated as a rate on the capital, and comes to be ascribed to the 
 capital. Under the competitive system profits tend to an equality over the whole 
 field, and accordingly we should expect the landowner to get simply the same 
 rent for the resources he lends (land) as the capitalist gets for the resources he 
 lends (capital). But as a fact the landowner gets more ; in fact, sufficient to 
 pay another rent, which is properly called land-rent. How is this ? 
 
 The reason is that in manufacture there are two outlays of capital, one for 
 wages and one for raw materials. But there is only one field of exploitation, 
 wages. There is, then, in manufacturing a portion of capital employed which 
 yields no profit, and the profit that is made in the total manufacture, being 
 calculated on this portion plus the portion employed in paying wages, the rate 
 of profit is lower than it would be otherwise. 
 
 Now in agriculture there is indeed only one source of rent or profit, labour, 
 but there is no outlay for raw materials. The profit thus in agriculture is 
 calculated on a smaller capital, and so must leave, over and above the ordinary 
 manufacturing rate of profit, a surplus which is land-rent. W. S. 
 
 2 Erkldrung, ii. p. 303.
 
 CHAP, ii CRITICISM 337 
 
 kind of official position involving the national functions of 
 managing the economic labour and the economic resources of 
 the nation in correspondence with national need." 
 
 Thus from this, its most favourable point of view, rent 
 may be regarded as a form of salary which certain " officers " 
 receive for the execution of their functions. 1 I have already 
 observed above how this remark, casually expressed in a 
 mere note, formed the basis on which later writers, particu- 
 larly Schaffle, have built up a peculiar form of the Labour 
 theory. 
 
 To come now to criticism of Rodbertus's system. Without 
 circumlocution I may say at once that I consider the theory 
 which it contains to be an entire failure. I am convinced 
 that it suffers from a series of grave theoretical defects which 
 I shall endeavour to set forth in the following pages as clearly 
 and as impartially as may be. 
 
 At the outset I am obliged to take exception to the very 
 first stone that Eodbertus lays in the structure of his 
 system the proposition that all goods, economically . con- 
 sidered, are products of labour and of labour alone. 
 
 First of all, what do the words " economically considered " 
 mean ? Eodbertus explains them by a contrast. He puts the 
 economical standpoint in opposition to the physical standpoint. 
 That goods, physically speaking, are the products not only of 
 labour but of natural powers, he explicitly allows. If then it 
 is said that, from the economic standpoint, goods are the pro- 
 duct of labour only, the statement can surely have but one 
 meaning, viz. that the co-operation of natural powers in 
 production is a matter of utter indifference so far as human 
 economy is concerned. On one occasion Rodbertus gives 
 forcible expression to this conception when he says : " All other 
 goods except those that have cost labour, however useful or 
 necessary they may be to mankind, are natural goods, and have 
 no place in economic consideration." " Man may be thankful for 
 what nature has done beforehand in the case of economic goods, 
 as it has spared him so much extra labour, but economy takes 
 
 1 Erklarung, p. 273, etc. In the posthumous tract on "Capital" Rodbertus 
 expresses himself more severely on the subject of private property in capital, and 
 would have it redeemed, if not abolished (p. 116, etc.) 
 
 Z
 
 333 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 notice of them only in so far as labour has completed the 
 work of nature." 1 
 
 Xow this is simply false. Even purely natural goods 
 have a place in economic consideration, provided only they 
 are scarce as compared with the need for them. If a lump of 
 solid gold in the shape of a meteoric stone falls on a man's 
 field, is it not to be economically considered ? Or if a silver 
 mine, is discovered by chance on his estate, is the silver not 
 to be economically considered ? Will the owner of the field 
 really pay no attention to the gold and silver given him by 
 nature, or give them away, or waste them, simply because they 
 were bestowed on him by nature without exertion on his part ? 
 Will he not preserve them just as carefully as he would gold 
 and silver that he had earned by the labour of his hands ; 
 place them in security from the greed of others ; cautiously 
 convert them into money in the market in short, treat them 
 economically ? And again, is it true that economy has regard 
 to those goods which have cost labour only in so far as labour 
 has completed the work of nature ? If that were the case, 
 men acting economically would have to put a cask of the 
 most exquisite Rhine wine on the same level with a cask of 
 well -made but naturally inferior country wine, for human 
 labour has done pretty much the same for both. That, not- 
 withstanding this, the Rhine wine is often valued economically 
 at ten times the amount of the other, is a striking confutation 
 of Rodbertus's theorem at the hands of everyday experience. 
 
 All this is so obvious that we might fairly expect 
 Rodbertus to have taken every precaution to guard this, his 
 first and most important fundamental proposition, against such 
 objections. In this expectation, however, we are disappointed. 
 With peculiar carelessness he is content on almost every 
 occasion to assert this proposition in the tone of an axiom. 
 Sometimes he appeals on its behalf to the authority of Adam 
 Smith and Ricardo, and only on one single occasion does he say 
 anything that might be construed as an attempt to give it 
 uny real foundation. 
 
 The critic will scarcely be satisfied with such poor support 
 for a proposition so important. As regards the authorities 
 appealed to, in a scientific discussion authorities in themselves 
 
 1 SoziaU Fragr, p. 69.
 
 CHAP, ii GOODS AS LABOUR- PRODUCTS 339 
 
 prove nothing. Their strength is simply the strength of the 
 arguments which they represent. But we shall shortly have 
 an opportunity of convincing ourselves that Adam Smith and 
 Eicardo merely assert the proposition as an axiom without 
 giving any kind of argument for it. Moreover, as Knies has 
 on a recent occasion very properly pointed out, 1 Adam Smith 
 and Eicardo themselves have not held consistently to it. 
 
 In the one seriously argued passage Eodbertus says : " Every 
 product that comes to us through labour in the shape of a good 
 is, economically speaking, to be placed to the credit of human 
 labour alone, because labour is the only original power, and also 
 the only original cost with which human economy is concerned." 2 
 As regards this argument, however, one may seriously doubt, 
 in the first place, whether the premiss made use of is itself 
 correct, and Knies has shown that there is good reason for 
 questioning it. 3 And in the second place, even if the premiss 
 be correct, the conclusion is not necessarily so. Even if 
 labour actually were the sole original power with which 
 human economy has anything to do, I do not at all see why it 
 should not be desirable to act economically in regard to some 
 things besides " original powers." Why not in regard to 
 certain results of these original powers, or to the results of 
 other original powers ? Why not, for instance, with the golden 
 meteorite we spoke of ? Why not with the precious stone 
 we accidentally find ? Why not with natural deposits of 
 coal ? Eodbertus lias too narrow a conception both of the 
 nature and of the motive of economy. We deal economically 
 with the original power, labour, because, as Eodbertus quite 
 correctly says, "Labour is limited by time and strength, because 
 in being employed it is expended, and because in the end it robs 
 us of our freedom." But all these are only secondary motives, 
 
 1 Krcdit, part second, ]>. 60, etc. 
 
 - Erkliirtmij und AbhiJfc, ii. p. 160 ; similarly Sozialc Frayc, p. 69. 
 
 :J Dfr Krcdit, pai't second, p. 69 : "What Rodbcrtus brings forward as his 
 sole reason, vix. that ' labour is the only original power, and also the only 
 original cost with which human economy is concerned,' is simply, in point of 
 fact, untrue. What surprising blindness it is not to see that in the case of a 
 landlord the effectual power of the soil in our limited fields could not be 
 allowed ' to lie dead ' by uneconomic men, could not be wasted in growing 
 weeds, etc. etc. So absurd an opinion would certainly in the long run justify 
 any one in defending the proposition that the loss to a landlord of X acres, and the 
 loss to a people's economy of Y square miles, represents no 'economical loss.'"
 
 340 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 not the final motive for our economic conduct. In the 
 last resort we deal economically with limited and toilsome 
 labour because we should suffer loss of wellbeing by an 
 uneconomic treatment. But exactly the same motive impels 
 us to deal economically with every other useful thing which, 
 as existing in a limited quantity, we could not want or lose 
 without losing something of the enjoyment of life. It matters 
 not whether it be an original power or not ; whether the thing 
 has cost the joriginal power we call labour or not. 
 
 Finally, the position taken by Eodbertus becomes entirely 
 untenable when he adds that goods are to be regarded as the 
 products of material manual labour alone. This principle would 
 forbid even direct intellectual guidance of labour from being 
 recognised as having any productive function, and would lead 
 to an amount of internal contradiction and false conclusion 
 that leaves no doubt of its incorrectness. This, however, has 
 been shown by Knies in such a striking way that it would 
 be mere superfluous iteration to dwell further on the point. 1 
 
 Thus in the very first proposition he has laid down 
 Rodbertus comes into collision with fact. To be entirely 
 just, however, I must here make one concession which Knies, 
 as representing the Use theory, was unable to make. I admit 
 that, in confuting this fundamental principle, the whole of 
 Rodbertus's interest theory has not been confuted. The pro- 
 position is wrong ; not, however, because it mistakes the part 
 played by capital in the production of goods, but because it 
 mistakes the part played by nature. 
 
 I believe with Rodbertus that, if we consider the result of 
 all the stages of production as a whole, capital cannot maintain 
 an independent place among the costs of production. It is 
 not exclusively " previous labour," as Rodbertus thinks, but it 
 
 1 See Knies, Dcr Kredit, part second, p. 64, etc. : " A man who wishes to 
 ' produce ' coal must not simply dig ; he must dig in a particular place ; in 
 thousands of places he may perform the same material operation of digging with- 
 out any result whatever. But if the difficult and necessary work of finding the 
 proper place is undertaken by a separate person, say a geologist ; if without some 
 other and "intellectual power" no shaft is sunk, and so on, how can the 'economic' 
 work be digging only ? When the choice of materials, the decision on the 
 proportions of the ingredients, and such like, are made by another person than 
 by him who rolls the pills, are we to say that the economical value of this material 
 body, this medicine, is a product of nothing but the hand labour employed hi 
 it?"
 
 CHAP, ii THE LABOURER'S CLAIM 341 
 
 is partly, and indeed, as a rule, it is principally "previous labour" ; 
 for the rest, it is valuable natural power stored up for human 
 purposes. Where natural power is conspicuous as in a pro- 
 duction which, in all its stages, only makes use of free gifts of 
 nature and of labour, or which makes use of such products as have 
 themselves originated exclusively in free gifts of nature and in 
 labour in such 'cases we could, indeed, say with Rodbertus that 
 the goods, economically considered, are products of labour only. 
 Since then Rodbertus's fundamental error does not refer to the 
 role of capital, but only to that of nature, the inferences regard- 
 ing the nature of profit on capital which he deduces are not 
 necessarily false. It is only if essential errors appear as well 
 in the development of his theory that we may reject these 
 inferences as false. Now such errors there undoubtedly are. 
 
 Not to make an unfair use of Rodbertus's first mistake, I 
 shall, in the whole of the following examination, put all the 
 hypotheses in such a way that the consequences of that 
 mistake may be completely eliminated. I shall assume that 
 all goods are produced only by the co-operation of labour and 
 of free natural powers, and by the assistance exclusively of 
 such objects of capital as have themselves originated only by 
 the co-operation of labour and free natural powers, without the 
 intervention of such natural gifts as possess exchange value. 
 On this limited hypothesis it is possible for us to admit 
 Rodbertus's fundamental proposition that goods, economically 
 considered, cost labour alone. Let us now look farther. 
 
 The next proposition of Rodbertus runs thus : that, accord- 
 ing to nature and the " pure idea of justice," the whole product, 
 or the whole value of the product, ought to belong without 
 deduction to the labourer who produced it. In this pro- 
 position also I fully concur. In my opinion no objection could 
 be taken to its correctness and justice under the presupposition 
 we have made. But I believe that Rodbertus, and all socialists 
 with him, have a false idea of the actual results that flow from 
 this true and just proposition, and are led by this mistake 
 into desiring to establish a condition which does not really 
 correspond with the principle, but contradicts it. It is remark- 
 able that, in the many attempts at confutation that have been 
 directed up till now against the Exploitation theory, this 
 decisive point has been touched on only in the most superficial
 
 342 RODBERTUS^S EXPLOITATION THEORY BOOK vi 
 
 way, and never yet been placed in the proper light. ' It is on 
 this account that I ask my readers to give some attention to 
 the following argument ; all the more so as it is by no means 
 easy. 
 
 I shall first simply specify and then examine the blunder. 
 The perfectly just proposition that the labourer should receive 
 the entire value of his product may be understood to mean, 
 either that the labourer should now receive the entire present 
 value of his product, or should receive the entire future 
 value of his product in the future. But Rodbertus and the 
 socialists expound it as if it meant that the labourer should 
 now receive the entire future value of his product, and they 
 speak as if this were quite self-evident, and indeed the only 
 possible explanation of the proposition. 
 
 Let us illustrate the matter by a concrete example. Sup- 
 pose that the production of a steam-engine costs five years of 
 labour, and that the price which the completed engine fetches 
 is 5 5 0. Suppose further, putting aside meanwhile the fact that 
 such work would actually be divided among several persons, that 
 a worker by his own continuous labour during five years makes 
 the engine. We ask, What is due to him as wages in the light 
 of the principle that to the labourer should belong his entire 
 product, or the entire value of his product ? There cannot be 
 a moment's doubt about the answer. The whole steam-engine 
 belongs to him, or the whole of its price, 550. But at what 
 time is this due to him ? There cannot be the slightest doubt 
 about that either. Clearly it is due on the expiiy of five years. 
 For of course he cannot get the steam-engine before it exists ; 
 he cannot take possession of a value of 550 created by 
 himself before it is created. He will, in this case, have to 
 get his compensation according to the formula, The whole 
 future product, or its whole future value, at a future period 
 of time. 
 
 But it very often happens that the labourer cannot or will 
 not wait till his product be fully completed. Our labourer, 
 for instance, at the expiry of a year, wishes to receive a part 
 payment corresponding' to the time he has worked. The ques- 
 tion is, How is this to be measured in accordance with the 
 above proposition ? I do not think there can be a moment's 
 doubt about the answer. The labourer has got his due if he
 
 CHAP, ii PRESENT WAGE FOR FUTURE PRODUCT m 
 
 now receives the whole of what he has made up till now. 
 Thus, for example, if up till now he has produced a heap of 
 brass, iron, or steel, in the raw state, then he will receive his 
 due if he is handed over just this entire heap of brass, iron, or 
 steel, or the entire value which this heap of materials has, and 
 of course the value which it has now. I do not think that 
 any socialist whatever could have anything to object to in this 
 conclusion. 
 
 Now, how great will this value be in proportion to the 
 value of the completed steam-engine ? This is a point on 
 which a superficial thinker may easily make a mistake. The 
 point is, the labourer has up till now performed a fifth part 
 of the technical work which the production of the whole engine 
 requires. Consequently, on a superficial glance, one is tempted 
 to infer that his present product will possess a fifth part 
 of the value of the whole product that is, a value of 110. 
 On this view the labourer ought to receive a year's wage of 
 110. 
 
 This, however, is incorrect. 110 are a fifth part of 
 the value of a steam-engine when completed. But what the 
 labourer has produced up till now is not a fifth part of an 
 engine that is already completed, but only a fifth part of an 
 engine that will not be completed till four years more have 
 elapsed. And these are two different things; not different 
 in virtue of a sophistical quibble, but different in very fact. 
 The one -fifth part has a different value from the other so 
 surely as, in the valuation of to-day, an entire and finished 
 engine has a different value from an engine that will only be 
 ready for use in four years ; so surely as, generally speaking, 
 present goods have a different value in the present from 
 future goods. 
 
 That present goods, in the estimation of the present time, 
 in which our economical transactions take place, have a higher 
 value than future goods of the same kind and quality, is one of 
 the most widely known and most important economic facts. In 
 the second volume of this work I shall have to make thorough 
 examination into the causes to which this fact owes its origin, 
 into the many and various ways in which it shows itself, and 
 into the no less many and various consequences to which it 
 leads in economic life ; and that examination will be neither so
 
 344 RQDBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 easy nor so simple as the simplicity of the fundamental thought 
 seems to promise. But in the meantime I think I may be 
 allowed to appeal to the fact that present goods have a higher 
 value than similar kinds of goods in the future, as one that is 
 already put beyond dispute by the most ordinary experience of 
 everyday life. If one were to give a thousand persons the 
 choice whether they would rather take a gift of 100 to-day, 
 or take it fifty years hence, surely all the thousand persons 
 would prefer to take the 100 now. Or if one were to ask 
 a thousand persons who wished a horse, and were disposed 
 to give 100 for a good one, how much they would give now 
 for a horse that they would only get possession of in ten or 
 in fifty years, although as good an animal were guaranteed 
 at that time, surely they would all name an infinitely smaller 
 sum, if they named one at all ; and thereby they would surely 
 prove that eve ybody considers present goods to be more 
 valuable than future goods of the same kind. 
 
 If this is so, that which has been made by our labourer in 
 the first year, i.e. the fifth part of a steam-engine which is to 
 be completed four years later, has not the entire value of a 
 fifth part of an already completed engine, but has a smaller 
 value. 
 
 How much smaller ? That I cannot explain at present 
 without anticipating my argument in a confusing way. 
 Enough here to remark that it stands in a certain connection 
 with the rate of interest usual in the country x a rate which 
 is a matter of experience and with the remoteness of the 
 period at which the whole product will be completed. If we 
 assume the usual rate of interest to be 5 per cent, then the 
 product of the first year's labour will, at the close of the year, 
 be worth about 100. 2 Therefore, according to the proposition 
 that the labourer ought to receive his whole product, or its 
 whole value, the wages due him for the first year's labour will 
 amount to the sum of 100. 
 
 If, notwithstanding the above deductions, any one should 
 
 1 Of course I do not mean to put forward the rate of interest as the cause of 
 the smaller valuation of future goods. I know quite well that interest and rate 
 of interest can only be a result of this primary phenomenon. I am not here ex- 
 plaining but only depicting facts. 
 
 The appropriateness of these figures, which seem strange at the first glance, 
 will be seen immediately.
 
 CHAP, ii PRESENT WAGE FOR FUTURE PRODUCT 345 
 
 have the impression that this sum is too small, let me offer the 
 following for his consideration. No one will doubt that the 
 labourer gets his full rights if at the end of five years he 
 receives the entire steam-engine, or the whole value of 550. 
 Let us calculate then for comparison's sake what would be the 
 value of the part- wage anticipated as above at the end of the fifth 
 year ? The 100 which the labourer has received at the end 
 of the first year can be put out at interest for the next four 
 years that is, till the end of the fifth year ; at the rate of 
 5 per cent (without calculating compound interest), the 100 
 may therefore increase by 20 this course being open even to 
 the wage-paid labourer. Thus, it is clear, the 100 paid at 
 the end of the first year are equivalent to 120 at the end of 
 the fifth. If the labourer then, for the fifth part of the tech- 
 nical labour, receives 100 at the end of a year, clearly he is 
 paid according to a scale which puts him in as favourable a 
 position as if he had received 550 for the whole labour at 
 the expiry of five years. 
 
 But what do Eodbertus and the socialists suppose to be 
 the application of the principle that the labourer should 
 receive the whole value of his product ? They would have 
 the whole value that the completed engine will have at the 
 end of the process of production applied to the payment of 
 wages, but they would have this payment not made at the 
 conclusion of the whole production, but spread proportionally 
 over the whole course of the labour. We should consider 
 well what that 'means. It means 'that the labourer in our 
 example, through this averaging of the part payments, is to 
 receive in two and a half years the whole of the 550 which 
 will be the value of the completed steam-engine at the end of 
 five years. 
 
 I must confess that I consider it absolutely impossible to 
 base this claim on these premises. How should it be according 
 to nature, and founded on the pure idea of justice, that any 
 one should receive at the end of two and a half years a whole 
 that he will only have produced in five years ? It is so little 
 " according to nature," that, on the contrary, in the nature of 
 things it could not be done. It could not be done even 
 if the labourer were released from all the shackles of the much- 
 abused wage-contract, and put in the most favourable position
 
 346 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 that can be conceived that of undertaker in his own right. 
 As labourer-undertaker he will certainly receive the whole of 
 the 550, but not before they are produced; that is to say, 
 not till the end of the five years. And how can that which 
 the very nature of things denies to the undertaker himself be 
 accomplished, in the name of the pure idea of justice, through 
 the contract of wages ? 
 
 To give the matter its proper expression, what the 
 socialists would have is, that the labourers, by means of the 
 wage -contract, should get more, than they have made; more 
 than they could get if they were undertakers on their own 
 account ; and more than they produce for the undertaker with 
 whom they conclude the wage -contract. What they have 
 created, and what they have just claim on, is the 550 at the 
 end of the five years. But the 550 at the end of two 
 and a half years which the socialists claim for them is more ; 
 if the interest stand at 5 per cent it is about as much as 
 620 at the end of five years. And this difference of value 
 is not, as might be thought, a result of social institutions 
 which have created interest and fixed it at 5 per cent institu- 
 tions that might be combated. It is a direct result of the fact 
 that the life of all of us plays itself out in time ; that to-day 
 with its wants and cares comes before to-morrow ; and that 
 none of us is sure of the day after to-morrow. It is 
 not only the capitalist greedy of profit, it is every labourer 
 as well, nay, every human being that makes this distinction 
 of value between present and future. How the labourer would 
 cry out that he was defrauded if, instead of the 20s. which are 
 due him for his week's wage to-day, one were to offer him 20s. 
 a year hence ! And that which is not a matter of indifference to 
 the labourer is to be a matter of indifference to the undertaker ! 
 He is to give 550 at the end of two and a half years for the 
 550 which he is to receive, in the form of the completed 
 product, only at the end of five years. That is neither just 
 nor natural. What is just and natural is I willingly ac- 
 knowledge it again that the labourer should receive the whole 
 value, the 550, at the end of five years. If he cannot or will 
 not wait five years, yet he should, all the same, have the value 
 of his product ; but of course the present value of his present 
 product. This value, however, will require to be less than the
 
 CHAP, ii PRESENT WAGE FOR FUTURE PRODUCT 347 
 
 corresponding proportion of the future value of the product of 
 the technical labour, because in the economic world the law 
 holds that the present value of future goods is less than that 
 of present goods, a law that owes its existence to no social or 
 political institution, but directly to the nature of men and the 
 nature of things. 
 
 If prolixity may ever be excused, it is in this instance, 
 where we have to confute a doctrine with issues so extremely 
 serious as the socialist Exploitation theory. Therefore at the 
 risk of being wearisome to many of my readers I shall put a 
 second concrete case, which, I hope, will afford me an oppor- 
 tunity of pointing out still more convincingly the blunders of 
 the socialists. 
 
 In our first illustration we took no account of the division 
 of labour. Let us now vary the hypothesis in such a way 
 that at this point it will come nearer to the reality of economic 
 life. 
 
 Suppose then that, in the making of the engine, five dif- 
 ferent workers take separate parts, each contributing one 
 year's labour. One labourer obtains, say, by mining, the need- 
 ful iron ore ; the second smelts it ; the third transforms the 
 iron into steel ; the fourth takes the steel and manufactures 
 the separate constituent parts ; and finally the fifth gives the 
 parts their necessary connection, and in general puts the 
 finishing touches to the work. As each succeeding labourer 
 in this case, by the very nature of things, can only begin his 
 work when his predecessors have finished jbheirs, the five years' 
 work of our labourers cannot be performed simultaneously but 
 only successively. Thus the making of the engine will take 
 five years just as in the first illustration. The value of the 
 completed engine remains, as before, 550. According to the 
 proposition that the labourer is to receive the entire value of 
 his product, how much will each of the five partners be able 
 to claim for what he has done ? 
 
