The Natural Economic Order/Part V/Chapter 6

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Readers who now understand to what circumstances houses, means of production, ships, etc. and money, owe their characteristics as capital, will also wish to hear something of the attempts hitherto made to explain interest. Those who desire thorough information on the subject will find the theories of interest very fully described in Boehm-Bawerk's "Capital and Capital-Interest". The following classification is taken from that work. The author puts the question: Whence and why does a capitalist receive interest? and groups the answers as follows:

1. Theories of Fructification.
2. Theories of Productivity.
3. Theories of Utility.
4. Theories of Abstinence.
5. Theories of Work.
6. Theories of Exploitation.

As Boehm-Bawerk does not confine himself to criticising the different theories, but also proposes a theory of his own, he is inevitably guided by his own theory when examining the theories of others, and his attention is attracted by evidence which speaks for or against it — at the cost of other evidence which, considered from another standpoint, gains greatly in importance and deserves a more thorough investigation than that accorded it by Boehm-Bawerk. I find for instance on p. 47 the following remarks:

"Sonnenfels,[1] influenced by Forbonnais,[2] sees the origin of interest in the interruption of the circulation of money by money-collecting capitalists out of whose hands money can be enticed again only by a tribute offered in the form of interest. He ascribes various evil effects to interest: that it increases the price of commodities, that it diminishes the reward of diligence (by this is meant probably the proceeds of labour) of which it allows the owner of money to partake. He even calls capitalists a class of non-workers who live by the sweat of the working classes."

For us a man advancing such opinions is an attractive personality, but Boehm-Bawerk does not examine this theory in detail; he dismisses the originator of it with a few words about "contradictory eloquence". But it may be that if these early writings on interest were studied from the point of view of basic interest they would be found to contain many remarkable statements. Possibly the independent interest-creating power of our traditional form of money has not had to await discovery and proof until the present day.

We shall now give a greatly condensed summary of the above six theories, referring all who wish to study the history of the theories of interest more closely to the above-named excellent work of Boehm-Bawerk.

A detailed examination of these theories is unnecessary, as anyone with the help of the theory of basic interest, can discover the point at which the theorist, lured from his course by a siren in the shape of a theory of value, runs full-sail upon some reef of error.

1. The Theory of Fructification, by a flight of fancy, deduces interest from rent on land. Because a field that yields interest cap be bought with money, money and everything that can be bought with money must yield interest. True, but this theory proves nothing at all, for it falls to explain why money, which is expressly declared to be unproductive, can buy a field that produces interest. Among those who adopted this theory we are surprised to find Turgot and Henry George — honest men in doubtful company. But probably we have here simply opinions held without deep conviction and passed on to provoke discussion and to call the attention of others to the problem of interest.

2. The Productivity Theory explains interest by asserting that the means of production (capital) assist production (labour). And this is true, for what could the proletariat do without means of production? But this theory asserts, further, that the resulting increase of produce must obviously and naturally belong to the owner of the means of production. This is not true and certainly not obvious, as is shown by the fact that work and the means of production cannot be separated; that it is impossible to say what part of the product is due to work and what part to the means of production. If interest were due to the fact that a proletarian worker can produce more with instruments of production than with his naked hands, nothing whatever would in most cases be left over for the worker. An agricultural worker without a field and a plough, or an engine-driver without an engine is helpless. But work and the means of production cannot be separated, and division of the product between owner of the means of production and worker must be determined by circumstances other than the amount of assistance rendered to production by the instruments of production. What are these circumstances?

Our answer is: The ratio in which the workers share the product with the owners of the instruments of production is determined by the demand and supply of these instruments, quite independently of their efficiency. The means of production assist labour, hence the demand from the proletariat. But this demand alone cannot determine interest; supply has also a word to say. In the division of the product between capitalists and proletariat everything depends upon the ratio of demand to supply. The capitalist can expect interest on his means of production only as long as demand exceeds supply. And the better, the more efficient the instruments of production placed at the disposal of the workmen by the capitalist. the more the produce of these instruments will help to swell their supply, and thus to depress interest. But according to the productivity theory, the contrary should be true: interest should increase in proportion to the efficiency of the means of production. If there were a universal ten-fold increase in the efficiency of the means of production, the productivity theory would expect an enormous gain for the capitalist, whereas in reality such an event would soon cause the supply of means of production to overtake demand, with the result that interest, under pressure of this supply, would disappear (on the supposition that money was not able to prevent such a development).

The productivity theory is unable to explain interest because it treats capital statically (as matter) instead of dynamically (as a force).[3] It sees only the demand caused by the usefulness of the means of production and fails to consider supply. The productivity theory treats capital simply as matter; it overlooks the forces necessary to convert this matter into capital.

3. The Utility Theories are the offspring of the productivity theory, says Boehm-Bawerk. But Boehm-Bawerk obscures the simple train of thought which leads to the productivity theory by converting the problem into a problem of value — without saying upon which theory of value his proof is based. When he speaks of the value of the product we may think of the ratio in which commodities exchange for one another. But what can we make of the expression "value of the means of production"? The exchange of instruments of production is exceptional, yield of interest, not price, being here spoken of. If the exception occurs, if an employer sells his factory, the price is determined entirely by the yield of interest, as is proved by the daily fluctuations of industrial shares and by the fact that the selling price of a field is the sum which yields interest equal to the rent. And what theory of value could be applied to the field? If the factory to be sold is resolved into its component parts, that is, into commodities, and the value of these commodities is established, we have commodities and prices, not means of production and interest. Commodities are produced for sale, means of production for personal use or as capital to lend. Is there any theory of value in existence which applies simultaneously to commodities and means of production, to price and interest ? An impenetrable fog overhangs this region.