 Let us try to answer this question first on the assumption 
 that the claims of wages are to be adjusted, without the inter- 
 vention of an outside undertaker, solely among the labourers 
 themselves ; the product obtained is to be divided simply 
 among the five labourers. In this case two things are 
 certain.
 
 348 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 First, a division can only take place after five years, be- 
 cause before that date there is nothing suitable for division. 
 For if one were now to give away in payment of wages to 
 individuals, say the brass and iron which had been secured 
 during the first two years, the raw material for the next 
 stage of the work would be wanting. It is abundantly clear 
 that the product acquired in the first years is necessarily with- 
 drawn from any earlier division, and must remain bound up 
 in the production till the close. 
 
 Second, it is certain that a total value of 550 will have 
 to be divided among the five labourers. 
 
 In what proportion will it be divided ? 
 
 Certainly not, as one might easily think at the first hasty 
 glance, into equal parts. For this would be distinctly to 
 favour those labourers whose labour comes at a later stage of 
 the total production, in comparison with their colleagues who 
 were employed in the earlier stages. The labourer who com- 
 pleted the engine would receive for his year's labour 110 
 immediately on the conclusion of his work ; the labourer who 
 turned out the separate constituent portions of the engine would 
 receive the same sum, but must wait on his payment for a 
 whole year after the completion of his year's labour; while 
 that labourer who procured the ore would not receive the same 
 amount of wages till four years after he had done his share 
 of the work. As such a delay could not possibly be indifferent 
 to the partners, every one would wish to undertake the final 
 labour (which has not to suffer any postponement of wage), 
 and nobody would be willing to take the preparatory stages. 
 To find labourers to take the preparatory stages then, the 
 labourers of the final stages would be compelled to grant to 
 their colleagues who prepared the work a larger share in the 
 final value of the product, as compensation for the postponement. 
 The amount of this larger share would be regulated, partly by 
 the period of the postponement, partly by the amount of differ- 
 ence that subsists between the valuation of present and the 
 valuation of future goods, a difference which would depend 
 on the economic circumstances of our little society, and on its 
 level of culture. If this difference, for instance, amounted to 
 5 per cent per annum, the shares of the five labourers would 
 graduate in the following manner :
 
 CHAP, ii PRESENT WAGE FOR FUTURE PRODUCT 349 
 
 The first labourer employed, who has to wait for his pay- 
 ment four years after the conclusion of his year's 
 work, receives at the end of the fifth year . 120 
 The second, who has to wait three years . . . 115 
 The third, who waits two years . . . . 110 
 The fourth, who waits one year . . . .105 
 The last, who receives his wages immediately on the con- 
 clusion of his labour 100 
 
 Total 550 
 
 That all the labourers should receive the same amount 
 of 110 is only conceivable on the assumption that the 
 difference of time is of no importance whatever to them, and that 
 they find themselves quite as well paid with the 110, which 
 they receive three or four years after, as if they had received 
 the 1 1 immediately on the conclusion of their labour. But 
 I need scarcely emphasise that such an assumption never 
 corresponds with fact, and never can. That they should each 
 receive 1 1 immediately on tlie accomplishment of their labour 
 is, if a third party do not step in, altogether impossible. 
 
 It is well worth the trouble, in passing, to draw particular 
 attention to one circumstance. I believe no one will find 
 the above scheme of distribution unjust. Above all, as the 
 labourers divide their own product among themselves alone, 
 there cannot be any question of injustice on the part of a 
 capitalist -undertaker. And yet that labourer who has per- 
 formed the second last fifth part of the work does not receive 
 the full fifth part of the final value of the product, but only 
 105 ; and the last labourer of all receives only 100. 
 
 Now assume, as is generally the case in actual fact, that 
 the labourers cannot or will not wait for their wage till the 
 very end of the production of the engine, and that they enter 
 into a negotiation with an undertaker, with the view of obtain- 
 ing a wage from him immediately on the performance of their 
 labour, in return for which he is to become the owner of the final 
 product. Assume, further, that this undertaker is a perfectly 
 just and disinterested man, who is far from making use of the 
 position into which the labourers are possibly forced, to usuriously 
 depress their claim of wages; and let us ask, On what conditions 
 will the wage-contract be concluded under such circumstances ?
 
 350 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 The question is tolerably easy to answer. Clearly the 
 labourers will be perfectly justly treated if the undertaker offers 
 them as wage the sums which they would have received as 
 parts of the division, if they had been producing on their own 
 account. This principle gives us first a firm standing ground 
 for one labourer, namely, for the last. This labourer would 
 in the former case have received 100 immediately after 
 the accomplishment of his labour. This 100, therefore, 
 to be perfectly just, the undertaker must now offer him. 
 For the remaining labourers the above principle gives no 
 immediate indication. The wages in this case are not paid at 
 the same time as they would have been in the case of the 
 division, and the sums paid in the former case cannot afford 
 a direct standard. But we have another standing ground. As 
 all five labourers have performed an equal amount towards 
 the accomplishment of the work, in justice an equal wage is 
 due to them ; and where every labourer is to be paid immediately 
 on the performance of his labour, this wage will be expressed 
 by an equal amount. Therefore, in justice, all five labourers, 
 at the end of their year's labour, will receive each 100. 
 
 If this seems too little, let me refer to the following simple 
 calculation, which will demonstrate that the labourers receive 
 quite the same value in this case as they would have received 
 had they divided the whole product among themselves alone, 
 in which case, as we have seen, the justice of the division 
 would have been beyond question. 
 
 Labourer No. 5 receives, in the case of division, 100 
 immediately after the year's labour; in the case of the wage- 
 contract he receives the same sum at the same time. 
 
 Labourer No. 4 receives, in the case of division, 105 a 
 year after the termination of the year's labour ; in the case 
 of the wage-contract 100 immediately after the labour. If, 
 in the latter case, he lets this sum lie at interest for a year 
 he will be in exactly the same position as he would have been 
 in the case of division; he will be in possession of 105 one 
 year after the conclusion of his labour. 
 
 Worker No. 3 receives, in the case of division, 110 two 
 years after the termination of his labour; in the wage-contract, 
 1 at once, which sum, placed at interest for two years, will 
 increase to 110.
 
 CHAP, it PRESENT WAGE FOR FUTURE PRODUCT 351 
 
 And in the same way, finally, the 100 which the first 
 and second labourers receive are, with the addition of the 
 respective 'interests, quite equivalent to the 120 and the 
 115 which, in the case of division, these two labourers would 
 have received respectively four and three years after the 
 conclusion of their labour. 
 
 But if each single wage under the contract is equal to the 
 corresponding quota under the division, of course the sum of 
 the wages must also be equal to the sum of the division 
 quotas; the sum of 500 which the undertaker pays to the 
 labourers immediately on the completion of their work is 
 entirely equal in value to the 550 which, in the other case, 
 would have been divided among the labourers at the end of 
 the fifth year. 
 
 A higher wage payment, e.g. to pay the year's labour at 
 110 each labourer,, is only conceivable in one of two 
 cases ; either if that which is not indifferent to the labourers, 
 namely, the difference of time, were completely indifferent to 
 the undertaker ; or if the undertaker were willing to make 
 a gift to the labourers of the difference in value between a 
 present 110 and a future 110. Neither the one nor the 
 other is to be expected of private undertakers, at least as a 
 rule ; nor do they deserve the slightest reproach on that 
 account, and, least of all, the reproach of injustice, exploitation, 
 or robbery. 
 
 There is only one personage from whom the labourers could 
 expect such a treatment the State. For on the one hand, the 
 state, as a permanently existing entity, is not bound to pay as 
 much regard to the difference of time in the outgoing and 
 replacing of goods as the short-lived individual. And on the 
 other hand, the state, whose end is the welfare of the whole, 
 can, if it is a question of the welfare of a great number of the 
 members, quit the strict standpoint of service and counter- 
 service, and, instead of bargaining, may give. So then it 
 certainly is conceivable that the state but certainly only the 
 state assuming the function of a gigantic undertaker of pro- 
 duction, might offer to the labourers as wage the full future 
 value of their future product at once, that is, immediately 
 after the accomplishment of their labour. 
 
 Whether the state ought to do this, by which, in the view
 
 352 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 of Socialism, the social question would be practically solved, is 
 a question of propriety which I have no intention of entering 
 on at this moment. But this must be repeated with all 
 emphasis : if the socialist state pays down at once, as wages 
 to the labourer, the whole future value of his product, it is 
 not a fulfilment of the fundamental law that the labourer 
 should receive the value of his product as wages, but a departure 
 from it on social and political grounds. And such a proceed- 
 ing would not be the bringing back of a state of things that 
 was in itself natural, or in accordance with the pure idea of 
 justice, a state of things only temporarily disturbed by the 
 exploiting greed of the capitalists. It would be an artificial* 
 interference, with the intention of making something possible 
 which, in the natural course of things, was not possible, and 
 of making it possible by means of a disguised continuous 
 gift from the magnanimous commonwealth state to its poorer 
 members. 
 
 And now a brief practical application. It is easy to 
 recognise that the method of payment which I have just now 
 described in our illustration is that which actually does obtain 
 in our economic world. In it the full final value of the 
 product of labour is not divided as wages, but only a smaller 
 sum ; this smaller sum, however, being divided at an earlier 
 period of time. Now, so long as the total sum of the wages 
 spread over the course of the production is not less than the 
 final value of the finished product by more than is necessary 
 to make up the difference in the valuation of present as 
 compared with future goods in other words, so long as the 
 sum of the wages does not differ from the final value of the 
 product by more than the amount of the interest customary 
 in the country no curtailment is made on the claims that 
 the workers have on the whole value of their product. They 
 receive their whole product according to its valuation at the 
 point of time in which tJiey receive their wages. Only in so far 
 as the total wages diifer from the final value of the product by 
 more than the amount of interest customary in the country, 
 can there be, under the circumstances, any real exploitation of 
 the labourers. 1 
 
 1 More exact criticism on this head I postpone till my second volume. To 
 protect myself against misunderstandings, however, and particularly against the
 
 CHAP, ii VALUE NOT REGULATED BY LABOUR 353 
 
 To return to Rodbertus. The second, and most distinct 
 blunder of which I have accused him in the foregoing, is that 
 he interprets the proposition I have conceded (the labourer is to 
 receive the whole value of his product) in an unwarrantable 
 and illogical manner, as if it meant that the labourer is to 
 receive now the whole value which his completed product will 
 have at some future time. 
 
 If we inquire how it was that Rodbertus fell into this 
 mistake, we shall find that the cause of it was another mistake, 
 this being the third important error in the Exploitation theoiy. 
 It is that he starts with the assumption that the value of 
 goods is regulated solely by the amount of labour which 
 their production has cost. If this were correct, then the 
 first product, in which is embodied the labour of one year, 
 must now possess a full fifth part of the value which the com- 
 pleted product, in which is embodied five years of labour, will 
 possess. In this case the claim of the labourer to receive as 
 wages a full fifth part of that completed value would be 
 justified. But this assumption, as Rodbertus puts it, is un- 
 doubtedly false. To prove this I need not question in the 
 least the theoretical validity of Ricardo's celebrated theory, 
 that labour is the source and measure of all value. I need 
 only point out the existence of a distinct exception to this 
 law, noticed by Ricardo himself and discussed by him in 
 detail in a separate chapter, but, strangely enough, passed 
 
 imputation of considering undertaking profit to be a " profit of plunder " when it 
 exceeds the usual rate of interest, I may add a short note. 
 
 In the total difference, between value of product and wages expended, which 
 falls to the undertaker, there may possibly be four constituents, essentially different 
 from each other. 
 
 1. A premium for risk, to provide against the danger of the production turn- 
 ing out badly. Rightly measured, this will, on an average of years, be spent in 
 covering actual losses, and this of course involves no curtailment of the labourer. 
 
 2. A payment for the undertaker's own labour. This of course is equally 
 unobjectionable, and in certain circumstances, as in the using of a new invention 
 of the undertaker, may be very highly assessed without any injustice being done 
 to the labourer. 
 
 3. The compensation referred to in the text, viz. the compensation for difference 
 of time between the wage payment and the realising of the final product, this 
 being afforded by the customary interest. 
 
 4. The undertaker may possibly get an additional profit by taking advantage 
 of the necessitous condition of the labourers to usuriously force down their wages. 
 
 Of these four constituents only the latter involves' any violation of the 
 principle that the labourer should receive the whole value of his product. 
 
 2 A
 
 354 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 over without notice by Rodbertus. This exception is found 
 in the fact that, of two goods which have cost an equal 
 amount of labour to produce, that one obtains a higher exchange 
 value the completion of which demands the greater advances 
 of previous labour, or the longer period of time. Ricardo 
 notices this fact in a characteristic manner. He declares (S 4 
 
 X O 
 
 of the first chapter of his Principles) that " the principle that 
 the quantity of labour employed in the production of goods 
 regulates their relative value, suffers a considerable modification 
 by the employment of machinery and other fixed and durable 
 capital," and further, in 5, "on account of the unequal 
 durability of capital, and of the unequal rapidity with which, it 
 is returned to its owner." That is to say, in a production 
 where much fixed capital is used, or fixed capital of a greater 
 durability, or where the time of turn -over on which the 
 floating capital is paid back to the undertaker is longer, the 
 goods made have a higher exchange value than goods' which 
 have cost an equal amount of labour, but into the production 
 of which the elements just named do not enter, or enter in 
 a lesser degree, indeed an exchange value which is higher by 
 the amount of the profit which the undertaker expects to 
 obtain. 
 
 That this exception to the law of labour- value noticed by 
 Ricardo really exists cannot be questioned, even by the most 
 zealous advocates of that law. Just as little can it be questioned 
 that, under certain circumstances, the consideration of the post- 
 ponement may have even a greater influence on the value of 
 goods than the consideration of the amount of labour-costs. I 
 may remind the reader, for example, of the value of an old 
 wine that has been stored up for scores of years, or of a hundred 
 years old tree in the forest. 
 
 But on that exception hangs a tale. It does not 
 require any great penetration to see that the principal 
 feature of natural interest on capital is really involved in 
 it. For when, on the division of the value, those goods 
 that require for their production an advance of foregoing 
 labour show a surplus of exchange value, it is just this 
 surplus that remains in the hands of the capitalist-under- 
 taker as profit. If this difference of value did not exist 
 natural interest on capital would not exist either. This
 
 CHAP, it THE GREAT EXCEPTION 355 
 
 difference of value makes it possible, contains it, is identical 
 with it. 
 
 Nothing is more easily demonstrated than this, if any 
 proof is wanted of so obvious a fact Supposing each of three 
 goods requires for its making a year's labour, but a different 
 length of time over which the labour is advanced. The first 
 good requires only one year's advance of the year's labour; the 
 second a ten years' advance ; the third a twenty years' advance. 
 Under these circumstances the exchange value of the first good 
 will, and must be, sufficient to cover the wages of a year's labour, 
 and, beyond that, one year's interest on the advanced labour. 
 It is perfectly clear that the same exchange value cannot be 
 sufficient to cover the wages of a year's labour, and a ten or 
 twenty years' interest on the ten or twenty years' advance of 
 labour as well. That interest can only be covered if and 
 because the exchange value of the second and third good is 
 correspondingly higher than that of the first good, although all 
 three have cost an equal amount of labour. The difference 
 of exchange value is clearly the source from which the ten 
 and twenty years' interest flows, and the only source from 
 which it can flow. 
 
 Thus this exception to the law of labour-value is nothing 
 less than the chief feature in natural interest on capital Any 
 one who would explain natural interest must, in the first 
 place, explain this ; without an. explanation of the exception 
 here can be no explanation of the problem of interest. Now 
 if, notwithstanding, in treatises on interest this exception is 
 ignored, not to say denied, it is as gross a blunder as could 
 well be conceived. "When Eodbertus ignores the exception, it 
 means nothing else than ignoring the chief part of what he 
 ought to have explained. 
 
 Nor can one excuse Rodbertus's blunder by saying that he 
 did not intend to lay down a rule which should hold in 
 actual life, but only a hypothetical assumption by which he 
 might carry through his abstract inquiries more easily and 
 more correctly. It is true that Eodbertus, in some passages 
 of his writings, does clothe the proposition, that the value 
 of all goods is determined by their labour costs, in the form of 
 a simple hypothesis. 1 But, firstly, there are many passages 
 
 1 E.g. Soziale Frage, pp. 44, 107.
 
 356 RODBERTUS' S EXPLOITATION THEORY BOOK vi 
 
 where Rodbertus expresses his conviction that his principle of 
 value also holds in actual economic life. 1 And, secondly, a 
 man may not assume anything that he likes, even as a simple 
 hypothesis. That is to say, even in a purely hypothetical 
 assumption, one may omit only such circumstances of actual 
 fact as are irrelevant to the question under examination. 
 But what is to be said for a theoretical inquiry into interest 
 which at the critical point leaves out the existence of the 
 most important feature ; which gets rid of the principal part 
 of what it had to explain with a " let us assume" ? 
 
 On one point it may be admitted that Rodbertus is right : 
 if we wish to discover a principle like that of land-rent or 
 interest, we must " not let value dance up and down " ; 2 we 
 must assume the validity of a fixed law of value. But is it 
 not also a fixed law of value that goods which require a 
 longer time between the expenditure of labour and their 
 completion have, ceteris paribus, a higher value ? And is not 
 this law of value of fundamental importance in relation to the 
 phenomenon of interest ? And yet it is to be left out of 
 account like an irregular accident of the circumstances of the 
 market ! 3 
 
 1 Soziale Frage, pp. 113, 147. Erkldrung und Abhilfe, i. p. 123. In the 
 latter Rodbertus says : " If the value of agricultural and manufacturing product 
 is regulated by the labour incorporated in it, as always happens on the whole, 
 even where commerce is free," etc. * Ibid. p. iii. n. 
 
 3 The above was written before the publication of Rodbertus's posthumous 
 work, Capital, in 1884. In it Rodbertus takes an exceedingly strange position 
 towards our question, a position which calls rather for a strengthening than a 
 modification of the above criticism. He strongly emphasises the point that the 
 law of labour value is not an exact law, but simply a law that determines the 
 point towards which value will gravitate (p. 6, etc.) He even owns in as many 
 words that, on account of the undertaker's claim on profit, a constant divergence 
 takes place between the actual value of the goods and their value as measured 
 by labour (p. 11, etc.) -Only he makes the extent of this concession much too 
 trifling when he assumes that the deviation obtains only in the relations of the 
 different stages of production of one and the same good ; and that the deviation 
 does not obtain in the case of all the stages of production as a whole. That is, if 
 the making of a good is divided into several sections of production, of which each 
 section develops into a separate trade, according to Rodbertus the value of the 
 separate product which is made in each individual section cannot remain in 
 exact correspondence with the quantity of labour expended on it ; because the 
 undertakers of the later stages of production have to make a greater outlay -for 
 material, and therefore a greater expenditure of capital, and on that account have 
 to calculate on a higher profit, which higher profit can only be provided by a 
 relatively higher value of the product in question.
 
 CHAP, ii OMISSIONS AND CONTRADICTIONS 357 
 
 This singular omission is not without result. On the 
 first result I have already touched. In overlooking the in- 
 fluence of time upon the value of products, Kodbertus could 
 not avoid falling into the mistake of confounding the claim of 
 the labourer to the whole present value of his product with 
 the claim to its future value. Some other consequences we 
 shall encounter shortly. 
 
 A fourth criticism which I have to make on Eodbertus is, 
 that his doctrine contradicts itself in important points. 
 
 His entire theory of land-rent is based upon the repeatedly 
 and emphatically expressed proposition that the absolute 
 
 However correct this is, it is clear that it does not go far enough. The 
 divergence of the actual value of goods from the quantity of labour expended 
 does not take place only between the fore-products of one good in relation to each 
 other, in such a way that, in the course of the various stages of production, 
 it cancels itself again through reciprocal compensation, and so the final 
 result of all the stages of production, the goods ready for consumption, obeys 
 the law of labour-value. On the contrary, the amount and the duration of the 
 advance of capital definitively forces the value of all goods away from exact 
 correspondence with their labour costs. To illustrate. Say that the production 
 of a commodity requiring ninety days for its manufacture is divided into three 
 stages of thirty days' labour in each. Rodbertus would say that the product of 
 the first thirty days' labour might only attain the value of twenty-five days' 
 labour, while the second thirty attained the value of thirty days', and the third 
 thirty of thirty-five days' labour. But on the whole the final value of the 
 product would be equal to ninety days' labour. But it U u*ttcr of common 
 experience that, in normal successive production, the value of su<>h a commodity 
 will increase during the three stages by a definite amount, say 30 + 31 +32, and 
 that the final product will be equal to, say, ninety-three days of labour ; i.e. a 
 value greater than the value of the labour incorporated in it by the amount of 
 the customary interest. 
 
 Besides this, Rodbertus deserves the severest censure that, in spite of his own 
 admission, he always persists in developing the law of the distribution of all goods 
 in wages and rent under the theoretical hypothesis that all goods possess "normal 
 value " ; that is, a value that corresponds to their labour costs. He thinks he is 
 justified in doing this because the ' ' normal value, in regard to the derivation 
 both of rent in general and of land-rent and capital-rent in particular, is the 
 least captious ; it alone does not quietly beg the question, and assume what 
 was first to be explained by it, as every value does in which is included before- 
 hand an element for rent." 
 
 Here Rodbertus is grievously mistaken. He begs the question quite as im- 
 properly as any of his opponents ever did ; only in an opposite way. His 
 opponents, by their assumptions, have begged the question of the existence of 
 interest. Rodbertus has begged the question of its non-existence. In taking no 
 notice of the constant divergence from " normal value " (which divergence gives 
 natural interest its source and its nourishment), he himself altogether abstracts 
 the chief feature in the phenomenon of interest
 
 358 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 amount of " rent " to be gained in a production does not 
 depend upon the amount of the capital employed, but 
 exclusively upon the amount of labour connected with the 
 production. 
 
 Supposing that in a certain industrial production for ex- 
 ample, in a shoemaking business ten labourers are employed. 
 Each labourer produces per year a product of the value of 100. 
 The necessary maintenance which he receives as wages claims 50 
 of this sum. Thus, whether the capital employed be large or small, 
 the year's rent (as we shall call it with Eodbertus) drawn by 
 the undertaker will amount to 500. If the capital employed 
 amounts, say to 1000, namely, 500 for wages of labour and 
 500 for material, then the rent will make up 50 per cent of 
 the capital. If in another production, say a jeweller's 
 business, ten labourers likewise are employed, then, under the 
 assumption that the value of products is regulated by the 
 amount of labour incorporated in them, they also will produce 
 another yearly product of 100 each, of which the half falls 
 to them as wages, while the other half falls to the undertaker 
 as rent. But as in this case the material, the gold, represents 
 a considerably higher value than the leather of the shoemaking 
 business, the total rent of 500 is distributed over a far 
 larger business capital. Assume that the jeweller's capital 
 amounts to 20,000, 500 for wages and 19,500 for 
 material, then the rent of 500 will only show a 2^ per cent 
 interest on the business capital. 
 
 Both examples are carried out entirely on the lines of 
 Eodbertus's theory. 
 
 As in almost every " manufacture " the proportion between 
 the number of the (directly and indirectly) employed labourers 
 and the amount of business capital employed is different, it 
 follows that, in almost every manufacture, business capital must 
 bear interest at the most various possible rates. Now even 
 Rodbertus does not venture to maintain that this is really 
 the case in everyday life. On the contrary, in a remark- 
 able passage in his theory of land-rent, he assumes that, in 
 virtue of the competition of capitals over the whole field of 
 manufacture, an equal rate of profit will become established. 
 I will give the passage in his own words. After remarking 
 that the rent derived from manufacture is considered wholly
 
 CHAP, ii CONTRADICTIONS 359 
 
 as profit on capital, since here it is exclusively wealth in the 
 form of capital that is employed, he goes on to say : 
 
 " This, further, will give a rate of profit which will tend to 
 the equalisation of profits, and according to this rate, therefore, 
 must be calculated that profit which, as one part of the rent 
 falling to the raw product, accrues to the capital required for 
 agriculture. For if, in consequence of the universal presence 
 of value in exchange, there now exists a homonymous standard 
 for indicating the ratio between return and resources, this 
 standard, in the case of the portion of rent accruing to the 
 capital employed in manufacture, also serves to indicate the 
 ratio between profit and capital. In other words, it will be 
 right to say that the profit in any trade amounts to ten per 
 cent of the capital employed. This rate will then furnish a 
 standard for the equalisation of profits. In whatever trade 
 this rate indicates a higher profit, competition will cause 
 increased investment of capital, and thereby cause a universal 
 tendency towards the equalising of profits. Similarly no one 
 will invest capital where he does not expect profit correspond- 
 ing to this rate." 
 
 It will repay us to look more closely into this passage. 
 
 Rodbertus speaks of competition as that factor which will 
 establish a uniform rate of profit over the field of manufacture. 
 In what manner it will do so is only slightly indicated by 
 him. He assumes that every rate of profit which is higher 
 than the average level is reduced to the average by an increase 
 of the supply of capital ; and we may supplement this by 
 saying that every lower rate of profit is raised to the average 
 level by the flowing off of capital. 
 
 Let us continue a little farther the consideration of the 
 process from the point at which Rodbertus breaks off. In 
 what manner can an increased supply of capital level down the 
 abnormally high rate of profit ? Clearly in this way; that with 
 the increased capital the production of the particular article is 
 increased, and through the increase of supply the exchange 
 value of the product is lowered till such time as after deduct- 
 ing the wages of labour, it only leaves the usual rate of profit 
 as rent. In our above example of the shoemaking business 
 we might evidently have pictured to ourselves the levelling 
 down of the abnormal rate of profit of 50 per cent to the
 
 360 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 average rate of 5 per cent in the following manner. Attracted 
 by the high rate of profit of 5 per cent, a great many persons 
 will go into the shoemaking business. At the same time 
 those who have been engaged in producing will extend 
 their business. Thus the supply of shoes is increased, and 
 their price and exchange value reduced. This process will 
 continue till such time as the exchange value of the year's 
 product of ten labourers in the shoemaking trade is reduced 
 from 1000 to 550. Then the undertaker, after deducting 
 500 for necessary wages, has only 50 over as rent, which, 
 distributed over a business capital of 1000, shows interest 
 at the usual rate of 5 per cent. On reaching this point the 
 exchange value of shoes will require to remain fixed if the 
 profit in the shoemaking trade is not to become abnormal 
 again, in which case a repetition of the process of levelling 
 down would ensue. 
 
 On the same analogy, if the rate of profit in the jeweller's 
 trade be under the average, say 2^ per cent, it will be raised 
 to 5 per cent in this way. The profit in jewellery being so 
 small, its manufacture will be curtailed, the supply of 
 jewellery thereby reduced and its exchange value raised, till 
 such time as the additional product of ten labourers in the 
 jewellery trade reaches an exchange value of 1500. There 
 now remain to the undertaker, after deducting 500 for 
 necessary wages, 1000 as rent, this being interest on the 
 business capital of 20,000 at the usual rate of 5 per cent. 
 Thus is reached the resting-point at which the exchange value 
 of jewellery, as in the former example the exchange value of 
 shoes, may remain steady. 
 
 Before going farther I shall, by looking at the matter from 
 another side, make entirely clear the important point that 
 the levelling of abnormal profits cannot take place without 
 a steady alteration in the exchange value of the products 
 concerned. 
 
 If the exchange value of the products were to remain un- 
 altered, then an insufficient rate of profit could only be raised 
 to the normal level if the difference were made up at the cost 
 of the labourers' necessary wages. For example, if the .product 
 of ten labourers in the jewellery manufacture retained without 
 
 '
 
 CHAP, ii CONTRADICTIONS 
 
 labour expended, then evidently a levelling up of the rate of 
 profit to 5 per cent-that is, an increase in the amount of 
 profit from 500 to 1000 is only conceivable if the wages 
 which the ten labourers have hitherto received were 
 wholly withdrawn, and the entire product handed over to the 
 capitalist as profit. To say nothing of the fact that such a 
 supposition contains in itself a simple impossibility, I nee 
 merely point out that it is equally opposed to experience and 
 to Rodbertus's own theory. It is contrary to experience; for 
 experience shows that the usual effect of a restriction of supply 
 in7ny branch of production is not a depression of the wages 
 of labour, but a raising of the prices of product *** 
 experience does not bear witness that the wages of labour in 
 such trr-des as require a large investment of capital, stand 
 eTntially lower than in other trades-which would nece^anly 
 the caL if the demand for a higher profit bad to be me 
 from wa-es instead of from prices of product And it is als< 
 cTntrarvto Eodbertus's own theory. For that theory assumes 
 that the labourers in the long run always receive the amoun 
 of the necessary costs of their maintenance as wages, a la 
 which would be sensibly violated by this kind of equalisation 
 
 It is just as easy to show conversely that, if the value of the 
 products remained unaltered, a limitation of profits could only 
 take place by raising the wages of the labourers in the trades 
 concerned above the normal scale, which again, as we have said, 
 is contrary to experience and to Rodbertus's own theory 
 
 I may venture then to claim that I have described the 
 process of the equalisation of profits in accordance with fa 3ts 
 and in accordance with Rodbertus's own hypothesis, when I 
 assume that the return of profits to their normal level is 
 brought about by means of a steady alteration m he 
 exchange value of the products concerned. But ] 
 year's product of ten labourers in the shoemaking trade has 
 an exchange value of 550, and the year's product of ten 
 labourers in the jewellery trade has an exchange value of 
 1 5 00 and it must be so if the equalisation of pro! 
 assumed by Rodbertus always takes place, what becomes 
 of his assumption that products exchange according to 1 
 labour incorporated in them? And if, from the employment 
 of the same amount of labour, there result in the one
 
 362 RODBERTUS' S EXPLOITATION THEORY BOOK vi 
 
 50, in the other 1000 as rent, what becomes, further, of 
 the doctrine that the amount of rent to be obtained in a pro- 
 duction is not regulated by the amount of capital employed, 
 but only by the amount of labour performed in it ? 
 
 The contradiction in which Rodbertus has involved himself 
 here is as obvious as it is insoluble. Either products do really 
 exchange, in the long run, in proportion to the labour incor- 
 porated in them, and the amount of rent in a production is 
 really regulated by the amount of labour employed in it, in 
 which case an equalisation of profits is impossible ; or there 
 is an equalisation of the profits of capital, in which case it is 
 impossible that products should continue to exchange in pro- 
 portion to the labour incorporated in them, and that the amount 
 of labour spent should be the only thing that determines the 
 amount of rent obtainable. Rodbertus must have noticed 
 this very evident contradiction if he had only devoted a little 
 real reflection to the manner in which profits become equalised, 
 instead of dismissing the subject in the most superficial way 
 with his phrase about the equalising effect of competition. 
 
 But we are not done with criticism. The whole explana- 
 tion of land -rent, which, with Rodbertus, is so intimately 
 connected with the explanation of interest, is based upon an 
 inconsistency so striking that the author's carelessness in not 
 observing it is almost inconceivable. 
 
 There are only two possibilities here: either, as the effect of 
 competition, an equalisation of profits does take place, or it does 
 not. Assume first that it does take place. What justifica- 
 tion has Rodbertus for supposing that the equalisation will 
 certainly embrace the whole sphere of manufacture, but will 
 come to a halt, as if spellbound, at the boundary of raw pro- 
 duction ? If agriculture promises an attractive profit why 
 should not more capital flow to it ? why should not more land 
 be cultivated, or the land be more intensively cultivated, or 
 cultivated by more improved methods, till the exchange value 
 of raw products comes into correspondence with the increased 
 capital now devoted to agriculture, and yields to it also no 
 more than the common rate of profit ? If the " law " that the 
 amount of rent is not regulated by the outlay of capital, but 
 only by the amount of labour expended, has not prevented 
 equalisation in manufacture, how could it prevent it in raw
 
 CHAP. II 
 
 CRITICISED AS A WHOLE 
 
 production? But what in that case would become of the 
 constant surplus over the usual rate of profit, the land-rent ? 
 
 Or assume that an equalisation does not take place. In that 
 case there being no universal rate of profit, then in agriculture, 
 as in everything else, there is no definite rule as to how much 
 "rent" one may calculate as profit of capital. And, finally, 
 there is no division line between capital and rent of land. 
 
 Therefore, in either case, whether an equalisation of pro 
 does take place or does not, Rodbertus's theory of land-rent hangs 
 in the air There is contradiction upon contradiction, and that, 
 moreover, not in trifles, but in the fundamental doctrines of the 
 theory. 
 
 My criticism has hitherto been directed to the individual 
 parts of Rodbertus's theory. I may conclude by putting the 
 theory as a whole to the test. If correct, it must be 
 competent to give a satisfactory explanation of the pheno- 
 menon of interest as presented in actual economic life, and 
 moreover, of all the essential forms in which it presents itself. 
 If it cannot do so, it is self-condemned ; it is not correct 
 
 I now maintain, and shall attempt to prove, that although 
 Rodbertus's Exploitation theory might possibly account for the 
 interest borne by that part of capital which is invested in wages 
 it is absolutely impossible for it to explain the interest on that 
 part of capital which is invested in the materials of manufacture. 
 Let the reader judge. 
 
 A jeweller whose chief business it is to make strings, ot 
 pearls, employs annually five labourers to make strings to the 
 value of 100,000, and sells them on an average in a years 
 time He will accordingly have a capital of 100,000 con- 
 stantlv invested in pearls, which, at the usual rate of interest, 
 must "yield him a clear annual profit of 5000. We now ask, 
 How is it to be explained that he gets this income? 
 
 Rodbertus answers, Interest on capital is a profit of plunder, 
 got by curtailing the natural and just wages of labour. Wages 
 of what labour ? Of the five labourers who sorted and strung 
 the pearls ? That cannot well be ; for if, by curtailing the just 
 wages of the five labourers, one could gain 5000, then the 
 iust wages of these labourers must, in any case, have amounted 
 to more than 5000. That is to say, these wages must have
 
 364 RODBERTUS'S EXPLOITATION THEORY BOOK vi 
 
 amounted, in any case, to more than 1000 per man, a height 
 of just wages that can hardly be taken seriously, especially as 
 the business of sorting and stringing pearls is very little above 
 the character of unskilled labour. 
 
 But let us look a little farther. Perhaps it is the labourers 
 of an earlier stage of production from the product of whose 
 labour the jeweller obtains his stolen profit ; say the pearl- 
 fishers. But the jeweller has not coine into contact at all 
 with these labourers, for he buys his pearls direct from 
 an undertaker of pearl-fishing, or from a middleman ; he has 
 therefore had no opportunity whatever of deducting from the 
 pearl-fishers a part of their product, or a part of the value of 
 their product. But perhaps the undertaker of pearl-fishing has 
 done so instead of him, so that the jeweller's profit originates 
 in a deduction which the undertaker of the pearl-fishing has 
 made from the wages of his labourers. That, however, is im- 
 possible ; for clearly the jeweller would make his profit even if 
 the undertaker of the pearl-fishing had made no deduction what- 
 ever from the wages of his labourers. Even if this latter under- 
 taker were to divide among his labourers as wages the whole 
 100,000 that the pearls so obtained are worth the whole 
 10 0,0 he receives from the jeweller as purchase money then 
 it only comes to this, that he makes no profit. It in no wise 
 follows that the jeweller loses his profit. For to the jeweller 
 it is a matter of complete indifference how this purchase money 
 which he pays is distributed, so long as the price is not raised. 
 Whatever then be the flights of our fancy, we shall seek in vain 
 for the labourers from whose just wages the jeweller's profit of 
 5000 could possibly have been withheld. 
 
 Perhaps, however, even after this illustration there may 
 be some readers still unconvinced. Perhaps they may think 
 it certainly a little strange that the labour of the five pearl 
 stringers should be the source from which the jeweller can 
 exploit so considerable a profit as 5000, but yet not quite 
 inconceivable. Let me therefore bring forward another and 
 still more striking illustration, a good old example by which 
 many an interest theory has already been tested and found false. 
 
 The owner, of a vineyard has harvested a cask of good young 
 wine. Immediately after the vintage it has an exchange value 
 of 10. He lets the wine lie undisturbed in the cellar, and
 
 CHAP. II 
 
 CRITICISED AS A WHOLE 365 
 
 after a dozen years the wine, now of course an old wine, has an 
 exchange value of 20. This is a well-known fact. The 
 difference of 10 faUs to the owner of the wine as interest on 
 the capital contained in the wine. Now who are the labourers 
 that are exploited by this profit of capital ? 
 
 During the storage there has been no further labour 
 expended on the wine. The only conceivable thing is that the 
 exploitation has been at the expense of those labourers who 
 produced the new wine. The owner of the vineyard has paid 
 them too small a wage. But I ask, How much ought he in 
 justice" to have paid them as wage?. Even if he pays them 
 the entire 10, which was the value of the new wine at the 
 time of harvest, there stills remains to him the increment in 
 value of 10, which Kodbertus brands as profit of plunder. 
 Indeed even if he pays them 12 or 15 as wages, the accu- 
 sation of plundering will still hang over him ; he will only be 
 free from it if he has paid the full 20. Now can any one 
 seriously ask that 20 should be paid as " just wages of labour " 
 for a product that is not worth more than 10 ? Does the 
 owner know beforehand whether the product will ever be 
 worth 20 ? Is it not possible that he might be forced, con- 
 trary to his original intention, to use or to .sell the wine before 
 the expiry of twelve years? And would he not then have 
 paid 20*for a product that was never worth more than 10 or 
 perhaps 12 ? And then, how is he to pay the labourers who 
 produce that other new wine which he sells at once for 10? 
 Is he to pay them also 20 ? Then he will be ruined. Or 
 only 10 ? Then different labourers will receive different 
 wages for precisely similar work, which again is unjust ; not to 
 mention the fact that a man cannot very well know beforehand 
 whose product it is that will be sold at once, and whose stored 
 up for a dozen years. 
 
 But still further. Even a 20 wage for a cask of new 
 wine would not be enough to protect the vine-grower from the 
 accusation of robbery ; for he might let the wine lie in the 
 cellar twenty-four years instead of twelve, and then it would 
 be worth not 2 but 40. Is he then, justly speaking, bound 
 to pay the labourers who, twenty-four years before that, have 
 produced the wine, 40 instead of 10 ? The idea is too 
 absurd. But if he pays them only 10 or 20, then he makes
 
 368 RODBERTUS^S EXPLOITATION THEORY BOOK vi 
 
 a profit on capital, and Kodbertus declares that he has curtailed 
 the labourer's just wage by keeping back a part of the value 
 of his product ! 
 
 I scarcely think any one will venture to maintain that 
 the cases of interest which have been brought forward, and the 
 numerous cases analogous to them, are explained by Eodbertus's 
 theory. But a theory which has failed to explain any important 
 part of the phenomena to be explained cannot be the true one, 
 and so this final examination brings us to the same result as 
 the detailed criticism which preceded it might lead us to expect. 
 Rodbertus's Exploitation theory is, in its foundation and in its 
 conclusions, wrong ; it is in contradiction with itself and with 
 the circumstances of actual life. 
 
 The nature of my critical task is such that, in the foregoing 
 pages, I could not choose but confine myself to one side that of 
 pointing out the errors into which Rodbertus had fallen. I 
 consider it due to the memory of this distinguished man to 
 acknowledge, in equally candid terms, his conspicuous merits 
 as regards the development of the theory of political economy. 
 Unfortunately, to dwell on these lies beyond the limits of my 
 present task.
 
 CHAPTER III 
 
 MAKX 
 
 MARX 1 starts from the proposition that the exchange value 2 
 of all goods is regulated entirely by the amount of labour which 
 their production costs. He lays much more emphasis on 
 this proposition than does Rodbertus. While Rodbertus only 
 mentions it incidentally, in the course of Ms argument as it 
 were, and puts it very often in the shape of a hypothetical 
 assumption without wasting any words in its proof, Marx 
 makes it his fundamental principle, and goes thoroughly into 
 statement and explication. To be just to the peculiar dia- 
 lectical style of the author I must give the essential parts of 
 the theory in his own words. 
 
 " The utility of a thing gives it a value in use. But this 
 utility is not something in the air. It is limited by the pro- 
 perties of the commodity, and has no existence apart from that 
 commodity. The commodity itself, the iron, corn, or diamond, 
 is therefore a use value or good. . . . Use values constitute the 
 matter of wealth, whatever be their social form. In the social 
 form we are about to consider they constitute at the same 
 time the material substratum of exchange value. Exchange 
 value in the first instance presents itself as the quantitative 
 
 1 Zur Kritik der politischen-Oekonomie, Berlin, 1859. Das Kapital, Kritik 
 der politischen-Oekoiwmic, vol. i. first edition, Hamburg, 1867 ; second edition, 
 1872. English translation by Moore and Aveling, Sonnenschein, 1887. 1 
 quote from Das Kapital as the book in which Marx stated his views last and 
 most in detail. On Marx also Knies has made some very valuable criticisms, of 
 which I make frequent use in the sequel. Most of the other attempts to criticise 
 and refute Marx's work are so far below that of Knies in value that I have not 
 found it useful to refer to them. 
 
 2 With Marx simply called Value.
 
 368 MARX'S EXPLOITATION THEORY BOOK vi 
 
 relation, the proportion in which use values of one kind are 
 exchanged for those of another kind, a relation constantly 
 changing with time and place. Hence exchange value seems 
 to be something accidental and purely relative, and an intrinsic 
 value in exchange seems a contradiction in terms. Let us 
 look at the matter more closely. 
 
 " A single commodity, e.g. a quarter of wheat, exchanges 
 with other articles in the most varying proportions. Still its 
 exchange value remains unaltered, whether expressed in X 
 boot-blacking, Y silk, or Z money. It must therefore have a 
 content distinct from those various forms of expression. Now 
 let us take two commodities, wheat and iron. Whatever be 
 the proportion in which they are exchangeable, it can always 
 be represented by an equation, in which a given quantity of 
 wheat appears as equal to a certain quantity of iron. For 
 instance, 1 quarter wheat = 1 cwt. of iron. What does this 
 equation tell us ? It tells us that there is a common element 
 of equal amount in two different things in a quarter of wheat 
 and in a cwt. of iron. The two things are therefore equal to a 
 third, which in itself is neither the one nor the other. Each 
 of the two, so far as it is an exchange value, must therefore be 
 reducible to that third. . . . This common element cannot be a 
 geometrical, physical, chemical, or other natural property of the 
 commodities. Their physical properties only come into con- 
 sideration so far as they make the commodities useful ; that is, 
 make them use values! But, on the other hand, the exchange 
 relation of goods evidently involves our disregarding their 
 use value. Within this relation one use value counts for just 
 as much as any other, provided only it be present in due 
 proportion. Or, as old Barbon says, " one sort of wares is as 
 good as another if the value be equal." There is no difference 
 or distinction in things of equal value. One hundred pounds' 
 worth of lead or iron is of as great a value as one hundred 
 pounds' worth of silver and gold." As use values, commodities 
 are, first and foremost, of different qualities ; as exchange values 
 they can only be of different quantities, and contain therefore 
 not an atom of use value. 
 
 " If then we disregard the use value of commodities, they 
 have only one common property left, that of being products of 
 labour. But even as the product of labour they have changed
 
 SOCIALL Y NECLSSAR Y LABOUR 
 
 in our hand. For if we disregard the use value of a commodity, 
 we disregard also the special material constituents and shapes 
 which rive it a use value. It is no longer a table, a house, 
 yarn or any other useful thing. All its sensible qualities 
 have disappeared. Nor is it any longer the product of the 
 labour of the joiner, the mason, the spinner, or of any othe 
 distinct kind of productive labour. With the useful character 
 of the products of labour disappears the useful character of the 
 labours embodied in them, and also the different concrete forms, 
 of these labours; they are no longer distinguished from -each 
 other, but are all reduced to equal human labour, abstract 
 
 human labour. 
 
 Consider now what is left. It is nothing but the same 
 immaterial objectivity, a mere congelation of homogeneous 
 human labour, i.e. of labour power expended without regard to 
 the form of its expenditure. All that these things now tell us 
 is that human labour was expended in their production, that 
 human labour is stored up in them ; as crystals of this common 
 social substance they are Values. ... A use value or good, 
 therefore, only has a value because abstract human labour is 
 objectified or materialised in it." 
 
 As labour is the source of all value, so, Marx continues, 
 the amount of the value of all goods is measured by the 
 quantity of labour contained in them, or in labour time 
 But not by that particular labour time which the individual 
 who made the good might find necessary, but by the "socially 
 necessary labour time." This Marx explains as the "labour 
 time required to produce a use value under the conditions of 
 production that are socially normal at the time, and with the 
 socially necessary degree of skill and intensity of labour.' 
 is only the quantity of socially necessary labour, or the labour 
 time socially necessary for the making of a use value, that 
 determines the amount of the value. " The single commodity 
 here is to be counted as the average sample of its class. 
 Commodities, therefore, in which equally great amounts of labour 
 are contained, or which could be made in the same labour time, 
 have the same amount of value. The value of one commodity 
 is to the value of every other commodity as the labour time 
 necessary to the production of the one is to the labour time 
 necessary to the production of the other. ... As values all 
 
 2 B
 
 370 MARX'S EXPLOITATION THEORY BOOK vi 
 
 commodities are only definite amounts of congealed labour 
 time." 1 
 
 Later on I shall try to estimate the value of these funda- 
 mental principles which Marx puts forward on the subject of 
 value. In the meantime I go on to his theory of interest. 
 
 Marx finds the problem of interest in the following 
 phenomenon. The usual circulation of commodities carried on 
 by the medium of exchange, money, proceeds in this way : one 
 man sells the commodity which he possesses for money, in 
 order to buy with the money another commodity which he 
 requires for his own purposes. This course of circulation 
 may be expressed by the formula, Commodity Money 
 Commodity. The starting point and the finishing point of 
 the circulation is a commodity, though the two commodities 
 be of different kinds. 
 
 " But by the side of this form of exchange we find another 
 and specifically different form, namely, Money Commodity 
 Money; the transformation of money into a commodity and the 
 transformation back again of the commodity into money buy- 
 ing in order to sell. Money that in its movement describes this 
 circulation becomes capital, and is already capital when it is 
 dedicated to be used in this way. ... In the simple circulation 
 of commodities the two extremes have the same economic form. 
 They are both commodities. They are also of the same value. 
 But they are qualitatively different use values, as, for instance, 
 wheat and clothes. The essence of the movement consists in 
 the exchange of those products in which the labour of society is 
 embodied. It is different with the circulation M C M. At 
 the first glance it looks as if it were meaningless, because 
 tautological. Both extremes have the same economic form. 
 They are both money, and therefore not qualitatively different 
 use values, for money is but the converted form of commodities 
 in which their different use values are lost. First to exchange 
 1 for wool, and then to exchange the same wool again for 
 100 that is, in a roundabout way to exchange money for 
 money, like for like seems a transaction as purposeless as it is 
 absurd. One sum of money can only be distinguished from 
 another snm of money by its amount. The process M C M 
 does not owe its character therefore to any qualitative difference 
 
 1 Das Kapital, second edition, p. 10, etc.
 
 CHAP, in SURPLUS VALUE 371 
 
 between its extremes, since they are both money, but only to 
 this quantitative difference. At the end of the process more 
 money is withdrawn from the circulation than was thrown in 
 at the beginning. The wool bought for 100 is sold again, 
 that is to say, for 100 + 10, or 110. The complete form 
 of this process therefore is M C M', where M' = M + AM; 
 that is, the sum originally advanced plus an increment. This 
 increment, or surplus over original value, I call Surplus Value 
 (Mehrwerth}. The value originally advanced, therefore, not only 
 remains during the circulation, but changes in amount; adds 
 to itself a surplus value, or makes itself value. And this 
 movement changes it into capital" (p. 132). 
 
 " To buy in order to sell, or, to put it more fully, to buy in 
 order to sell at a higher price, M C M 7 , seems indeed the 
 peculiar form characteristic of one kind of capital only, 
 merchant capital. But industrial capital also is money that 
 changes itself into commodities, and by the sale of these 
 commodities changes back into more money. Acts which take 
 place outside the sphere of circulation, between the buying and 
 the selling, do not make any alteration in the form of the 
 movement. Finally, in interest bearing capital the circulation 
 M c M ' presents itself in an abridged form, shows its 
 result without any mediation, en style lapidaire so to speak, 
 as M M'; i.e. money which is equal to more money, value 
 which is greater than itself" (p. 138). 
 
 Whence then comes the surplus value ? 
 Marx works out the problem dialectically. First he 
 declares that the surplus value can neither originate in the 
 fact that the capitalist, as buyer, buys commodities regularly 
 under their value, nor in the fact that the capitalist, as seller, 
 sells them regularly over their value. It cannot therefore 
 originate in the circulation. But neither can it originate out- 
 side the circulation. For "outside the circulation the owner of 
 the commodity only stands related to his own commodity. As 
 regards its value the relation is limited to this, that the 
 commodity contains a quantity of the owner's own labour 
 measured by definite social laws. This quantity of labour is 
 expressed in the amount of the value of the commodity pro- 
 duced/and, since the amount of the value is expressed in money, 
 the quantity of labour is expressed in a price, say 10. But
 
 372 MARX'S EXPLOITATION THEORY BOOK vi 
 
 the owner's labour does not represent itself in the value of the 
 commodity and in a surplus over its own value in a price of 
 10, which is at the same time a price of 11 in a value 
 which is greater than itself ! The owner of a commodity can 
 by his labour produce value, but not value that evolves itself. 
 He can raise the value of a commodity by adding new value 
 to that which is there already, through new labour ; as, e.g. 
 in making boots out of leather. The same material has now 
 more value, because it contains a greater amount of labour. 
 The boot then has more value than the leather, but the value 
 of the leather remains as it was. It has not evolved itself; 
 it has not added a surplus value to itself during the making of 
 the boot" (p. 150). 
 
 And now the problem stands as follows : " Our money 
 owner, who is yet only a capitalist in the grub stage, must buy 
 the commodities at their value, must sell them at their value, 
 and yet at the end of the process must draw out more money 
 than he put in. The bursting of the grub into the butterfly 
 must take place in the sphere of circulation, and not in the 
 sphere of circulation. These are the conditions of the problem. 
 Hie Ehodus, hie salta !" (p. 150). 
 
 The solution Marx finds in this, that there is one commodity 
 whose use value possesses the peculiar quality of being the 
 source of exchange value. This commodity is the capacity of 
 labour, or Labour Power. It is offered -for sale on the market 
 under the double condition that the labourer is personally free, 
 for otherwise it would not be his labour power that would 
 be on sale, but his entire person as a slave ; and that the 
 labourer is deprived of " all things necessary for the realising 
 of his labour power," for otherwise he would prefer to produce 
 on his own account, and to offer his products instead of his 
 labour power for sale. It is by trading in this commodity 
 that the capitalist receives the surplus value. In the following 
 way. 
 
 The value of the commodity, labour power, like that of all 
 other commodities, is regulated by the labour time necessary 
 for its reproduction ; that is, in this case, by the labour time 
 that is necessary to produce as much means of subsistence as 
 are required for the maintenance of the labourer. Say, for 
 instance, that, to produce the necessary means of subsistence
 
 CHAP, in UNPAID LABOUR 373 
 
 for one day, a social labour time of six hours is necessary, and 
 assume that this same labour time is embodied in three 
 shillings of money, then the labour power of one day is to be 
 bought for three shillings. If the capitalist has completed this 
 purchase, the use value of the labour power belongs to him, and 
 he realises it by getting the labourer to work for him. If he 
 were to get him to work only so many hours per day as are 
 incorporated in the labour power itself, and as must have been 
 paid in the buying of the same, no surplus value would emerge. 
 For, according to the assumption, six hours of labour cannot 
 put into the product in which they are incorporated any greater 
 value than three shillings, and so much the capitalist has paid 
 as wage. But this is not the way in which capitalists act. 
 Even if they have bought the labour power for a price that only 
 corresponds to six hours' labour time, they get the worker to 
 labour the whole day for them. And now, in the product 
 made during this day, there are more hours of labour in- 
 corporated than the capitalist was obliged to pay for; he has 
 consequently a greater value than the wage he has paid, and 
 the difference is the "surplus value" that falls to the capitalist. 
 
 To take an example. Suppose that a worker can in six 
 hours spin 10 Ibs. of Wool into yarn. Suppose that this 
 wool for its own production has required twenty hours of 
 labour, and possesses, accordingly, a value of 10s. Suppose, 
 further, that during the six hours of spinning the spinner uses 
 up so much of his tools as corresponds to the labour of four 
 hours, and represents consequently a value of 2s. The total 
 value of the means of production consumed in the spinning 
 will amount to 12s., corresponding to twenty-four hours' labour. 
 In the spinning process the wool " absorbs " other six hours of 
 labour ; the yarn spun is therefore, on the whole, the product 
 of thirty hours of labour, and will have in conformity a value 
 of 15s. Under the assumption that the capitalist gets the 
 hired labourer to work only six hours in the day, the making of 
 the yarn has cost the capitalist quite 15s. 10s. for wool; 2s. 
 for wear and tear of tools ; 3s. for wage of labour. There is 
 no surplus value here. 
 
 Quite otherwise is it if the capitalist gets the labourer to 
 work twelve hours a day for him. In twelve hours the 
 labourer works up 20 Ibs. of wool, in which previously
 
 374 MARX'S EXPLOITATION THEORY BOOK vi 
 
 forty hours of labour have been incorporated, and which, 
 consequently, are worth 20s.; further he uses up in tools the 
 product of eight hours' labour, of the value of 4s. ; but during a 
 day he adds to the raw material twelve hours' labour, that 
 is, a new value of 6s. And now the balance-sheet stands as 
 follows : The yarn produced during a day has cost in all sixty 
 hours' labour; it has therefore a value of 30s. The outlays 
 of the capitalist amounted to 20s. for wool, 4s. for wear and 
 tear of tools, and 3s. for wage ; in all, therefore, only 2 7s. 
 There remains now a " surplus value " of 3s. 
 
 Surplus value therefore, according to Marx, is a con- 
 sequence of the capitalist getting the labourer to work a 
 part of the day for him without paying for it. In the 
 labourer's work day two portions may be distinguished. In 
 the first part, the " necessary labour time," the worker produces 
 the means of his own maintenance, or the value of that 
 maintenance ; for this part of his labour he receives an 
 equivalent in wage. During the second portion, the " surplus 
 labour time," he is " exploited " ; he produces " surplus value " 
 without receiving any equivalent whatever for it. 1 " Capital 
 is therefore not merely a command over labour, as Adam 
 Smith calls it. It is essentially a command over unpaid labour. 
 All surplus value, in whatever particular form it may after- 
 wards crystallise itself, be it profit, interest, rent, or any other, is 
 in substance only the material shape of unpaid labour. The 
 secret of the power of capital to evolve value is found in 
 its disposal over a definite quantity of the unpaid labour of 
 others" (p. 554). 
 
 In this statement the careful reader will have recognised 
 if partly in a somewhat altered dress all the essential 
 propositions combined by Eodbertus in his theory of interest : 
 the doctrine that the value of goods is measured by quantity 
 of labour ; that labour alone creates all value ; that in the 
 loan contract the worker receives less value than he creates, 
 and that necessity compels him to acquiesce in this ; that the 
 capitalist appropriates the surplus to himself; and that 
 consequently the profit so obtained has the character of 
 plunder from the produce of the labour of others. 
 
 1 Das Kapital, p. 205, etc.
 
 CHAP, in RODBERTUS AND MARX 375 
 
 On account of the substantial agreement of both theories, 
 or, to speak more correctly, of both ways of formulating the 
 same theory, almost everything that I have adduced against 
 Eodbertus's doctrine has equal force against Marx. I may 
 therefore limit myself now to some supplementary remarks 
 that I consider necessary ; partly for the purpose of adapting 
 my criticism in particular places to Marx's peculiar statement 
 of the theory, partly also for dealing with some new matter 
 introduced by Marx. 
 
 Of this by far the most important is the attempt to prove 
 the proposition that all value rests on labour, instead of merely 
 asserting it. In criticising Eodbertus I laid as little emphasis 
 on that proposition as he had done. I was content to point 
 out some undoubted exceptions to it, but I did not go to the 
 root of the matter. In the case of Marx I neither can nor 
 will intermit this. It is true that in doing so I venture on a 
 field already traversed many a time, and by distinguished 
 writers. I can scarcely hope then to bring forward much that 
 is new. But in a book which has for its subject the critical 
 statement of theories of interest, it would ill become me to 
 avoid the thorough criticism of a proposition which has been 
 placed at the head of one of the most important of these 
 theories, as its most important fundamental principle. And, 
 unfortunately, the present position of our science is not such 
 that it can be considered superfluous once more to undertake 
 this task. Although this proposition is, in truth, nothing more 
 than a fallacy once perpetrated by a great man, and repeated 
 ever since by a credulous crowd, in our day it is like to be 
 accepted in widening circles as a kind of gospel. 
 
 For the doctrine that the value of all goods depends upon 
 labour, the proud names of Adam Smith and Eicardo have 
 usually been claimed both as authors and authorities. This 
 is correct; but it is not altogether correct. The doctrine 
 is to be found in the writings of both; but Adam Smith 
 now and then contradicts it, 1 and Eicardp so narrows the 
 
 1 e.g. when in the fifth chapter of the second book he says of the farmer: 
 "Not only his labouring servants, but his labouring cattle are productive 
 labourers ; " and further, " In agriculture too Nature labours along with man, 
 and though her labour costs no expense, its produce has its value as well as that 
 of the most expensive workmen." See also Knies, Der Kredit, part H. p. 62.
 
 376 MARX'S EXPLOITATION THEORY BOOK vi 
 
 sphere within which it is valid, and surrounds it with such 
 important exceptions, that it is scarcely justifiable to assert 
 that he has represented labour as the universal and the 
 exclusive principle of value. He begins his Principles with 
 the express assertion that the exchange value of goods has its 
 origin in two sources in their scarcity and in the quantity of 
 labour that their production has cost. Certain goods, such as 
 rare statues and paintings, get their value exclusively from the 
 former source, and it is only the value of those goods that can 
 be multiplied, without any assignable limit, by labour, which is 
 determined by the amount of labour they cost. These latter, 
 indeed, in Ricardo's opinion, constitute "by far the greatest part 
 of those goods which are the objects of desire " ; but even in 
 regard to them Ricardo finds himself compelled to a further 
 limitation. He has to admit that, even in their case, the 
 exchange value is not determined exclusively by labour; 
 that time also the time elapsing between the advancing of 
 the labour and the realising of the finished product has a 
 considerable influence on it. 1 
 
 It appears then that neither Adam Smith nor Ricardo have 
 stated the principle that stands in their name in such an 
 unqualified way as they generally get credit for. Still, to a 
 certain extent, they have stated it, and we have to inquire on 
 what grounds they did so. 
 
 On seeking to answer this question we shall make a 
 remarkable discovery. It is that neither Adam Smith nor 
 Ricardo have given any reason for this principle, but simply 
 asserted its validity as something self - explanatory. The 
 celebrated passage in Adam Smith, which Ricardo afterwards 
 verbally adopted in his own doctrine, runs thus : " The real 
 price of everything, what everything really costs to the man 
 who wants to acquire it, is the toil and trouble of acquiring it. 
 What everything is really worth to the man who has acquired 
 it, and who wants to dispose of it, or exchange it for some- 
 thing else, is the toil and trouble which it can save to himself, 
 and which it can impose upon other people." 2 
 
 Let us pause here a moment. The tone in which Adam 
 
 1 See above, p. 354, and Knies as before, p. 60, etc. 
 
 2 Wealth of Nations, book i. chap. v. (p. 13 of M'Culloch's edition) ; Ricardo, 
 Principles, chap. i.
 
 CHAP, in VALUE AND TROUBLE 377 
 
 Smith speaks signifies that the truth of these words must be 
 immediately obvious. But is it really obvious ? Are value 
 and trouble really so closely related that the very concep- 
 tion of them at once carries conviction that trouble is the 
 ground of value ? I do not think any unprejudiced person 
 will maintain this. That I have given myself trouble about a 
 thing is one fact; that the thing is worth the trouble is 
 another and a different fact ; and that the two facts do not 
 always go hand in hand is too well confirmed by experience 
 for any doubt about it to be possible. It is confirmed .by 
 every one of the innumerable cases in which, from want of 
 technical skill, or from unsuccessful speculation, or simply from 
 ill-luck, labour is every day being followed by a valueless 
 result. But not less is it confirmed by every one of the 
 numerous cases where little trouble is rewarded with high 
 gains ; such as the occupation of a piece of land, the finding of 
 a precious stone, the discovery of a gold mine. 
 
 But not to mention cases that may be considered as 
 exceptions from the regular course of things, it is a fact, as 
 indubitable as it is perfectly normal, that the same amount of 
 labour exerted by different persons has a quite different value. 
 The result of one month's labour on the part of a famous artist 
 is, quite regularly, a hundred times more valuable than the same 
 period of labour on the part of a common carpenter. How 
 could that be possible if trouble were really the principle of 
 value ? How could it be possible if, in virtue of some immediate 
 psychological connection, we were forced to base our estimate 
 of value on the consideration of toil and trouble, and only 
 on that consideration ? l Or perhaps it is that nature is so 
 
 1 Adam Smith gets rid of the difficulty mentioned in the text as follows : " If 
 the one species of labour requires an uncommon degree of dexterity and ingenuity, 
 the esteem which men have for such talents will naturally give a value to their 
 produce superior to what would be due to the time employed about it. Such 
 talents can seldom be acquired, but in consequence of long application and the 
 superior value of their produce may frequently be more than a reasonable com- 
 pensation for the time and labour which must be spent in acquiring them " 
 (book i. chap, vi.) 
 
 The insufficiency of this explanation is obvious. In the first place, it is clear 
 .that the higher value of the products of exceptionally skilled men rests on a 
 quite different foundation from the "esteem which men have for such talents." 
 How many poets and scholars does the public leave to starve in spite of the very 
 high esteem which it pays to their talents, and how many unscrupulous speculators 
 has it rewarded for their adroitness by hundreds of thousands, although it
 
 378 MARX'S EXPLOITATION THEORY BOOK vi 
 
 aristocratic that its psychological laws force our spirit to 
 reckon the trouble of a skilled artist a hundred times more 
 valuable than the more modest trouble of a carpenter ! I 
 think that any one who reflects for a little, instead of blindly 
 taking it on trust, will be convinced that there is no 
 immediately obvious and essential connection between trouble 
 and value, such as the passage in Adam Smith seems to 
 assume. 
 
 But does the passage actually refer to exchange value, as 
 has been tacitly assumed ? I do not think that any one who 
 reads it with unprejudiced eye can maintain that either. The 
 passage applies neither to exchange value, nor to use value, 
 nor to any other kind of value in the strict scientific sense. 
 The fact is as shown by the employment of the expression 
 " worth " instead of value that in this case Adam Smith has 
 used the word in that very wide and vague sense which it 
 has in everyday speech. And this is very significant. Feel- 
 ing involuntarily that, at the bar of strictly scientific reflection, 
 his proposition could not be admitted, he turns to the loose 
 impressions of everyday life, and makes use of the ill-defined 
 expressions of everyday life, with a result, as experience has 
 shown, very much to be deplored in the interests of the science. 
 
 Finally, how little the whole passage can lay claim to 
 scientific exactitude is shown by the fact that, even in the few 
 words that compose it, there is a contradiction. In one breath 
 he claims for two things the distinctive property of being 
 the principle of " real " value : first, for the trouble that a man 
 can save himself through the possession of a good ; second, for 
 the trouble that a man can impose upon other people. But 
 these are two quantities which, as every one knows, are not 
 absolutely identical. Under the regime of the division of 
 labour, the trouble which I personally would be obliged to 
 undergo to obtain possession of a thing I desired is usually 
 much greater than the trouble with which a labourer technically 
 trained produces it. Which of these two troubles, the " saved " 
 
 has no esteem whatever for their "talents"! But suppose esteem were the 
 foundation of value, in that case the law that value depends on trouble would 
 evidently not be confirmed but violated. If, again, in the second of the above 
 sentences, Adam Smith attempts to trace that higher value to the trouble ex- 
 pended in acquiring the dexterity, by his insertion of the word "frequently " he 
 confesses that it will not hold in all cases. The contradiction therefore remains.
 
 CHAP, in VALUE AND TROUBLE 379 
 
 or the "imposed," are we to understand as determining the 
 real value ? 
 
 In short, the celebrated passage where our old master 
 Adam Smith introduces the Labour Principle into the theory 
 of value is as far as possible from being the great and well 
 grounded scientific principle it has usually been considered. 
 It does not of itself carry conviction. It is not supported 
 by a particle of evidence. It has the slovenly dress and the 
 slovenly character of a popular expression. Finally, it con- 
 tradicts itself. That, notwithstanding this, it found general 
 acceptance is due, in my opinion, to the coincidence of two 
 circumstances ; first, that an Adam Smith said it, and, second, 
 that he said it without adducing any evidence for it. If Adam 
 Smith had but addressed a single word in its proof to the 
 intelligence of his readers, instead of simply appealing to their 
 immediate impressions, they would have insisted upon putting 
 the evidence before the bar of their intelligence, and then the 
 absence of all real argument would infallibly have shown 
 itself. It is only by taking people by surprise that such 
 propositions can win acceptance. 
 
 Let us see what Adam Smith, and after him, Kicardo, says 
 further. " Labour was the first price the original purchase 
 money that was paid for all things." This proposition is 
 comparatively inoffensive, but it has no bearing on the 
 principle of value. 
 
 " In that early and rude state of society which precedes 
 both the accumulation of stock and the appropriation of land, 
 the proportion between the quantities of labour necessary for 
 acquiring different objects seems to be the only circumstance 
 which can afford any rule for exchanging them for one another. 
 If, among a nation of hunters, for example, it usually cost 
 twice the labour to kill a beaver which it does to kill a deer, 
 one beaver should naturally exchange for or be worth two 
 deer. It is natural that what is usually the produce of two 
 days' or two hours' labour should be worth double of what is 
 usually the produce of one day's or one hour's labour." 
 
 In these words also we shall look in vain for any trace of a 
 rational basis for the doctrine. Adam Smith simply says, "seems 
 to be the only circumstance," " should naturally," " it is natural," 
 and so on, but throughout he leaves it to the reader to convince
 
 380 MARX 'S EXPLOITA TION THEOR Y BOOK vi 
 
 himself of the " naturalness " of such judgments a task, be it 
 remarked in passing, that the critical reader will not find easy. 
 For if it is " natural " that the exchange of products should 
 be regulated exclusively by the proportion of labour time that 
 their attainment costs, it must also be natural that, for instance, 
 any uncommon species of butterfly, or any rare edible frog, 
 should be worth, " among a nation of hunters " ten times more 
 than a deer, inasmuch as a man might spend ten days in 
 looking for the former, while he could capture the latter 
 usually by one day's labour. But the " naturalness " of this 
 proportion would scarcely be obvious to everybody ! 
 
 The result of these considerations may, I think, be summed 
 up as follows. Adam Smith and Ricardo have asserted that 
 labour is the principle of the value of goods simply as an 
 axiom, and without giving any evidence for it. Consequently 
 any one who would maintain this principle must not look 
 to Adam Smith and Ricardo as guaranteeing its truth, but 
 must seek for some other and independent basis of proof. 
 
 Now it is a very remarkable fact that of later writers 
 scarcely any one has done so. The men who in other respects 
 sifted the old-fashioned doctrine inside and out with their 
 destructive criticism, with whom no proposition, however vener- 
 able with age, was secure from being put once more in question 
 and tested, these very men have not uttered a word in 
 criticism of the weightiest principle that they borrowed from 
 the old doctrine. From Ricardo to Rodbertus, from Sismondi 
 to Lassalle, the name of Adam Smith is the only guarantee 
 thought necessary for this doctrine. No writer adds anything 
 of his own but repeated asseverations that the proposition is 
 true, incontrovertible, indubitable ; there is no real attempt 
 to prove its truth, to meet objections, to remove doubts. The 
 despisers of proof from authority content themselves with 
 appealing to authority ; the sworn foes of unproved assumptions 
 and assertions content themselves with assuming and asserting 
 
 O O 
 
 Only a very few representatives of the Labour Value theory form 
 any exception to this rule ; one of these few, however, is Marx. 
 An economist looking for a real confirmation of the principle 
 in question might proceed in one of two directions ; he might 
 either attempt to develop the proof from grounds involved 
 in its very statement, or he might deduce it from experience.
 
 CHAP, in THE COMMON ELEMENT IN EXCHANGE 381 
 
 Marx has taken the former course, with a result on which the 
 reader may presently form his own opinion. 
 
 I have already quoted in Marx's own words the passages 
 relative to the subject. The line of argument divides itself 
 clearly into three steps. 
 
 First step. Since in exchange two goods are made equal 
 to one another, there must be a common element of similar 
 quantity in the two. and in this common element must reside 
 the principle of Exchange value. 
 
 Second step. This common element cannot be the Use 
 value, for in the exchange of goods the use value is disregarded. 
 
 Third step. If the use value of commodities be disregarded 
 there remains in them only one common property that of being 
 products of labour. Consequently, so runs the conclusion, 
 Labour is the principle of value ; or, as Marx says, the use 
 value, or "good," only has a value because human labour is 
 made objective in it, is materialised in it. 
 
 I have seldom read anytliing to equal this for bad reasoning 
 and carelessness in drawing conclusions. 
 
 The first step may pass, but the second step can only be 
 maintained by a logical fallacy of the grossest kind. The use 
 value cannot be the common element because it is " obviously 
 disregarded in the exchange relations of commodities, for " I 
 quote literally " within the exchange relations one use value 
 counts for just as much as any other, if only it is to be had 
 in the proper proportion." What would Marx have said to 
 the following argument ? 
 
 In an opera company there are three celebrated singers a 
 tenor, a bass, and a baritone and these have each a salary of 
 1000. The question is asked, What is the common circum- 
 stance on account of which their salaries are made equal ? 
 And I answer, In the question of salary one good voice counts 
 for just as much as any other a good tenor for as much as a 
 good bass or a good baritone provided only it is to be had in 
 proper proportion ; consequently in the question of salary the 
 good voice is evidently disregarded, and the good voice cannot 
 be the cause of the good salary. 
 
 The fallaciousness of this argument is clear. But it is just as 
 clear that Marx's conclusion, from which this is exactly copied, 
 is not a whit more correct. Both commit the same fallacy.
 
 382 MARX'S EXPLOITATION THEORY BOOK vi 
 
 They confuse the disregarding of a genus with the disregarding 
 of the specific forms in which this genus manifests itself. In 
 our illustration the circumstance which is of no account as 
 regards the question of salary is evidently only the special form 
 which the good voice assumes, whether tenor, bass, or baritone. 
 It is by no means the good voice in general. And just so is it 
 with the exchange relations of commodities. The special forms 
 under which use value may appear, whether the use be for food, 
 clothing, shelter, or any other thing, is of course disregarded ; 
 but the use value of the commodity in general is never dis- 
 regarded. Marx might have seen that we do not absolutely 
 disregard use value from the fact that there can be no exchange 
 value where there is not a use value a fact which Marx 
 himself is repeatedly forced to admit 1 
 
 But still worse fallacies are involved in the third step of 
 the demonstration. If the use value of commodities is dis- 
 regarded, says Marx, there remains in them only one common 
 property that of being products of labour. 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? For that they are products of nature just 
 as they are products of labour no one declares more plainly 
 than Marx himself, when in one place he says, " Commodities 
 are combinations of two elements, natural material and labour ; " 
 or when he incidentally quotes Petty's expression about material 
 wealth, " Labour is its father and the earth its mother." ' 2 
 
 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 ? For in support of this latter 
 proposition Marx hasjiot adduced the smallest positive argument. 
 His sole argument is the negative one, that the use value, thus 
 happily disregarded and out of the way, is not the principle of 
 exchange value. But does not this negative argument apply 
 
 1 For instance, in p. 15 at the end : " Finally, nothing can be valuable without 
 being an object of use. If it is useless the labour contained in it is also useless ; 
 it does not count as labour (sic), and therefore confers no value." Knies has 
 already drawn attention to the logical blunder here criticised (Das Geld, Berlin, 
 1873, p. 123, etc.) 
 
 2 Das Kapital, p. 17 etc.
 
 CHAP. HI LABOUR NOT THE COMMON ELEMENT 383 
 
 with equal force to all the other common properties overlooked 
 by Marx ? Wantonness in assertion and carelessness in reason- 
 ing cannot go much farther. 
 
 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 ? I 
 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 ! l 
 
 Without doing Marx any wrong then we shall here take the 
 liberty of saying that his attempt to prove the truth of his 
 principle deductively has completely fallen through. 
 
 If the proposition that the value of all goods rests on labour 
 is neither an axiom nor capably of proof by deduction, there 
 still remains at least one possibility in its favour ; it may be 
 capable of demonstration by experience. To give Marx every 
 chance we shall look at this possibility also. What is the 
 testimony of experience ? 
 
 Experience shows that the exchange value of goods stands 
 in proportion to that amount of labour which their production 
 costs only in the case of one class of goods, and even then only 
 approximately. Well known as this should be, considering that 
 the facts on which it rests are so familiar, it is very seldom 
 estimated at its proper value. Of course everybody, including 
 the socialist writers, agrees that experience does not entirely con- 
 firm the Labour Principle. It is commonly imagined, however, 
 that the cases in which actual facts confirm the labour principle 
 form the rule, and that the cases which contradict the principle 
 form a relatively insignificant exception. This view is very 
 erroneous, and to correct it once and for all I shall put to- 
 gether in groups the exceptions by which experience proves the 
 labour principle to be limited in economic life. We shall see 
 that the exceptions so much preponderate that they scarcely 
 leave any room for the rule. 
 
 1. From the scope .of the Labour Principle are excepted 
 
 1 See also on the subject Knies, Das Geld, p. 121.
 
 384 MARX'S EXPLOITATION THEORY BOOK vi 
 
 all " scarce " goods that, from actual or legal hindrances, cannot 
 be reproduced at all, or can be reproduced only in limited 
 amount. Ricardo names, by way of example, rare statues and 
 pictures, scarce books and coins, wines of a peculiar quality, 
 and adds the remark that such goods form only a very small 
 proportion of the goods daily exchanged in the market. 
 If, however, we consider that to this category belongs the 
 whole of the land, and, further, those numerous goods in the 
 production of which patents, copyright, and trade secrets come 
 into play, it will be found that the extent of these " exceptions " 
 is by no means inconsiderable. 1 
 
 2. All goods that are produced not by common, but by 
 skilled labour, form an exception. Although in the day's pro- 
 duct of a sculptor, a skilled joiner, a violin-maker, an engineer, 
 and so on, no more labour be incorporated than in the day's 
 product of a common labourer or a factory operative, the former 
 has a greater exchange value, and often a many times greater 
 exchange value. The adherents of the labour value theory 
 have of course not been able to overlook this exception. Some- 
 times they mention it, but in such a way as to suggest that it 
 does not form a real exception, but only a little variation that 
 yet comes under the rule. Marx, for instance, adopts the ex- 
 pedient of reckoning skilled labour as a multiplex of common 
 labour. "Complicated labour," he says (p. 19), "counts only 
 as strengthened, or rather multiplied, simple labour, so that a 
 smaller quantity of complicated labour is equal to a greater 
 quantity of simple labour. Experience shows that this reduc- 
 tion is constantly made. A commodity may be the product 
 of the most complicated labour; its value makes it equal to 
 the product of simple labour, and represents therefore only a 
 definite quantity of simple labour." 
 
 The naivety of this theoretical juggle is almost stupefying. 
 That a day's labour of a sculptor may be considered equal to 
 five days' labour of a miner in many respects for instance, in 
 money valuation there can be no doubt. But that twelve 
 hours' labour of a sculptor actually are sixty hours' common 
 labour no one will maintain. Now in questions of theory for 
 instance, in the question of the principle of value it is not a 
 matter of what fictions men may set up, but of what actually is. 
 
 1 See also Knies, Kredit, part ii. p. 61.
 
 CHAP, in EXCEPTIONS TO LABOUR PRINCIPLE 385 
 
 For theory the day's production of the sculptor is, and remains, 
 the product of one day's labour, and if a good which is the pro- 
 duct of one day's labour is worth as much as another which is 
 the product of five days' labour, men may invent what fictions 
 they please ; there is here an exception from the rule asserted, 
 that the exchange value of goods is regulated by the amount of 
 human labour incorporated in them. Suppose that a railway 
 generally graduates its tariff according to the distances travelled 
 by persons and goods, but, as regards one part of the line in which 
 the working expenses are peculiarly heavy, arranges that each 
 mile shall count as two, can it be maintained that the length 
 of the distances is really the exclusive principle in fixing the 
 railway tariff ? Certainly not ; by a fiction it is assumed to 
 be so, but in truth the application of that principle is limited 
 by another consideration, the character of the distances. 
 Similarly we cannot preserve the theoretical unity of the 
 labour principle by any such fiction. 
 
 Not to carry the matter further, I may say that this second 
 exception embraces a considerable proportion of all bought and 
 sold goods. In one respect, strictly speaking, we might say 
 that almost all goods belong to it. For into the production of 
 almost every good there enters some skilled labour labour of 
 an inventor, of a manager, of a pioneer, or some such labour 
 and this raises the value of the good a little above the level 
 which would have been determined if the quantity of labour 
 had been the only consideration. 
 
 3. The number of exceptions is increased by those goods 
 not, it is true, a very important class that are produced by 
 abnormally badly paid labour. For reasons that need not be 
 discussed here, wages remain constantly under the minimum of 
 subsistence in certain branches of production ; for instance, in 
 certain women's industries, such as sewing, embroidering, and 
 knitting. The products of these employments have thus an 
 abnormally low value. There is, for instance, nothing unusual 
 in the product of three days' labour on the part of a white 
 seam worker only fetching as much as the product of two 
 days' labour on the part of a factory worker. 
 
 All the exceptions mentioned hitherto take the form of 
 exempting certain groups of goods altogether from the law of 
 labour value, and therefore tend to narrow the sphere- of that 
 
 2 c
 
 386 MARX'S EXPLOITATION THEORY BOOK vi 
 
 law's validity. The only goods then left to the action of the law 
 are those goods which can be produced at will, without any limit- 
 ations, and which at the same time require nothing but un- 
 skilled labour for their production. But even in this contracted 
 sphere the law of labour value does not rule absolutely. There 
 are some further exceptions that go a great way to break down 
 its strictness. 
 
 4. A fourth exception to the Labour Principle may be found 
 in the familiar and universally admitted phenomenon that even 
 those goods, in which exchange value entirely corresponds with 
 the labour costs, do not show this correspondence at every 
 moment. By the fluctuations of supply and demand their ex- 
 change value is put sometimes above, sometimes below the level 
 corresponding to the amount of labour incorporated in them. 
 The amount of labour only indicates the point towards which 
 exchange value gravitates, not any fixed point of value. This 
 exception, too, the socialist adherents of the labour principle 
 seem to me to make too light of. They mention it indeed, but 
 they treat it as a little transitory irregularity, the existence of 
 which does not interfere with the great " law " of exchange value. 
 But it is undeniable that these irregularities are just so many 
 cases where exchange value is regulated by other determinants 
 than the amount of labour costs. They might at all events 
 have suggested the inquiry whether there is not perhaps a more 
 universal principle of exchange value, to which might be trace- 
 able, not only the regular formations of value, but also those 
 formations which, from the standpoint of the labour theory, 
 appear to be " irregular." But we should look in vain for any 
 such inquiry among the theorists of this school. 
 
 5. Apart from these momentary fluctuations, it is clear 
 that in the following case the exchange value of goods con- 
 stantly diverges, and that not inconsiderably, from the level 
 indicated by the quantity of labour incorporated in them. Of 
 two goods which cost exactly the same amount of social average 
 labour to produce, that one maintains a higher exchange value 
 the production of which requires the greater advance of " pre- 
 vious " labour. Ricardo, as we saw, in two sections of the 
 first chapter of his Principles, has spoken in detail of this ex- 
 ception from the labour principle. Eodbertus and Marx ignore, 
 without expressly denying it; indeed they could not very
 
 CHAP, in LABOUR PRINCIPLE ENTIRELY INADEQUATE 387 
 
 well do so ; for that an oak-tree of a hundred years possesses 
 a higher value than corresponds to the half minute's labour 
 required in planting the seed is too well known to be success- 
 fully disputed. 
 
 To sum up. The asserted " law " that the value of goods 
 is regulated by the amount of the labour incorporated in them, 
 does not hold at all in the case of a very considerable proportion 
 of goods ; in the case of the others, does not hold always, and 
 never holds exactly. These are the facts of experience with 
 which the value theorists have to reckon. 
 
 What conclusions can an unprejudiced theorist draw from 
 such facts ? Certainly not the conclusion that the origin and 
 measure of all value is to be ascribed exclusively to labour. 
 Such a conclusion would be very like deducing the law. 
 All electricity is caused by friction, from the experience that 
 electricity is produced in many ways, and is very often 
 produced by friction. 
 
 On the other hand, the conclusion might very well be drawn 
 that expenditure of labour is one circumstance which exerts a 
 powerful influence on the value of many goods; always re- 
 membering that labour is not an ultimate cause for an 
 ultimate cause must be common to all the phenomena of 
 value but a particular and intermediate cause. It would 
 not be difficult to find a deductive proof of such an influence, 
 though no deductive proof could be given of the more 
 thoroughgoing principle. And, further, it may be very inter- 
 esting and very important accurately to trace the influence of 
 labour on the value of goods, and to express the results in the 
 form of laws. Only in doing so we must keep before us the 
 fact that these will be only particular laws of value not 
 affecting the universal nature of value. To use a comparison. 
 The law that formulates the influence of labour on the 
 exchange value of goods will stand to the universal law of 
 value in the same relation as the law, The west wind brings 
 rain, stands to a universal theory of rain. West wind is a 
 very general intermediate cause of rain, just as expenditure of 
 labour is a very general intermediate cause of value ; but the 
 ultimate cause of rain is as little the west wind as that of 
 value is the expended labour. 
 
 Ricardo himself only went a very little way over the
 
 388 MARX'S EXPLOITATION THEORY BOOK vi 
 
 proper limits. As I have shown, he knew right well that his 
 law of value was only a particular law ; he knew, for instance, 
 that the value of scarce goods rests on quite another principle. 
 He only erred in so far as he very much over-estimated the 
 extent to which his law is valid, and practically ascribed to it a 
 validity almost universal. The consequence is that, later on, he 
 forgot almost entirely the little exceptions he had rightly made 
 but too little considered at the beginning of his work, and often 
 spoke of his law as if it were really a universal law of value. 
 
 It was his shortsighted followers who first fell into the 
 scarcely conceivable blunder of deliberately and absolutely 
 representing labour as the universal principle of value. I say, 
 the scarcely conceivable blunder, for really it is not easy to 
 understand how men trained in theoretical research could, 
 after mature consideration, maintain a principle for which they 
 could find such slight support. They could find no argument 
 for it in the nature of things, for that shows no necessary 
 connection whatever between value and labour; nor in ex- 
 perience, for experience shows, on the contrary, that value for 
 the most part does not correspond with labour expended ; nor, 
 finally, even in authority, for the authorities appealed to had 
 never maintained the principle with that pretentious univer- 
 sality now given it. 
 
 And this principle, entirely unfounded as it is, the 
 socialist adherents of the Exploitation theory do not maintain 
 as something unessential, as some innocent bit of system 
 building ; they put it in the forefront of practical claims of 
 the most aggressive description. They maintain the law that 
 the value of all commodities rests on the labour time in- 
 corporated in them, in order that the next moment they may 
 attack, as " opposed to law," " unnatural," and " unjust," all 
 formations of value that do not harmonise with this " law," 
 such as the difference in value that falls as surplus to the 
 capitalist and demand their abolition. Thus they first 
 ignore the exceptions in order to proclaim their law of value 
 as universal. And, after thus assuming its universality, they 
 again draw attention to the exceptions in order to brand them 
 as offences against the law. This kind of arguing is very 
 much as if one were to assume that there are many foolish 
 people in the world, and to ignore that there are also many
 
 CHAP, in REPEATS RODBERTUS'S MISTAKES 
 
 wise ones ; and thus coming to the " universally valid law " 
 that " all men are foolish," should demand the extirpation of 
 the wise on the ground that their existence is obviously 
 " contrary to law " ! 
 
 I have criticised the law of Labour Value with all the 
 severity that a doctrine so utterly false seemed to me to 
 deserve. It may be that my criticism also is open to many 
 objections. But one thing at any rate seems to me certain : 
 earnest writers concerned to find out the truth will not in 
 future venture to content themselves with asserting the law of 
 labour value as has been hitherto done. 
 
 lu future any one who thinks that he can maintain this law 
 will first of all be obliged to supply what his predecessors have 
 omitted a proof that can be taken seriously. Not quotations 
 from authorities ; not protesting and dogmatising phrases ; but 
 a proof that earnestly and conscientiously goes into the essence 
 of the matter. On such a basis no one will be more ready 
 and willing to continue the discussion than myself. 
 
 To return to Marx. Sharing in Ivodbertus's mistaken 
 idea that the value of all goods rests on labour, he falls later 
 on into almost all the mistakes of which I have accused 
 Rodbertus. Shut up in his labour theory Marx, too, fails to 
 grasp the idea that Time also has an influence on value. On 
 one occasion he says expressly that, as regards the value of a 
 commodity, it is all the same whether a part of the labour of 
 making it be expended at a much earlier point of time or not. 1 
 Consequently he does not observe that there is all the differ- 
 ence in the world whether the labourer receives the final 
 value of the product at the end of the whole process of 
 production, or receives it a couple of months or years earlier ; 
 and he repeats Eodbertus's mistake of claiming now, in the 
 name of justice, the value of the finished product as it will be 
 tlun. 
 
 Another point to be noted is that, in business capital, 
 Marx distinguishes two portions ; of which one, in his pecu- 
 liar terminology called Variable capital, is advanced for the 
 wages of labour; the other, which he calls Constant capital, 
 is advanced for the means of production. And Marx 
 
 1 P. 17.'.
 
 390 MARX'S EXPLOITATION THEORY BOOK vi 
 
 maintains that only the amount of the variable capital has any 
 influence on the quantity of surplus value obtainable, 1 the 
 amount of the constant capital being in this respect of no 
 account. 2 But in this Marx, like Rodbertus before him, falls 
 into contradiction with facts ; for facts show, on the contrary, 
 that, under the working of the law of assimilation of profits, 
 the amount of surplus value obtained stands, over the whole 
 field, in direct proportion to the amount of the total capital- 
 variable and constant together that has been expended. It is 
 singular that Marx himself became aware of the fact that there 
 was a contradiction here, 3 and found it necessary for the sake 
 of his solution to promise to deal with it later on. 4 But the 
 promise was never kept, and indeed could not be kept. 
 
 Finally, Marx's theory, taken as a whole, was as powerless 
 as Rodbertus's to give an answer even approximately satis- 
 factory to one important part of the interest phenomena. 
 At what hour of the labour day does the labourer begin to 
 create the surplus value that the wine obtains, say between 
 the fifth and the tenth year of its lying in the cellar ? Or is 
 it, seriously speaking, nothing but robbery nothing but the 
 exploitation of unpaid labour when the worker who sticks 
 the acorn in the ground is not paid the full 20 that the oak 
 will be worth some day when, without further labour of man, 
 it has grown into a tree ? 
 
 Perhaps I need not go farther. If what I have said is 
 true, the socialist Exploitation theory, as represented by its two 
 most distinguished adherents, is not only incorrect, but, in 
 theoretical value, even takes one of the lowest places 
 among interest theories. However serious the fallacies we 
 may meet among the representatives of some of the other 
 theories, I scarcely think that anywhere else are to be found 
 
 1 "The rate of surplus value and the value of labour power being given, the 
 amounts of surplus value produced are in direct ratio with the amounts of 
 variable capital advanced. . . . The value and the degree of exploitation of labour 
 power being equal, the amounts of value and surplus value produced by various 
 capitals stand in direct ratio with the amounts of the variable constituent of 
 these capitals ; that is, of those constituents which are converted into living 
 labour power " (p. 311, etc.) 
 
 - " The value of these contributory means of production may rise, fall, 
 ivmain unchanged, be little or much, it remains without any influence whatever 
 in producing surplus value " (p. 312). 
 
 3 Pp. 204, 312. < Pp. 312, 542 at end.
 
 CHAP, in REASONS FOR ITS POPULARITY 391 
 
 together so great a number of the worst fallacies wanton, 
 unproved assumption, self-contradiction, and blindness to facts. 
 The socialists are able critics, but exceedingly weak theorists. 
 The world would long ago have come to this conclusion if the 
 opposite party had chanced to have had in its service a pen as 
 keen and cutting as that of Lassalle and as slashing as that of 
 Marx. 
 
 That in spite of its inherent weakness the Exploitation 
 theory found, and still finds, so much credence, is due, in my 
 opinion, to the coincidence of two circumstances. The first 
 is that it has shifted the struggle to a sphere where appeal 
 is usually made to the heart as well as to the head. What 
 we wish to believe we readily believe. The condition of the 
 labouring classes is indeed most pitiful ; every philanthropist 
 must wish that it were bettered. Many profits do in fact 
 flow from an impure spring ; every philanthropist must wish 
 that such springs were dried up. In considering a theory 
 whose conclusions incline to raise the claims of the poor, and 
 to depress the claims of the rich, a theory which agrees 
 partly, or it may be entirely, with the wishes of his heart, 
 many a one will be prejudiced in its favour from the first, and 
 will relax a great deal of the critical severity that, in other 
 circumstances, he would have shown in examining its scientific 
 basis. And it need scarcely be said that theories such as 
 these have a strong attraction for the masses. Their concern 
 is not with criticism ; they simply follow the line of their own 
 wishes. They believe in the Exploitation theory because it is 
 agreeable to them, and although it is false ; and they would 
 believe in it even if its theoretical argument were much worse 
 than it is. 
 
 A second circumstance that helped to spread the theory 
 was the weakness of its opponents. So long as the scientific 
 opposition to it was led chiefly by men who adhered to the 
 Abstinence theory, the Productivity theory, or the Labour 
 theory of a Bastiat or M'Culloch, a Eoscher or Strasburger, 
 the battle could net go badly for the socialists. From positions 
 so faultily chosen these men could not strike at the real 
 weaknesses of Socialism ; it was not too difficult to repel their 
 lame attacks, and to follow the fighters triumphantly into their
 
 392 MARX'S EXPLOITATION THEORY BOOK vi 
 
 own camp. This the socialists were strong enough to do, with 
 as much success as skill. If many socialistic writers have 
 won an abiding place in the history of economic science, it is 
 due to the strength and cleverness with which they managed 
 to destroy so many flourishing and deeply-rooted erroneous 
 doctrines. This is the service, and almost the only service, 
 which Socialism has rendered to our science. To put truth in 
 the place of error was beyond the power of the Exploitation 
 theorists even more than it was beyond the power of their 
 much abused opponents.
 
 BOOK VII 
 
 MINOR SYSTEMS
 
 CHAPTER I 
 
 THE ECLECTICS 
 
 THE difficulties which the interest problem presented to the 
 science of political economy are reflected, perhaps, nowhere 
 more significantly than in the fact, that most economic writers 
 of our century did not form any definite opinion on the 
 
 indefiniteness took a different shape somewhere 
 about the year 1830. Before that date those who were 
 undecided and at that time there were many such simply 
 avoided entering on the interest problem. They come under. 
 that category which I have called the Colourless school 
 Later on, when the problem had become a common subject o 
 scientific discussion, this was no longer possible. Economist 
 were obliged to own to an opinion, and those w;ho could not 
 come to a decision of their own became eclectics Interest 
 theories were put forward in abundance. Wnters who 
 neither could nor would make one for themselves, nor decic 
 exclusively on one of those already made, would choose from 
 two or three or more heterogeneous theories the parts that 
 suited them, and weave them into what generally proved 
 rather badly connected whole. Or, without even trying 
 obtain the appearance of a whole, they would in the course 
 of their writings employ sometimes one, sometimes another 
 theory, as suited best for the purposes they might happe. 
 
 have in view. , , 
 
 It need not be said that an eclecticism on which the 
 cardinal duty of the theorist, logical consistency, sat so lightly, 
 does not indicate any very high degree of theoretical excellence. 
 Still here also, as with the Colourless theorists, among many
 
 396 THE ECLECTICS BOOK VH 
 
 men of secondary importauce we meet with a few writers of 
 the first rank. Nor is this to be wondered at. The develop- 
 ment of the theory had been so peculiar that, for capable 
 writers especially, the temptation to become eclectic must have 
 been almost overpowering. There were so many heterogeneous 
 theories in existence that one might be pardoned for thinking 
 it impossible that there should be any more. A critical 
 mind, indeed, could not find any one of them entirely satis- 
 factory. But neither could the fact be ignored that in many 
 of them there was at least a kernel of truth. The Productivity 
 theory as a whole, for instance, was certainly unsatisfactory, 
 but no unprejudiced person could help feeling that the exist- 
 ence of interest must have something to do with the greater 
 return obtained by capitalist production, or, as it was generally 
 called, the productivity of capital. Or, granted that a complete 
 explanation of interest was not to be found in the " abstinence 
 of the capitalist," it could scarcely be denied that the privation 
 which saving usually costs is not a thing altogether without 
 influence on the fact and on the amount of interest. In such 
 circumstances nothing was more natural than that economists 
 should try to piece together the fragments of truth from 
 different theories. This tendency was strengthened by the 
 fact that the social and political question of interest, as well 
 as the theoretical, was now before the public ; and many a 
 writer, in his eagerness to justify the existence of interest, 
 preferred to give up the unity of his theory rather than cease 
 heaping together arguments in its favour. As might be 
 expected, the fragments of truth thus collected remained, at 
 the hands of the eclectics, nothing but fragments, their rough 
 edges grating against each other and stubbornly resisting all 
 attempts to work them into a homogeneous whole. 
 
 There are many ways in which eclecticism has combined 
 the various interest theories. The greatest preference has 'been 
 shown towards a combination of those two theories that came 
 nearest the truth, the Productivity and the Abstinence theory. 
 Among the numerous writers who follow this direction Kossi 
 deserves to be mentioned at some length ; partly because his 
 rendering of the Productivity theory is not without a certain 
 originality ; partly because he may serve as a type of the 
 illogical method usual among the eclectics.
 
 397 
 
 In his Cours d' Economic Politiqi^ Rossi makes use of the 
 Productivity and the Abstinence theories alternately, without 
 making any attempt to weld the two into one organic theory 
 On the whole, on those occasions when he makes general 
 mention of the phenomenon of interest and its origin, he 
 follows the Abstinence theory ; while in details, particularly 
 in the inquiry as to the rate of interest, he prefers to follow 
 the Productivity theory. To prove this I may put down m 
 the order of their statement the most important passages, 
 without taking more pains than the author has done to make 
 them consistent with each 'other. 
 
 In the traditionary way Rossi recognises capital as a iactor 
 in production by the side of labour and land. In return for 
 its co-operation it requires a compensation profit, 
 question why this is so, the answer is given provisionally m the 
 mystic words, which seem to point rather to the Productivity 
 theory " on the same grounds and by the same title as labour 
 (p 93) More definitely, and here distinctly according to the 
 Abstinence theory, Rossi expresses himself in the summary to 
 the third lecture of the third volume : " The capitalist demands 
 the compensation due to the privation which he imposes on 
 himself" (iii p 32). In the course of the following lecture 
 he develops this idea more carefully. First of all, he blames 
 Malthus for putting profit, which certainly is not an expense 
 but an income of the capitalist, among the costs of production,- 
 a criticism, however, which he might have first taken to him- 
 self, since in the sixth lecture of the first volume he has formally, 
 and in the most explicit manner, enumerated the profit of 
 capital among the costs of production. 2 The true constituent 
 of cost which he puts in the place of profit is, "capitahsed 
 savin" (I'dpargne capitalize), the non-consumption and the 
 productive employment of goods over which the capitalist has 
 command. Later too we find repeated allusions (e.g. in. pp. 
 261, 291) to the capitalist's renunciation of enjoyment as a 
 factor in the origination of profit. 
 
 If up to this point Rossi has shown himself for the most 
 part an Abstinence theorist, from the second half of the third 
 
 1 Fourth edition, Paris, 1865. 
 
 s "The costs of production are made up of (1) the recompense to t 
 workers ; (2) the profits of the capitalist," etc. (p. 93)
 
 398 THE ECLECTICS BOOK vn 
 
 volume onwards we come upon expressions, at first occasionally 
 and then frequently, which show that Eossi had also come 
 under the influence of the popular Productivity theory. He 
 begins in somewhat vague terms by bringing profit into con- 
 nection with the circumstance that " capitals contribute to 
 production" (iii. p. 258). A little later (p. 340) he says 
 quite distinctly, " Profit is the compensation due to productive 
 power" no longer, be it observed, to privation. Finally, the 
 rate of interest is explained at great length by the pro- 
 ductivity of capital. He regards it as " natural " that the 
 capitalist should receive for his shafe in the product as much 
 as his capital has produced in it, and that will be much if the 
 productive power of capital is great, little if the productive 
 power of capital is little. Thus Kossi arrives at the law that 
 the natural height of profit is in proportion to the productive 
 power of capital. He develops this law first in the case 
 where production requires capital alone in its operations, the 
 factor labour being left out of account as vanishingly small and 
 only the use value of the product being taken into consideration. 
 Under these assumptions he finds it evident that if, for instance, 
 the employment of a spade on a definite piece of ground, after 
 replacing the capital laid out, procures twenty bushels of grain 
 as profit, the employment of a more efficient capital, say a 
 plough, on the same piece of land, after fully replacing the 
 capital, will bring in more profit, say sixty bushels, " because 
 a capital of greater productive power has been employed." 
 But the same natural principle obtains in the complicated 
 relations of our actual economic life. There also it is " natural " 
 that the capitalist should share the product with the labourers 
 in the ratio of the productive power of his capital to the 
 productive power of the labourers. If, in a production that 
 has hitherto employed a hundred workers, a machine is 
 introduced which replaces the power of fifty workers, the 
 capitalist has a natural claim to one-half the total product, or 
 the wage of fifty labourers. 
 
 This natural relation is only disturbed by one thing ; that 
 the capitalist plays a double role. Not only does he contribute 
 his capital to the common co-operation, but he connects with 
 that a second business, the buying of labour. In virtue of the 
 former, he would always receive the natural profit that corre-
 
 399 
 CHAP. I 
 
 spends to the productive power of capital, and that alone. But 
 in buying labour sometimes cheap, sometimes dear, he may 
 either increase his natural profit at the expense of the natural 
 waae of labour, or may give up a portion of his profit to the 
 advantaoe of the labourers. Thus if the fifty workers displaced 
 by the machine compete with those left in employment and 
 depress the wages of labour, it may be that the capitalist buys 
 the labour of the fifty still employed for a less share of the 
 total return than would naturally fall to them according to the 
 ratio of their productive power to the productive power of 
 capital Say that he buys their labour for 40 per cent instead 
 of 50'per cent of the total product, a profit of 10 per cent is 
 added to the natural profit on capital. But this, although 
 usually classed with profit on capital, is in its nature entirely 
 foreign to it, and should be looked on as a profit made by the 
 buying of labour. It is not the natural profit on capital, but 
 this foreign addition that causes an antagonism between capital 
 and labour, and it is only in the case of this addition that the 
 principle of wages falling as profits increase and vice versd has 
 any validity. The natural and true profit on capital leaves 
 wages untouched, and depends altogether on the productive 
 power of capital (lecture iii. pp. 21, 22). 
 
 After all that has been said in former chapters en the 
 Productivity theories, we may well dispense with any thorough 
 and detailed criticism of such views. I shall merely point out 
 one monstrous conclusion that follows logically from Rossi's 
 theory. According to him all the surplus returns obtained by 
 the introduction and improvement of machinery, or from the 
 development of capital in general, must to all eternity wholly 
 and entirely flow into the pockets of the capital, without 
 the labourer getting any share whatever in the advantages of 
 these improvements ; for those surplus returns are due to the 
 increased productive power of capital, and their result forms 
 the " natural " share of the capitalist ! 1 
 
 On the same lines as Kossi, and contributing nothing 
 new, we meet among French writers Molinari 2 and Leroy- 
 
 i See also the sharp but most pertinent criticism of Pierstorff, Lehre vom 
 Untemchmergeurinn, p. 93, etc. 
 
 * Covrs d'Ecviomie Politique, second edition, Paris, 1863. His Productivity 
 theory is similar to that of Say (e.g. "interest is a compensation for the productive
 
 400 THE ECLECTICS BOOK vn 
 
 Beaulieu, 1 aud among Germans Eoscher, with his followers 
 Schiiz and Max Wirth. 2 
 
 Among Italian economists who follow the same eclectic 
 lines may be mentioned Cossa. Unfortunately this admirable 
 writer, in his monograph on the conception of capital, 3 has not 
 extended his researches to the question of interest, and we 
 have to go by the very scanty hints that occur in his well- 
 known Elementi di Economia Politico,* From it one would 
 judge Cossa to be an eclectic ; yet his way of speaking, as if 
 interpreting the ordinary doctrines, appears to me evidently 
 to betray that he has some critical scruples about them. Thus 
 while looking on interest as compensation for the " productive 
 service" of capital (p. 119), he refuses to recognise this 
 service as a primary factor in production, and only allows it 
 the place of a secondary or derivative instrument. 6 Again, 
 like the Abstinence theorists, he puts " privations " among the 
 costs of production (p. 65), but in the theory of interest he 
 adopts a tone which seems to imply that this did not express 
 his own conviction, but only that of other people. 6 
 
 The most interesting of those eclectic systems that combine 
 the Abstinence and the Productivity conceptions I consider to 
 be that of Jevons, with which I shall finish consideration of 
 this group. 7 
 
 service of capital," L p. 302). His Abstinence theory (1,289,293,800) is par- 
 ticularly unsatisfactory on account of the peculiar meaning he gives to the 
 conception of "privation." He means by it what the capitalist may suffer on 
 account of the capital sunk in production not being available for the satisfaction 
 of pressing wants which may possibly arise in the meantime. Surely a very 
 unsuitable foundation for a universal theory of interest ! 
 
 1 Essai sur la Repartition des Richesses, second edition, Paris, 1885. See 
 particularly pp. 236 (Abstinence theory), 233, 238 (Productivity theory) ; see also 
 above, p. 131. 
 
 2 On Roscher, see above, p. 129, Schiiz, Grundsatze der National-Ockonomie, 
 Tubingen, 1843 ; particularly pp. 70, 285, 296, etc. Max Wirth, Grundziige der 
 National-Oekonomie, third edition, i. p. 324 ; fifth edition, i. 327. See further 
 Huhn, Allgemeine Volkswirthscfiaftslehre, Leipzig, 1862, p. 204 ; H. Bischof, 
 Grundziige eines Systems der National-Oekonomik, Graz, 1876, p. 459, and 
 particularly note on p. 465 ; Schiilze - Delitzpch, Kapitel zu einem deutschen 
 Arleiterkatechismus, pp. 23, 27, 28, etc. 
 
 3 La Nosione del Capitate, in the Saggi di Econoniia Politica, Mailand, 1878, 
 p. 155. 4 Sixth edition, 1883. 
 
 8 P. 34, and more at length in the Saggi. 
 
 6 "The elements of interest are two: first, compensation for the non-use of 
 capital, or, as some say, for its formation, and for its productive service " (p. 119). 
 
 7 Theory of Political Economy, second edition, London, 1879.
 
 CHAP, i COSSA, JEVONS 401 
 
 Jevons begins by giving a very clear statement of the 
 economic function of capital, in which he steers clear of the 
 mysticism of any particular " productive power." The function 
 of capital he finds simply in this, that it enables us to expend 
 labour in advance. It assists men to surmount the difficulty 
 caused by the time that elapses between the beginning and the 
 end of a work. It makes possible an infinite number of im- 
 provements in the production of those goods the manufacture of 
 which necessarily depends upon the lengthening of the interval 
 between the moment when labour is exerted and the moment 
 when the work is finished. All such improvements are limited 
 by the use of capital, and in making these improvements 
 possible lies the great and almost the only use of capital. 1 
 
 This being the foundation, Jevons explains interest as 
 follows. He assumes that every extension of time between 
 employment of labour and enjoyment of result makes it 
 possible to obtain a greater product with the same amount 
 of labour. The difference between the product that would 
 have been obtained in the shorter period, and the greater 
 product that may be obtained when the time is extended, 
 forms the profit of that capital by the investing of which the 
 lengthening of the interval has been made possible. If we call 
 the shorter interval t, and the longer interval made possible by 
 au additional investment of capital t + A/, and further, the pro- 
 duct obtainable by a definite quantity of labour in the shorter 
 interval Yt, then by hypothesis the product obtainable in 
 the longer interval will be correspondingly greater; that is 
 F( + A/). The difference of these two quantities F(< + A/) 
 
 Yt is profit. 
 
 To ascertain the rate of interest represented by this 
 amount of prolit we must calculate the profit on that amount 
 of capital by which the extension of the time was made 
 possible. If Yt is the invested capital, then this is the 
 amount of produce that could have been obtained on the 
 expiry of f, without any additional investment. The duration 
 of the additional investment is A*. The whole amount of the 
 additional investment is therefore represented in the product 
 
 = (Yt . AO- Dividing the above increment of produce by the 
 latter amount, the rule of interest appears thus
 
 402 THE ECLECTICS BOOK vn 
 
 F(< + A/) - t 1 
 ~~AT~ < ~FD- 
 
 The more abundantly a coun-try is supplied with capital, 
 the greater is the product F obtainable without any new 
 investment of capital ; the greater also is the capital on which 
 the profit made by additional extension of time is calculated, 
 and the less is the rate of interest corresponding to that 
 profit. Hence the tendency of interest to fall with advancing 
 prosperity. Since, further, all capitals tend to receive a 
 similar rate of interest, they must all be content to take that 
 lowest rate obtained by the additional capital last invested. 
 Thus the advantage conferred on production by the last 
 addition of capital determines the height of the usual rate 
 of interest in the country. 
 
 The resemblance of this line of thought to that of the 
 German Thiinen is obvious. It presents the same weak 
 points to criticism. Like Thiinen, Jevons too lightly identi- 
 fies the " surplus in products " with the " surplus in value." 
 What his statement seems actually to point to is an 
 " increment of produce " due to the assistance of the last 
 increment of capital. But that this surplus in produce 
 indicates at the same time a surplus in value over the 
 capital consumed in the investment, Jevons has nowhere 
 proved. To illustrate by a concrete case. It is easy to 
 understand that a man employing imperfect, but quickly 
 made machinery, may produce in a year's time 1000 pieces 
 of a particular class of goods, and by employing machinery 
 which is more perfect, but takes longer to make, may produce 
 in the same time 1200 pieces of the goods. But there 
 is nothing here to show that the difference of 200 pieces 
 must be a net surplus in value. Two things might prevent 
 its being so. (1) It might be that the more perfect 
 machinery to which the increment of 200 pieces is due 
 should obtain so high a value on account of this capability 
 that the increment of 200 pieces is absorbed by the amount 
 set aside for depreciation. (2) It is conceivable that the new 
 method of production, which gives these good results, might 
 be employed so extensively that the increased supply of pro- 
 
 1 P. 266. Jevons puts the same formula in other ways that need not be 
 specified here. 

 
 CHAP. I 
 
 JEVONS 403 
 
 ducts would press down the value of the present 1200 pieces 
 to the same level as the former 1000 pieces. In neither 
 case would there be any surplus value. Jevons, therefore, 
 has here fallen into the old error of the Productivity theo- 
 rists, and mechanically translated the surplus in products, 
 which everybody would grant, into a surplus in value. 
 
 Of course in his system there are attempts at explanation 
 of this difference of value. But he has not brought these 
 attempts into connection with his Productivity theory ; they 
 do not complete that theory, but traverse it. 
 
 One of these attempts is where he accepts parts of the 
 Abstinence theory. Jevons quotes Senior with approval ; he 
 explains what Senior called "abstinence" as that "temporary 
 sacrifice of enjoyment that is essential to the existence of 
 capital," or as the capitalist's " endurance of want " ; and he 
 gives formula for calculating the amount of the sacrifice of 
 abstinence (p. 253, etc.) He reckons this abstinence some- 
 times indeed, writing loosely, he reckons even interest among 
 the costs of production ; and in one place he expressly speaks 
 of the capitalist's income as " compensation for abstinence and 
 
 risk" (p. 295). 
 
 Jevons has some very interesting remarks on the effect 
 of time on the valuation of needs and satisfactions. He 
 points out that we anticipate future pleasures and pains, the 
 prospect of future pleasure being already felt as anticipated 
 pleasure. But the intensity of the anticipated pleasure is 
 always less than that of the future pleasure itself, and depends 
 on two factors the intensity of the pleasure anticipated, and 
 the time that intervenes before the emergence of the pleasure 
 (p. 36, etc.) Somewhat strangely Jevons holds that the 
 distinction we thus make in immediate valuation between a 
 present and a future enjoyment is, rightly considered, unjusti- 
 fiable. It rests only, he says, on an intellectual error, or 
 an error of natural disposition ; and, properly speaking, time 
 should have no such influence. All the same, on account of 
 the imperfection of human nature, it is a fact that " a future 
 feeling is always less influential than a present one" (p. "78). 
 
 Now Jevons is quite correct in saying that this power of 
 anticipation must exert a far-reaching influence in economics, 
 for, among other things, all accumulation of capital depends
 
 404 THE ECLECTICS BOOK vn 
 
 upon it (p. 37). But, unfortunately, he is satisfied with 
 throwing out suggestions of the most general description, and 
 applying them quite fragmentarily. 1 He fails to develop the 
 idea, or to give it any fruitful application to the theory of 
 income and value. This omission is the more surprising that 
 there are some features in his interest theory which strongly 
 suggested the possibility of making a very good use of the 
 element of time in the explanation of interest. With more 
 emphasis than any one before him, he had asserted the role 
 played by time in the function of capital. The next step 
 evidently would have been to inquire whether the difference 
 of time might not also exert an immediate influence on the 
 valuation of the product of capital, of such a kind that the 
 difference of value, on which interest is founded, might be 
 explained by it. Instead of this Jevons, as we have seen, 
 persists in the old method of explaining interest simply by the 
 difference in the quantity of the product. 
 
 Still more obvious, probably, would it have been to connect 
 his other conception of " abstinence " with the difference that 
 we make in the estimation of present and future enjoyments, 
 and to account for the sacrifice that lies in the postponement 
 of enjoyment by that lesser valuation of the future utility. 
 But Jevons gives no positive expression to this. Indeed, 
 indirectly, he even excludes it ; for, as we have seen, on the 
 one hand he pronounces the lesser valuation to be a simple 
 error caused by the imperfection of our nature, and, on the 
 other hand, he pronounces the abstinence to be a real and 
 true sacrifice, viz. the continuance in the (painful) state of 
 need. 
 
 Thus there is no reciprocal fructification between the many 
 interesting and acute ideas that Jevons throws out regarding 
 our subject ; and Jevons himself remains an eclectic of genius 
 perhaps, but still an eclectic. 
 
 A second group of eclectics add on ideas taken from the 
 Labour theory in one or other of its varieties. First may be 
 
 1 Thus, on one occasion, he says that, under the influence of this element of 
 time, in the case of the distribution of a stock of goods in the present and in the 
 future, " less commodity will be consigned to future days in some proportion to 
 the intervening time " (p. 79).
 
 CHAP, i JEVONS, READ 405 
 
 mentioned Read, 1 whose work, appearing as it did at the 
 period when English economic literature on the subject of 
 interest was most confused, shows a peculiarly inconsistent 
 heaping together of opinions. He begins by laying the 
 greatest emphasis on the independent productive power of 
 capital, regarding the existence of which power he has no 
 doubt. "How absurd," he exclaims on one occasion (p. 83), 
 "must it appear to contend that labour produces all, and 
 is the only source of wealth, as if capital produced nothing, 
 and was not a real and distinct source of wealth also ! ' And 
 a little farther on he finishes an exposition of what capital 
 does in certain branches of production by saying, quite in the 
 spirit of the Productivity theory, that everything remaining 
 over, after payment of the workers who co-operate in the work, 
 " may fairly be claimed as the produce and reward of capital." 
 Later stall, however, he sees the matter in an essentially 
 different light. He now puts in the foreground the fact that 
 capital itself comes into existence through labour and saving, 
 and builds on that an explanation of interest, half in the spirit 
 of James Mill's Labour theory, &nd half in that of Senior's 
 Abstinence theory. " The person who has laboured before, and 
 not consumed but saved the produce of his labour, and which 
 produce is now applied to assist another labourer in the work of 
 production, is entitled to his profit or interest (which is the 
 reward for labour that is past, and for saving and preserving 
 the fruits of that labour) as much as the present labourer is 
 entitled to his wages, which is the reward for his more recent 
 labour" (p. 310). That eclectic hesitation of this kind must 
 result in all sorts of contradictions goes without saying. Thus 
 in this latter passage Bead himself resolves capital into previous 
 labour, although earlier he had protested against this in the 
 most stubborn way. 2 Thus too he explains profit to be wage 
 for previous labour, while in a previous passage 3 he had blamed 
 M'Culloch most severely for effacing the distinction between 
 the conception of profit and that of wage. 
 
 With Read may be appropriately classed the German econo- 
 
 1 An Inquiry into the Natural Grounds of Bight to Vendible Property or Wealth, 
 Edinburgh, 1829. 
 
 a P. 131, and generally all through the argument against Godwin, and the 
 anonymous tract " Labour Defended." 3 Note to p. 247.
 
 406 THE ECLECTICS BOOK vn 
 
 mist Gerstner. The " familiar question " whether capital by 
 itself, and independently of the other two sources of goods, 
 is productive, he answers in the affirmative. He believes 
 that the part played in the production of the total product 
 by the instrument of production we call capital, can be 
 determined with mathematical exactitude, and without more 
 ado looks upon this share as the " rent in the total profit 
 that is due to capital." 1 With this frank and concise Pro- 
 ductivity theory, however, Gerstner combines certain points 
 of agreement with James Mill's Labour theory; as when (p. 
 20) he defines the instruments of production as "a kind of 
 anticipation of labour," and on that basis calls " the rent of 
 capital that falls to the instruments of production the supple- 
 mentary wage for previously performed labour" (p. 23). But, 
 like Eead, he gives no thought to the question that naturally 
 suggests itself, whether in that case the previously performed 
 labour has not previously received its wages from the capital 
 value of the capital, and why, over and above that, it still gets 
 an eternal contribution in the shape of interest. 
 
 To the same division of the eclectics belong the French 
 economists Cauwes 2 and Joseph Gamier. 
 
 I have already pointed out 3 how Cauwes, with some reser- 
 vation, shows himself an adherent of Courcelle Seneuil's Labour 
 theory. But at the same time he puts forward a number of 
 views that have their origin in the Productivity theory. 
 Arguing against the socialists he ascribes to capital an indepen- 
 dent " active role " in production by the side of labour (i. p. 
 235). In the "productivity of capital" he finds what 
 determines the current rate of loan interest. 4 Finally, he 
 derives the existence of "surplus value " from the productivity of 
 capital in a passage, where he bases the explanation of interest 
 on the fact that we are indebted to the productive employ- 
 ment of capital for a " certain surplus value." 5 
 
 1 Beitrag zur Lehre vom Kapital, Erlangcn, 1857, pp. 16, 22, etc. 
 Precis d' Economic Politique, second edition, Paris, 1881. 
 ' See above, p. 304. 
 
 4 ' ' The principle then is that the rate of interest is a direct consequence of 
 the productivity of capital" (ii. p. 110). 
 
 5 " We saw that the real value of interest depended on the productive em- 
 ployment given to capital ; since a certain surplus value is due to capital, interest 
 is one part of that surplus value presumably fixic tiforfait (without consideration
 
 CHAP, i GARNIER, MILL 407 
 
 In Joseph Gamier l we find the elements of no less than 
 three different theories eclectically combined. The basis of his 
 views is Say's Productivity theory, from which he even revived 
 and adopted the feature long ago rejected by criticism ; that of 
 reckoning interest among the costs of production. 2 Then, in 
 imitation of Bastiat, he calls the " privation " which the lender 
 of the capital suffers through the alienation of it, the justi- 
 fication of interest. Finally, he declares that interest invites 
 and compensates the " labour of saving." 3 
 
 All the eclectics hitherto mentioned combine a number of 
 theories which, if they do not agree in the character of their 
 arguments, at least agree in the practical results at which 
 these arguments arrive. That is to say, they combine theories 
 which are favourable to interest. But, strangely enough, there 
 are some writers who, with one or more theories favourable to 
 interest, combine elements of the theory hostile to it, the 
 Exploitation theory. 
 
 Thus J. G. Hoffmann lays down a peculiar theory that, on 
 one side, is favourable to interest, and explains it as the 
 remuneration of certain labours in the public service performed 
 by the capitalists. 4 But, on the other side, he distinctly 
 rejects the Productivity theory, which was then fashionable, 
 speaking of it as a delusion to think " that in the dead 
 mass of capital or land there dwell forces of acquisition " (p. 
 588); and in blunt terms declares that in taking interest the 
 capitalist takes to himself the fruit of other people's labour. 
 " Capital," he says, " can be employed for the promotion of 
 one's own labour, or for the promotion of other people's. In 
 the latter case a hire is due the owner for it, and this hire can 
 only be paid from the fruit of labour. This hire, this interest, 
 has so far the nature of land-rent that, like it, it comes to the 
 receiver from the fruit of other people's labour" (p. 576). 
 
 Still more striking is the combination of opposed opinions 
 in J. S. Mill. It has often been remarked that Mill takes a 
 
 of gain or loss) which the lender receives for the service rendered by him " (ii. 
 p. 189). 
 
 1 Traite (f Economic Politique, eighth edition, Paris, 1880. 
 
 2 P. 47. * P. 522. 
 
 4 Kleine Schriften staatswirthschaftlichen Inhalts, Berlin, 1843, p. 566. See 
 above, p. 312.
 
 408 THE ECLECTICS BOOK vn 
 
 middle position between two very strongly diverging ten- 
 dencies of political economy the so-culled Manchester school 
 on the one side, and Socialism on the other. It is easy to 
 understand that such a compromise cannot, as a rule, be 
 favourable to the construction of a complete and organic 
 system least of all in that sphere where the chief struggle 
 of socialism and capitalism is being fought out, the theory of 
 interest. The fact is that Mill's theory of interest has got into 
 such u tangle that it would be a serious wrong to this distin- 
 guished thinker were we to determine his scientific position in 
 political economy by this very unsuccessful part of his work. 
 
 As Mill constructed his system in the main on the 
 economical views of Eicardo, he adopted, among others, the 
 principle that labour is the chief source of all value. But 
 this principle is traversed by the actual existence of interest. 
 Mill consequently modified it in the way of making the value 
 of goods determined by their costs of production, instead of by 
 labour in general. Among these costs of production, besides 
 labour which constitutes " so much the principal element as to 
 be very nearly the whole," he finds room for profit, and gives it 
 an independent position. Profit with him is the second con- 
 stant element in costs. 1 
 
 That Mill should have fallen into the old mistake of Mal- 
 thus, and described a surplus as a sacrifice, is all the more 
 wonderful that in English political economy it had already 
 been criticised, severely and forcibly, both by Torrens and 
 Senior. 
 
 But whence comes profit ? Instead of one, Mill gives three 
 inconsistent answers to this question. 
 
 In these the Productivity theory has the smallest share, and 
 it is only in isolated passages, and with all manner of reser- 
 vations, that Mill tends in this direction. First, he explains 
 with a certain hesitation that capital is the third independent 
 factor in production. Of course capital itself is the product of 
 labour; its efficiency in production is therefore that of labour 
 in an indirect shape. Nevertheless he finds that it " requires 
 to be specified separately." 2 In no less involved terms does 
 he express himself on the kindred question whether capital 
 
 1 Principles, book iii. chap. iv. 1, 4, 6 ; chap. vi. 1, No. 8, etc. 
 8 Book i. chap. vii. 1.
 
 CHAP, i /. 5. MILL 409 
 
 possesses independent productivity. " We often speak of the 
 ' productive powers of capital.' This expression is not literally 
 correct. The only productive powers are those of labour 
 and natural agents ; or if any portion of capital can by a 
 stretch of language be said to have a productive power of its 
 own, it is only tools and machinery which, like wind and water, 
 may be said to co-operate with labour. The food of labourers 
 and the materials of production have no productive power." l 
 Thus tools are really productive, while raw materials are not 
 a distinction as startling as it is untenable. 
 
 Much more decisive is his profession of Senior's Abstinence 
 theory. It forms, as it were, Mill's official theory on interest. 
 It appears explicitly and completely in the chapter devoted to 
 profit, and is often appealed to afterwards in the course of the 
 work. " As the wages of the labourer are the remuneration of 
 labour," says Mill in the fifteenth chapter of the second book of 
 his Principles, "so the profits of the capitalist are prqperly, accord- 
 ing to Mr. Senior's well-chosen expression, the remuneration of 
 abstinence. They are what he gains by forbearing to con- 
 sume his capital for his own uses, and allowing it to be con- 
 sumed by productive labourers for their uses. For this 
 forbearance he requires a recompense." And as distinctly in 
 another place : " In our analysis of the requisites of production 
 we found that there is another necessary element in it besides 
 labour. There is also capital; and this being the result of 
 abstinence, the produce or its value must be sufficient to 
 remunerate not only all the labour required, but the abstinence 
 of all the persons by whom the remuneration of the different 
 classes of labourers was, advanced. The return for abstinence 
 is profit." 2 
 
 But besides this, in the same chapter, under the heading 
 of profit, Mill brings forward yet a third theory : " The cause 
 of profit," he says in the fifth paragraph, " is that labour pro- 
 duces more than is required for its support The reason why 
 agricultural capital yields a profit is because human beings 
 can grow more food than is necessary to feed them while it is 
 being grown, including the time occupied in constructing the 
 tools, and making all. other needful preparations; from which 
 it is a consequence that if a capitalist undertakes to feed the 
 
 1 Book v. 1. Book iii. chap. iv. 4.
 
 410 THE ECLECTICS BOOK VH 
 
 labourers on condition of receiving the produce, he has some 
 of it remaining for himself after replacing his advances. To 
 vary the form of the theorem : the reason why capital yields 
 a profit is because food, clothing, materials, and tools last 
 longer than the time which was required to produce them ; 
 so that if a capitalist supplies a party of labourers with these 
 things, on condition of receiving all they produce, they will, 
 in addition to reproducing their own necessaries and instru- 
 ments, have a portion of their time remaining to work for the 
 capitalist." Here the cause of profit is found, not in a pro- 
 ductive power of capital, nor in the necessity of compensating 
 the capitalist's abstinence as a special sacrifice, but simply in 
 this, that "labour produces more than is required for its 
 support " ; that " the workers have a portion of their time 
 remaining to work for the capitalist " : in a word, profit is 
 explained according to the Exploitation theory, as an appro- 
 priation by the capitalist of the surplus value created by 
 labour. 
 
 A similar middle course, on the boundary line between 
 Capitalism and Socialism, is taken by the German Katheder 
 Socialists. The result in this case also is not seldom an 
 eclecticism, but it is an eclecticism which ends more in agree- 
 ment with the Exploitation theory than was the case with 
 MilL I shall only mention here the Katheder Socialist whom 
 we have already met repeatedly in the course of this work, 
 Schaffle. 
 
 In those writings of Schaffle where he treats of our 
 subject three clear and distinct currents of thought may be 
 traced. In the first Schaffle follows Hermann's Use theory, 
 which he weakens as a theory by the subjective colouring he 
 gives to the conception of Use so bringing it nearer to the 
 second of his theories. The first current predominates in the 
 Gesellschaftliche System der nwnschlichcn Wirthschaft, and has 
 left evident traces even in the Bau und Leben. 1 The second 
 current takes the direction of making interest a kind of pro- 
 fessional income, an income which is drawn by the capitalist 
 for certain services he renders. This conception, which had 
 already appeared in the Gesellschaftliche System, is explicitly 
 confirmed in the Bau und Lebcn. 2 But, finally, by the side of 
 1 See above, p. 206. 2 See above, p. 306.
 
 CHAP, i SCHAFFLE 411 
 
 this in the Bau und Leben there appear numerous approxima- 
 tions to the socialist Exploitation theory. The chief of these 
 is the resolution of all the costs of production into labour. 
 While in the Gesellschaftliche System l Schaffle had still 
 recognised the uses of wealth as an independent and element- 
 ary factor in cost besides labour, he now says : " Costs have 
 two constituents : expenditure of personal goods through the 
 putting forth of labour, and expenditure of capital But the 
 latter costs also can be traced back to labour costs, for the 
 productive expenditure of real goods may be reduced to a sum 
 of labours expended at earlier periods ; all costs, therefore, 
 may be considered as costs of labour." 2 
 
 If thus the labour which the production of goods costs 
 is the only economic sacrifice that requires to be considered, 
 it is but a step farther to claim the whole result of production 
 for those who have made this sacrifice. Thus Schaffle 
 repeatedly gives us to understand (e.g. iii. p. 313, etc.) 
 that he considers the ideal economic distribution of goods 
 to be the division to the members of the community accord- 
 ing to work done. In the present day of course the 
 realisation of this ideal is still prevented by all kinds of 
 hindrances ; among others, by the fact that wealth as capital 
 serves as an instrument of appropriation partly an illegal 
 and immoral appropriation, partly a legal and moral appro- 
 priation of the product of labour.^ This appropriation of 
 surplus value by the capitalists Schaffle does not condemn 
 unconditionally ; he would let it continue as a temporary and 
 artificial arrangement so long as we are not able to replace the 
 " economic service of private capital by a more perfect public 
 organisation, established by law, and less 'greedy of surplus 
 value.'" 4 
 
 But notwithstanding this opportunist toleration, Schaffle 
 often brings forward in blunt terms the dogma of the Exploi- 
 tation theory, that interest is a robbery of the product of 
 other people's labour. Thus, in immediate continuation of 
 these words, he says : " All the same the speculative, in- 
 dividualistic organisation of business is not the non plus ultra 
 
 1 i. pp. 258, 268, 271, etc. 
 
 2 Bau und Leben, iii. p. 273, etc. 3 iii. p. 266, etc. 
 4 iii. p. 423. See also iii. pp. 330, 386, 428, etc.
 
 412 
 
 THE ECLECTICS 
 
 BOOK VII 
 
 of the history of economics. It serves a social purpose only 
 indirectly. It is immediately directed, not to the highest net 
 utility of the whole, but to the greatest acquisition of the 
 means of production by private owners, and towards procuring 
 for the families of the capitalists the highest life of enjoyment. 
 The possession of the means of production, movable and im- 
 movable, is made use of to appropriate from the produce of the 
 national labour as much as possible. Proudhon has already 
 put it in full critical evidence that capital forestalls labour in a 
 hundred different forms. The only share of which the wage 
 labourer is assured is the share that an upright beast of burden, 
 endowed with reason, and therefore incapable of being reduced 
 to simple animal wants, finds necessary to sustain him in the 
 condition of life in which he has been placed by circumstances 
 that are historical this condition itself being necessary to 
 allow of the capitalist's competition."
 
 CHAPTER II 
 
 THE LATER FRUCTIFICATION THEORY 
 
 I HAVE pointed to the wide spread of eclecticism as a 
 symptom of the unsatisfactory position of the economical 
 doctrine of interest. Our economists select elements out of 
 many theories, when and because no one of the existing theories 
 is found sufficient. 
 
 A second symptom that points in the same direction is the 
 fact that, in spite of the great number of existing theories, there 
 is no check to the literature of the subject. Ever since scientific 
 Socialism brought scepticism to bear on the old school of opinions 
 there has been no lustrum, and in the latter lustrum no year, 
 in which some new interest theory has not seen the light of 
 day. So far as these have retained at least some principles of 
 the older explanations, and have varied them only in the way 
 of carrying out the original principles more strictly, I have 
 tried to classify them according to the prevailing tendencies 
 they show, and have included them in the statement of 
 preceding chapters. 
 
 But some recent attempts strike out a way of their own, 1 and 
 
 one of them seems remarkable enough to call for fuller notice, 
 
 that of the American writer, Henry George. From its likeness 
 in fundamental ideas to Turgot's Fructification theory, it may 
 be appropriately called the Later Fructification theory. 
 
 George's 2 interest theory occurs in the course of a polemic 
 against Bastiat and his weU-known illustration of the lending 
 
 1 By desire of the author I here omit, as of little interest to English readers 
 i statement and criticism of Schellwien's theory (Die Arbeit mwL ihr RecU, Berlin,' 
 1882, p. 195, etc.), which occupies pp. 477-486 of the German edition. W. S. 
 
 - Progress and Poverty. Kegan Paul, 1885.
 
 414 THE LATER FRUCTIFICATION THEORY BOOK vn 
 
 of the plane. A carpenter James has made a plane for his 
 own use, but lends it for a year to another carpenter William. 
 At the end of the year he is not content with getting back an 
 equally good plane, because this would not compensate him for 
 the loss of the advantage he might have had from the use of 
 the plane during the year, and on that account he asks in 
 addition a new plank as interest. Bastiat had explained and 
 justified the payment of the plank by showing that William 
 obtains "the power which exists in the tool to increase the 
 productiveness of labour." l This explanation of interest from 
 the productivity of capital George does not consider valid, for 
 various reasons which do not concern us here, and then 
 proceeds as follows : " And 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 con- 
 sisted 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." 
 
 The fact that, for the utilisation of the productive forces 
 of nature, labour also is necessary, and that, consequently, the 
 
 1 Capital et Rente. See above, p. 289.
 
 CHAP, ii HENRY GEORGE 415 
 
 produce of agriculture, for instance, is in a certain sense a 
 produce of labour, is not sufficient to obliterate the essential 
 difference that exists, according to George, between the different 
 modes of production. In such modes of production as consist 
 " merely of changing the form or place of matter, as planing 
 boards or mining coal, labour alone is the efficient cause. . . . 
 When labour stops production stops. When the carpenter 
 drops his plane as the sun sets, the increase of value which he 
 with his plane is producing ceases until he begins his labour 
 again the following morning. When the factory bell rings for 
 closing, when the mine is shut down, production ends until work 
 is resumed. The intervening time, so far as regards production, 
 might as well be blotted out The lapse of days, the change of 
 seasons, is no element in the production that depends solely on the 
 amount of labour expended." But in the other modes of pro- 
 duction " which avail themselves of the reproductive forces of 
 nature time is an element The seed in the ground germinates 
 and grows while the farmer sleeps or ploughs the fields." l 
 
 So far George has shown how certain naturally fruitful 
 kinds of capital bear interest But, as every one knows, all 
 kinds of capital, even those that are naturally unfruitful, pro- 
 duce interest George explains this simply from the efficiency 
 of the law of equalisation of profits. "No one would keep 
 capital in one form when it could be changed into a more 
 advantageous form. . . . And so in any circle of exchange 
 the power of increase which the reproductive or vital force of 
 nature gives to some species of capital must average with all ; 
 and he who lends or uses in exchange money or planes or bricks 
 or clothing, is not deprived of the power to obtain an increase 
 any more than if he had lent, or put to a reproductive use, so 
 much capital in a form capable of increase." 
 
 To return to Bastiat's illustration : the reason why William 
 at the end of the year should return to James more than an 
 equally good plane, does not rest in the increased power " which 
 the tool gives to labour," for "that is not an element . . . but it 
 
 1 Parallel with the "vital forces of nature," according to George, works also 
 ' ' the utilisation of the variations in the forces of nature and of man by exchange." 
 This too leads to "an increase which somewhat resembles that produced by the 
 vital forces ofnpture" (p. 129). But I need not here enter into a more exact 
 exposition of t! is somewhat obscure element, since George himself ascribes to it 
 only a secondary role in the origination of interest.
 
 416 THE LATER FRUCTIFICATION THEORY BOOK vn 
 
 springs from the element of time the difference of a year be- 
 tween the lending and return of the plane. Now if the view 
 is confined to the illustration, there is nothing to suggest how 
 this element should operate, for a plane at the end of the year 
 has no greater value than at the beginning. But if we sub- 
 stitute for the plane a calf, it is clearly to be seen that to put 
 James in as good a position as if he had not lent, William at 
 the end of the year must return not a calf, but a cow. Or if 
 we suppose that the ten days' labour had been devoted to 
 planting corn, it is evident that James would not have been 
 fully recompensed if at the end of the year he had received 
 simply so much planted corn, for during the year the planted 
 corn would have germinated and grown and multiplied ; so, if 
 the plane had been devoted to exchange, it might during the 
 year have been turned over several times, each increase yielding 
 an increase to James. ... In the last analysis the advantage 
 which is given by the lapse of time springs from the generative 
 force of nature and the varying powers of nature and of man." 
 
 The resemblance of all this to Turgot's Fructification theory 
 is obvious. Both start with the idea that in certain kinds of 
 goods there resides, as a natural endowment, the ability to bring 
 forth an increment of value ; and both demonstrate that, under 
 the influence of exchange transactions and the efforts of 
 economic men to get possession of this most remunerative 
 fructification, the endowment must artificially become the 
 general property of all kinds of goods. They differ only in 
 that Turgot places the source of the increment of value 
 quite outside of capital, in rent -bearing land, while George 
 seeks it inside the sphere of capital, in certain naturally fruitful 
 kinds of goods. 
 
 This difference avoids the weightiest objection that we had 
 to urge against Turgot. Turgot had left unexplained how it 
 is possible to purchase, for a relatively small sum of capital, 
 land which yields successively an infinite sum of rent, and 
 to secure the advantage of an enduring fructification for un- 
 fruitful capital. With George, on the other hand, it seems 
 to need no proof that unfruitful wealth is exchanged in equal 
 ratio with fruitful. For since the latter can be produced in 
 ;iny quantity at will, the possibility of increasing the supply
 
 CHAP. II 
 
 HENRY GEORGE 417 
 
 of such goods will not permit of their enjoying a higher level 
 of price than the unfruitful goods that cost as much to produce. 
 On the other hand, George's theory is open to two other 
 criticisms, which are, I think, decisive. 
 
 First, the separation of production into two groups, in one 
 of which the vital forces of nature form a distinct element in 
 addition to labour, while in the other they do not, is entirely 
 untenable. George here repeats in a somewhat altered form 
 the old mistake of the physiocrats, who would not allow that 
 nature co-operates in the work of production except in one 
 single branch of it, agriculture. The natural sciences have long 
 a^o told us that the co-operation of nature is universal. All 
 our production rests on the fact that, by the application of 
 natural forces, we put imperishable matter into useful forms. 
 Whether the natural power of which we avail ourselves in 
 this be vegetative or inorganic, mechanical or chemical, makes 
 no difference whatever in the relation in which natural power 
 stands to our labour. It is quite unscientific to say that, in 
 production by means of a plane, " labour alone is the efiicient 
 cause." The muscular movement of the man who planes 
 would be of very little use if the natural powers and properties 
 of the steel edge of the plane did not come to his assistance. 
 Is it even true that, on account of the character of plank 
 planing as a " simple change of form or place of the material," 
 nature in this case can do nothing without labour ? Can we not 
 fasten the plane into an automatic machine, and get it driven 
 by the force of a stream ; and will not the plane, untiring, con- 
 tinue the production even when the carpenter sleeps ? What 
 more does nature do in the growing of grain ? 
 
 Second, George has not explained that prior phenomenon 
 of interest by which he seeks to explain all the other phenomena. 
 He says all kinds of goods must bear interest because they 
 can be exchanged for seed-corn, cattle, or wine and these bear 
 an interest. But why do these bear an interest .' 
 
 Many a reader will perhaps think, at the first glance, as 
 George himself evidently thinks, that it is self-evident. 
 It is evident that the ten grains of wheat, into which the one 
 grain has multiplied itself, are worth more than .the one 
 grain of wheat that was sown; that the grown-up cow is 
 worth more than the calf out of which it grew. (Duly it would 
 
 2 E
 
 418 THE LATER FRUCTIFICATION THEORY HOOK vn 
 
 be well to consider that it is not a matter of ten grains simply 
 growing out of one grain. The action of cultivated land, and 
 a certain expenditure of labour, have had a share in it. And 
 that ten grains are worth more than one grain + the action of 
 the ground and -f the labour expended, is obviously not self- 
 evident. Just as little is it simply self-evident that the cow is 
 worth more than the calf + the fodder which it has consumed 
 during its growth -f the labour which its rearing demanded. 
 And yet it is only under these conditions that interest can fall 
 to the share of the grain of wheat, or to the calf. 
 
 Indeed, even in the case of wine which improves in lying, 
 it is not by any means self-evident that the wine which has grown 
 better is of more value than the inferior and unripe wine. 
 For in our method of valuing the goods which we possess we 
 follow unhesitatingly the principle of anticipating future use. 1 
 We do not estimate the value of our goods according to the use 
 at least we do not value them only according to the use which 
 they bring us at the moment, but also according to that use which 
 they will bring us in the future. We ascribe to the field, which 
 for the moment lies useless in fallow, a value with regard to the 
 crop which it will bring us by and by. We give a value even 
 now to the scattered bricks, beams, nails, clamps, etc., which 
 bring us no use when in that condition, in consideration of the 
 use they will afford us when put together at some future time 
 in the shape of a house. We value the fermenting must, which, 
 as such, we cannot make any use of, because we know that by 
 and by it will be serviceable wine. And so might we also value 
 the unripe wine, which we know will become excellent wine 
 after lying, by the .amount of use which it will give us as 
 matured wine. But if we ascribe to it here and now a value 
 corresponding to that future use, there remains no room for an in- 
 crease of value, and for interest. And why should we not ? 
 
 And if we do not ascribe such a value, or not quite such 
 a value, the cause is certainly not to be found, as George 
 imagines, in the productive powers of nature which the wine 
 possesses. For that there are vital forces of nature in the 
 fermenting must, which in itself is even hurtful, or in the unripe 
 wine, which of itself is of little use ; and that these vital forces 
 
 i 
 
 80, etc. 
 
 See my remarks on "Computation of Wealth " in Eecktc vnd Verhdltnisse, p. 
 -n
 
 CHAP. II 
 
 HENRY GEORGE 419 
 
 tend to the furnishing of a costly product, can, in the nature of 
 things, only afford a ground for valuing the goods which con- 
 tain these precious forces at a high figure, not at a low one. 
 If, nevertheless, we value them at a relatively low figure, we 
 do it not because of their containing useful natural forces, but 
 in spite of it. The surplus value of the products of nature, 
 which George appeals to, is therefore not self-evident. 
 
 George makes one attempt to explain this surplus value, 
 though it must be called a very lame one. He says that time, 
 as well as labour, constitutes an independent element in its 
 production. But is this really an explanation, or is it an 
 evasion of the explanation ? How comes the person who 
 throws a seed of corn into the earth to get compensation, 
 out of the value of the product, not only for his labour but 
 also for the time that the seed has lain in the ground and 
 <*rown ? Is time then the object of a monopoly ? Such an 
 argument almost tempts one to recall the naive words of the 
 old canonist, that time is a good common to all, to the debtor 
 as to the creditor, to the producer as to the consumer. 
 
 Of course George did not mean time, but the vegetative 
 powers of nature actually working during time. But how 
 should the producer manage to get himself paid for these 
 vegetative forces of nature by a special surplus value in the 
 product ? Are, then, these natural powers objects of a monopoly ? 
 Are they not rather accessible to every man who owns a 
 seed of corn ? And cannot every one put himself in possession 
 of a seed of corn ? Since the production of seed-corn can be 
 indefinitely augmented by labour, would the amount of corn 
 not be steadily increased so long as a monopoly of the natural 
 forces immanent in the grain made its possession appeal- 
 peculiarly advantageous? And would not, on that account, 
 the supply inevitably increase till the extra profit due to that 
 monopoly was absorbed, and the production of corn became no 
 more remunerative than any other kind of production ? 
 
 The careful reader will note that in this discussion we 
 have come back into the same groove of ideas into which we 
 were brought by our criticism of Strasburger's Productivity 
 theory. 1 In this part of his work George has under-estimated 
 the interest problem in the same way as Strasburger did, only 
 
 1 See above, p. 178.
 
 420 THE LATER FRUCTIFICATION THEORY BOOK vn 
 
 to a greater extent and with still greater naivety. Both 
 hastily conclude that the powers of nature are the cause 
 of interest. But Strasburger at least made an attempt to 
 investigate exactly the alleged causal connection between the 
 two, and to follow it out in detail. George, on the contrary, 
 gives us nothing but assertions which take for granted that, in 
 certain productions, time is an " element." It is certainly not 
 in this superficial way that the great problem is to be solved.
 
 CONCLUSION. 
 
 OUR attention has been too long fixed on individual theories. 
 Let us, in conclusion, consider the subject as a whole. We have 
 seen the rise of a motley array of interest theories. We have 
 considered them all carefully and tested them thoroughly. 
 No one of them contains the whole truth. Are they on that 
 account quite fruitless ? Taken all together, do they form 
 nothing but a chaos of contradiction and error, that leaves us 
 no nearer the truth than when we started ? Is it not rather 
 the case that, through the tangle of contradictory theories, there 
 runs a line of development which, if it has not itself led to the 
 truth, has at least pointed the way in which truth is to be 
 found ? And how runs the line of this development ? 
 
 I cannot better introduce the answer to this last question 
 than by asking my readers once more to put clearly before 
 their minds the substance of our problem. What really is the 
 problem of interest ? 
 
 The problem is to discover and state the causes which 
 guide into the hands of the capitalists a portion of the stream- 
 of goods annually flowing out of the national production. 
 There can be no question then that the interest problem is a 
 problem of distribution. 
 
 But in what part of the stream is it that the current 
 branches off into different arms ? On this point the 
 historical development of theory has brought to light three 
 essentially distinct views, and these views have led to three as 
 distinct fundamental conceptions of the whole problem. 
 
 Let us keep for a moment to the figure of the stream : it 
 will serve very well to illustrate the subject. The source
 
 42^ CONCLUSION 
 
 represents the production of goods ; the mouth the ultimate 
 division into incomes whereby human needs are satisfied ; the 
 course of the stream represents that stage between source and 
 ultimate division where goods pass from hand to hand 
 in economic transactions, and receive their value by human 
 estimation. 
 
 Now the three views are the following. One view has it 
 that the capitalist's share is already separated out from the first. 
 Three distinct sources nature, labour, and capital each in 
 Virtue of its inherent productive power, bring forth a definite 
 quantity of goods, with a definite quantity of value, and just 
 the same amount of value as lias flowed from each source is 
 discharged into the income of those persons who own the source. 
 It is not so much one stream as three streams, that flow 
 together for a long time in the same bed. But their waters 
 do not mingle, and at the mouth they divide again in the 
 same proportion as when they came out of the separate sources. 
 This view transfers the whole explanation to the source of 
 wealth ; it treats the problem of interest as a problem of 
 production. It is the view of the Naive Productivity theories. 
 
 The second view is directly opposed to the first. It finds 
 the division first and exclusively in the discharge. There is 
 only one source, labour. Out of it pours the whole stream of 
 wealth, one and undivided. Even the course of the stream is 
 undivided ; in the value of goods there is nothing to prepare 
 the way for a division of them among different participants, 
 for all value is measured simply by labour. It is just at the 
 mouth, just where the stream of wealth is about to pour out, 
 and should pour out into the income of the workers who 
 produce it, that, from each side, the owners of land and the 
 owners of capital thrust out a dam into the stream, and 
 forcibly divert a part of the current into their own property. 
 This is the view of the socialist Exploitation theory. It denies 
 interest any previous history in the earlier stages of the career 
 of wealth. It sees in it simply the result of an inorganic, 
 accidental, and violent taking. It treats the problem as purely 
 one of distribution or division in the most offensive sense of 
 the word. 
 
 The third view lies midway between the two. According 
 to it there are two, perhaps even three springs in the source
 
 THREE CONCEPTIONS OF THE PROBLEM 423 
 
 out of which flows the undivided stream of wealth. But in 
 its course this stream conies under the influences that create 
 value, and under these influences it immediately begins to 
 branch asunder again. That is to say, in their calculation of 
 use values (and of exchange values based on these) men put 
 a value on the importance they attach to various goods and 
 classes of goods, taking into consideration the amount and 
 intensity of their needs on the one hand, and the quantity of 
 means available to satisfy them on the other, and thus come 
 to make division between goods and goods; they raise one 
 kind and lower another. Thus emerge complicated differences 
 of level, complicated tensions and attractions, under the influ- 
 ence of which the stream of goods is gradually forced asunder 
 into three branches, of which each has its particular mouth. 
 The one mouth discharges yito the income of the owners of 
 the land ; the second into that of the workers ; the third into 
 that of the capitalists. But these three branches are neither 
 identical with the two or three springs, nor do they even 
 correspond with them in force. What decides the force of 
 each branch at its mouth is not the strength of each spring at 
 its source, but the amount which the formation of values has 
 forced from the united stream into each of the three branches. 
 This then is the view in which all the remaining theories 
 of interest agree. They find the final division already sug- 
 gested in the stage of the formation of values, and therefore 
 they consider it their duty to carry back their theory into 
 this sphere. They supplement and widen out the distribution 
 problem of interest into a problem of value. 
 
 Which of these three fundamental conceptions is the 
 right one ? To any moderate and candid observer the answer 
 cannot remain doubtful. 
 
 It certainly is not the first view. Not only is coital 
 not an original source of wealth, since it is at all times 
 the fruit of nature and labour, but, as we have suffi- 
 ciently proved, there is no power whatever in a factor of 
 production to turn out its physical products with a definite 
 value attached to them. In the production of goods neither 
 value in general, nor surplus value in particular, nor interest 
 on capital comes ready-made into the world. The problem of 
 interest is not a simple problem of production.
 
 424 CONCLUSION 
 
 But neither can the second conception be the correct one. 
 The facts are against it. It is not for the first time in the dis- 
 tribution of goods, but before that, in the formation of value, 
 that a foreign element intrudes itself by the side of labour. 
 An oak tree a hundred years old, which during its long growth 
 has only required the attention of a single day's labour, has a 
 hundred times higher value than the chair which another day's 
 labour has made out of a pair of boards. In this case the oak 
 trunk, the product of one day's labour, does not at once become 
 a hundred times more valuable than the chair which costs one 
 day's labour. But day by day, year by year, the growing value 
 of the oak diverges from the value of the chair. And as it is 
 with the value of the oak, so is it with the value of all those 
 products the production of which costs, not only labour, but 
 time. 
 
 Now it is the same quiet and stubborn working forces 
 as, step by step, separated the value of the oak from that of 
 the chair, that have at the same time produced interest on 
 capital. These forces, effective long before goods come to 
 division, have marked out the future limiting line between wage 
 of labour and interest on capital. For labour can be paid on 
 no other principle than " like wages for like work." But if the 
 value of goods produced by similar labour becomes dissimilar 
 through the action of these forces, the similar level of wages can- 
 not everywhere be maintained and coincide with the dissimilar 
 rise in the value of goods. It is only the value of goods not 
 thus favoured that falls in level, and is appropriated by the 
 general rate of wages which it determines. All goods that are 
 favoured rise above this level in proportion as they have been 
 favoured by the formation of value, and could not be appro- 
 priated by the general rate of wages. When then the final 
 division comes, after all the workers have received like wages 
 for like work, these favoured goods must of themselves leave 
 something over which the capitalist can and may appropriate. 
 They leave this something over, not because at the last moment 
 the capitalist, by his sudden snatch at the spoil, artificially 
 forces down the level of wages under the level of the value of 
 goods, but because, long previously, the tendencies of the forma- 
 tion of value had raised the value of those goods which cost 
 labour and time above the value of those other goods which
 
 FUNDAMENTALLY A PROBLEM OF VALUE 425 
 
 cost only labour producing its result at once ; the value of 
 which latter labour, as it must be sufficient to satisfy the 
 labour of its production, forms at the same time the standard 
 for the general rate of wages. 
 
 So speak the facts. The conclusions which they force us 
 to draw are clear. The problem of interest is a problem of 
 distribution. But the distribution has a previous history, and 
 must be explained by that previous history. The sums of 
 wealth do not start away from each other on a sudden ; the 
 diverging lines which they follow were quietly and gradu- 
 ally cut out in previous stages of their career. Whoever 
 wishes really to understand the distribution, and truly to ex- 
 plain it, must go back to the origin of the quiet but distinct 
 grooving of these lines of division, and this will lead him to 
 the sphere of value. This is where the principal work is to be 
 done in the explanation of interest. Whoever treats the pro- 
 blem as a simple problem of production breaks off his explana- 
 tion before he has come to the principal point. Whoever treats 
 it as a problem of distribution, and distribution only, begins it 
 after the principal point is passed. It is only the economist 
 who undertakes to clear up those remarkable rises and falls of 
 value, where the rises are surplus value, who can hope, in 
 explaining them, to explain interest in a really scientific 
 way. The interest problem in its last resort is a problem of 
 value. 
 
 If we keep this in view we shall easily find the order of 
 merit into which these various* groups of theories fall, and we 
 shall ascertain where runs the upward line of the development. 
 
 Two theories have entirely mistaken the character of the 
 interest problem; together the one forming the counterpart 
 of the other- they constitute the lowest step in the develop- 
 ment. These are the Naive Trod activity theory and the 
 socialist Exploitation theory. It may seem strange to mention 
 these two in the same breath. How widely the two diverge 
 in the results at which they arrive! How much superior the 
 adherents of the Exploitation theory consider their arguments 
 to the naive assumptions of the Productivity theorists ! How 
 proudly they proclaim their own advanced critical attitude ! 
 The association, however, is justified. First, the two theories 
 agree in what they do not do. Neither of them touches on the
 
 426 CONCLUSION 
 
 distinctive problem. Neither of them wastes words in explaining 
 those peculiar waves which are thrown up by the value of goods, 
 and out of which surplus value conies. The Productivity theory 
 contents itself with saying, in regard to these waves of value, 
 that they have been produced. The Exploitation theory, almost 
 more culpably, does not even notice them ; for it they do not 
 exist; for it, however the facts of the economical world may 
 run contrary, the level of the value of goods agrees simply 
 with the level of the labour expended on them. 
 
 But not only negations, but positive ideas bind these two 
 theories more closely together than could well be believed. 
 They are in truth fruit of one and the same bough ; children 
 of one and the same naive 'assumption that value grows out of 
 production like the blade out of the field. 
 
 This assumption lias an important history of its own in 
 economic literature. In constantly changing shapes it has, 
 for a hundred and thirty years, ruled our science, and by 
 forcing the explanation of the fundamental phenomenon in a 
 wrong direction has hindered its progress. First it appears in 
 the physiocrat doctrine that land creates all surplus of value 
 by its own fruitfulness. Adam Smith took the strength away 
 from the assumption. Eicardo entirely uprooted it. But, 
 before the first phenomenal form of it had quite disappeared, 
 Say introduced it for a seeond time into the science in a new 
 and extended form. Instead of the one productive power of the 
 physiocrats appear three productive powers, which produce 
 values and surplus values exactly in the same way as formerly 
 the physiocrats had produced the produit net. Under this 
 form the assumption held the science under its ban for ten 
 long decades. At length the spell was broken, for the most 
 part through the passionate but praiseworthy criticism of the 
 socialist theorists. But still its tough vitality asserted itself. 
 Giving up the form, not the substance, it managed to save 
 itself under a new disguise, and by a strange freak of fortune 
 found its new home in the writings of those who had most 
 bitterly opposed it, the Socialists. The value-creating powers 
 were gone ; the value-creating power of labour remained, and 
 with it the : olcl fatal weakness that, instead of the subtle 
 syntheses of the formation of value which should be the work 
 and the pride of our science to unravel, there was nothing left
 
 RANK OF THE VARIOUS THEORIES 427 
 
 but a stout assumption, or, so 'far as an assumption would not 
 pass, a still more stout denial. 
 
 Thus the naive theory of the Productivity of capital and 
 the emancipated theory of the socialists are twin systems. 
 So far as the latter aspires to be a critical theory, well and 
 good ; it is really so ; but it is also obviously a naive doctrine. 
 It criticises one naive extreme only to fall into an opposite 
 extreme that is no less naive. It is nothing else than the 
 long-delayed counterpart of the Naive Productivity theory. 
 
 In comparison with it the remaining theories of interest 
 may take credit to themselves for standing a step higher. They 
 seek for the solution of the interest problem on the ground 
 where the solution is really to be found, the ground of value. 
 The respective merits of these theories, however, are different. 
 
 Those which seek to explain interest by the external 
 machinery of the theory of costs have to carry a heavy 
 handicap in the assumption that value grows out of produc- 
 tion. Their explanation always leaves something over to 
 explain. Just as certain as is the fact that the fundamental 
 forces which set in motion all economical efforts of men are 
 their interests, egoistic or altruistic, so certain is it that no 
 explanation of the economical phenomena can be satisfactory 
 where the threads of explanation do not reach back unbroken 
 to these fundamental and undoubted forces. This is why 
 the cost theories fail. In thinking that they find the principle 
 of value, of that guide and universal intermediate motive of 
 human economical affairs, not in a relation to human welfare, 
 but in a dry fact of the external history of the manufacture of 
 goods, in the technical conditions of their production, they 
 follow the thread of explanation into a cid-de-sac, from which 
 it is impossible to find a way to the psychological interest- 
 motive to which every satisfactory explanation must go back. 
 This condemnation applies to the majority of the interest 
 theories we have been considering, however different the 
 individual theories may have been. 
 
 Lastly, one step higher in rank stand those theories which 
 have quite cut themselves adrift from the old superstition that 
 the value of goods comes from their past instead of from their 
 future. These theories know what they wish to explain, and 
 in what direction the explanation is to be sought. If they
 
 428 CONCLUSION 
 
 have, notwithstanding, not discovered the entire truth, it is 
 rather the result of accident ; while their predecessors, cut off 
 from the right way of its seeking by a wall of assumption, 
 sought it in a wrong direction, and so sought it in vain. The 
 higher step of the development is indicated in certain' indi- 
 vidual formulations of the Abstinence theory, but principally 
 in the later Use theories ; and here it is the theory of 
 Menger which, to my mind, appears the highest point of the 
 development \\p till now. And that not because his positive 
 solution is the most complete, but because his statement of the 
 problem is the most complete two things, of which, as is 
 often the case, the second may perhaps be more important and 
 more difficult than the first. 
 
 On the foundation thus laid I shall try to find for the 
 vexed problem a solution which invents nothing and assumes 
 nothing, but simply and truly attempts to deduce the pheno- 
 mena of the formation of interest from the simplest natural 
 and psychological principles of our science. 
 
 I may just mention the element which seems to me to 
 involve the whole truth. It is the influence of Time on 
 human valuation of goods. To expand this proposition must 
 be the task of the second and positive part of my work.
 
 INDEX OF AUTHORS MENTIONED 
 
 Where reference is given to several passages the principal ones are 
 indicated by black figures. 
 
 ALEXIUS a Massalia, 35, 37. 
 Ambrosius, 20. 
 Aquinas, 22, 2:5, 24. 
 Aristotle, 16, 17, 48. 
 Augustine, 20. 
 
 BACON, 33, 43. 
 
 Barbeyrac, 40. 
 
 Bastiat, 288, 391, 407, 413, 415. 
 
 Beccaria, 51. 
 
 Benthnm, 47. 
 
 Bernhar.li, 96, 205. 
 
 Resold, 32. 
 
 Bischof, 400. 
 
 Bodiuus, 52. 
 
 Bohmer, 15, 23, 40. 
 
 Bornitz, 32. 
 
 Boxhorn, 40. 
 
 Biisch, 317. 
 
 CAIRNES, 286. 
 
 Calvin, 28, 64. 
 
 Camerarius, 32. 
 
 Canard, 105. 
 
 Cancrin, 81. 
 
 Carey, 153, 293. 
 
 Cato, 16. 
 
 Cauwes, 130, 304, 406. 
 
 Chalmers, 102. 
 
 Cherbuliez, 286, 305. 
 
 Child, 44. 
 
 Chrysostom, 20. 
 
 Cicero, 16. 
 
 Concilia, 49. 
 
 Coiitzen, 41. 
 
 Cossa, 400. 
 
 Courcelle-Seneuil, 247, 300, 406. 
 
 Covarruvias, 22. 
 
 Culpepper, 43. 
 
 DIKTZEL, H., 260. 
 
 Dietzel, K., 287. 
 
 Droz, 107. 
 
 Diiliring, 324. 
 
 Dumoulin (see Molinaeus). 
 
 EISF.LF.N, 86. 
 
 Endemann, 15, 18, 20, 21, 24, 25, 26, 
 27, 30, 32, 37, 41, 59. 
 
 FOUBONXAIS, 42, 49. 
 Fulda, 86. 
 Funk, 15, 57, 59. 
 
 GAIUS, 255. 
 
 Galiani, 48, 49, 56, 208, 259. 
 
 Gamier, G., 105. 
 
 Gamier, J., 130, 286, 305, 407. 
 
 Genovesi, 50. 
 
 George, 65, 413. 
 
 Gerstner, 300, 406. 
 
 Glaser, 172. 
 
 Godwin, 405. 
 
 Goldschmidt, 254. 
 
 Graswinckel, 40. 
 
 Grotius, 33, 34. 
 
 Guth, 324. 
 
 HELD, 318. 
 
 Hermann, 188, 193, 207, 210, 216, 233, 
 
 245, 325, 410. 
 Hodgskin, 270, 318. 
 Hoffmann, 312, 407. 
 Hufeland, 81. 
 Huhn, 400. 
 Hume, 47, 58, 59, 60.
 
 430 
 
 INDEX 
 
 JAKOB, 85. 
 Jevous, 286, 400. 
 Jones, 102. 
 Justi, 41, 58. 
 
 KLEINWACHTEII, 130, 132. 
 
 Kloppenburg, 40. 
 
 Knies, 15, 16, 17, 18, 207, 216, 223, 
 
 227, 239, 245, 255, 259, 339, 340, 
 
 367, 375, 383, 384. 
 Kozak, 328. 
 Kraus, 81. 
 
 LACTANTIUS, 20. 
 
 Laspeyres, 15, 35, 40. 
 
 Lassalle, 173, 276, 323. 
 
 Lauderdale, 111, 143, 179, 270, 275. 
 
 Law, 52, 58. 
 
 Leibnitz, 41. 
 
 Leroy-Beaulieu, 131, 141, 399. 
 
 Locke, 44, 58, 60, 270, 317. 
 
 Lotz, 83, 316. 
 
 Lucder, 81. 
 
 Luther, 27. 
 
 M'CuLLOCH, 97, 270, 271, 275, 300, 
 
 391, 405. 
 M'Leod, 102. 
 Maffei, 48. 
 
 Malthus, 96, 149, 270, 274, 275, 408. 
 Mangoldt, 205. 
 Mavesius, 40. 
 Mario, 192. 
 
 Marx, 173, 174, 323, 325, 326, 367. 
 Mataja, 212. 
 Melanchthon, 27. 
 Melon, 52. 
 
 Monger, 188, 209, 260, 428. 
 Mercier de la Riviere, 62. 
 Mill, James, 270, 271, 275, 297, 300, 
 
 320, 405, 406. 
 
 Mill, John Stuart, 286, 325, 407. 
 Mirabeau, 63, 62. 
 Mithoff, 205. 
 Molinaeus (Dumoulin), 20, 28, 29, 33. 
 
 37, 58. 
 
 Molinari, 57, 130, 286, 399. 
 Montesquieu, 52. 
 Murhard, 81. 
 
 NASSE, 208. 
 Nebenius, 192, 271. 
 Neumann, 15, 35, 41. 
 Noodt, 40. 
 North, 44. 
 
 PETTY, 382. 
 
 Pierstorff, 9, 71, 91, 137, 151, 275, 399. 
 
 Plato, 16. 
 
 Platter, 71, 74. 
 
 Plautus, 16, 17. 
 
 Politz, 81. 
 
 Potliier, 62, 57. 
 
 Proudhon, 130, 321, 325. 
 
 Pufendorf, 41. 
 
 QUESNAY, 62. 
 
 RAU, 86. 
 
 Read, 153, 300, 406. 
 
 Ricardo, 87, 150, 202, 269, 271, 275, 
 
 297, 312, 316, 320, 321, 339, 353, 
 
 354, 376, 386, 408, 426. 
 Riedel, 127, 132, 139, 210. 
 Rizy, 15. 
 Rodbertus, 173, 291, 306, 322, 325, 
 
 326, 328, 374, 389, 390. 
 Roesler, 172, 202. 
 Iloscher, 15, 32, 33, 41, 44, 59, 113, 
 
 128, 132, 139, 202, 210, 247, 248, 
 
 286, 391, 400. 
 Rossi, 130, 286, 397. 
 
 SALMASIUS, 33, 36, 58, 59, 215, 247, 
 
 256, 259. 
 Sartorius, 81. 
 Say, J. B., 85, 104, 111, 120, 132, 139, 
 
 188, 193, 194, 198, 210, 229, 232, 
 
 245, 249, 325, 407. 
 Schaffle, 206, 216, 221, 227, 229, 232, 
 
 245, 249, 306, 325, 337, 410. 
 Schanz, 43. 
 Schelhvien, 413. 
 Schmalz, 81. 
 Schon, 137. 
 
 Schulze-Delitzsch, 400. 
 Schiiz, 286, 400. 
 Scialoja, 131, 132. 
 Scrope, 271. 
 Seneca, 16, 17. 
 Senior, 87, 247, 269, 271, 302, 325, 
 
 403, 405, 408, 409. 
 Seuter, 81. 
 Sismondi, 318. 
 Sivers, 63. 
 Smith, Adam, 70, 86, 87, 90, 91, 102, 
 
 124, 127, 269, 271, 312, 316, 318, 
 
 320, 325, 339, 376, 426. 
 Smith, Peshiue, 153, 161. 
 Soden, 82, 316. 
 Sonnenfels, 42, 58, 59, 317. 
 Steuart, 46, 58, 59, 317. 
 Storch, 190. 
 Strasburger, 173, 391, 419.
 
 INDEX 
 
 431 
 
 TELLEZ, 21, 23. 
 Thunen, 164, 205, 402. 
 Torrens, 96, 151, 274, 408. 
 Turgot, 64, 61, 78, 259, 413, 41b. 
 
 ULPIAN, 255. 
 
 VACOXICS Vacnna, 23. 
 Vasco, 48, 50, 51. 
 
 WAGNER, 247, 308, 311. 
 Whately, 102. 
 Wirth, 286, 400. 
 Wiskemann, 15, 27. 
 Wollemborg, 150, 287. 
 
 ZABARELLA 24. 
 Zwingli, 27. 
 
 THE END
 
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 UNIVERSITY OF ILLINOIS-URBANA