Our author says for example on page 131:

"It should be obvious that even if we have proved that capital has a power of producing goods or of producing more goods, we are still not justified in assuming as proved that capital has a power of producing more value[4] than would otherwise have been produced, still less of producing more value than it possesses.[5] To substitute the latter conceptions for the former in the train of reasoning would clearly be equivalent to pretending that something had been proved which in reality had not been proved."

It may be that everything here said of so-called value, of intrinsic value, of production of value, of stores of value, of extracted or petrified value is obvious to those who hold the same opinions as Boehm-Bawerk. But how can he possibly assume that all his readers hold these opinions ? Does "the problem of value" no longer exist? For many of us it is "obvious" that when the fog of value condenses into a "conception of value", what the author really means is simply a product in a certain quantity and of a certain quality, which can be exchanged. But to those who understand value in this sense it is quite obvious that the power of capital to produce mote goods includes the power of capital to produce more value. If, for example, the general use of the steam-engine doubles the product of labour, everyone will obtain, in exchange for his doubled produce, double the quantity of goods he obtained formerly. If, now, he calls the "value" of his produce what he obtains in exchange for it, he obviously obtains in exchange for his produce (doubled by the use of the steam-engine) exactly double the quantity of "value".

4. The Abstinence Theory, proposed by Senior, begins well by seeking the explanation of interest in the existing disproportion between the demand and supply of means of production. But the abstinence theory stops halfway. Senior regards mankind as confirmed spendthrifts, who prefer to live a few days in dissipation and for the remainder of the year to pay interest upon a loan, rather than to renounce an immediate enjoyment. Hence the scarcity of the means of production, the disproportion between demand and supply; hence interest. The few persons who practice abstinence are rewarded for their rare virtue by interest. Even these few persons are abstinent, not because they prefer future enjoyment to present prodigality, not because as youths they wish to save for marriage, as men for old age, as fathers for their children; but because they know that their savings will yield interest. Without this reward of virtue they, also, would live from hand to mouth, they, also, would save no seed-potatoes but squander the whole harvest in one mighty potato feast. Without interest no one would have any motive for producing and preserving capital. Present enjoyment is always and obviously preferable to future enjoyment. For no one knows whether he will be alive in the future to enjoy the goods he saves!

If such is human nature (how abstemious in comparison are bees and marmots!) is it not astonishing that mankind continues to exist and that anyone ever makes a loan in money? Human beings who are such reckless managers of their own property must, when entrusted with the property of others, be under still greater temptation to sacrifice future enjoyment to the sweets of the present. How can they ever pay interest or repay borrowed capital? And if our ancestors always consumed their winter provisions before the winter began, it is difficult to account for the fact of our existence. Or did our forefathers renounce immediate enjoyment because the provisions in their cellars yielded interest, that is, became more valuable, more abundant and of better quality? Yet there is some truth in Senior's theory. Doubtless interest owes its existence to scarcity of capital, and scarcity of capital must be due to thriftlessness. But, strangely enough, the spendthrifts are not those who pay the interest, but those who exact it. It is true, indeed, that what the capitalists spend does not belong to them, but to others; for the unemployment they cause for the purpose of exacting basic interest through the interruption of the monetary circulation, is at the expense of the workers. Capitalists spend the property of others, namely the power of work of the toiling, thrifty masses. To prevent over-production of capital and a fall in the rate of interest, they allow produce worth billions of dollars to be destroyed, at the expense of others, as over-production during economic crises. Hence the scarcity of capital, hence interest. Sermons about abstinence should therefore be addressed to the capitalists, not to the workers. The workers have shown that they can practice abstinence even unto death by starvation to snatch back a small fraction of the capitalists' booty. Such heroic abstinence they have shown in a thousand strikes; so if they could be persuaded that to abolish interest they need only save — chew no tobacco. drink no brandy — presumably they would do so. But under present conditions what would be the result? The moment interest upon real capital fell below basic interest, a crisis. an economic catastrophe, would rob the workers of the fruit of their abstinence.

But in any case the abstinence theory leads straight to the following contradiction: Work, toil, sweat, to produce and sell many commodities, but buy as few commodities as possible. Starve, freeze, abstain, buy nothing of what you produce (that is, of what you have destined for sale) - in order to gain the largest Possible surplus of money for the formation of new real capital.

The originators of the abstinence theory would have come upon this complete contradiction if they had followed up their original line of argument, for they would have discovered the defects of our present monetary system. Probably the same line of reasoning taught Proudhon that gold blocks the road between commodities and real capital, and prevents the conversion of an over-production of commodities, which depresses prices and leads to an economic crisis, into an over-production of capital. which depresses interest and stimulates exchange.

5. The Theories of Work declare that interest is the product of the capitalist's labour. Rodbertus calls the reception of interest an office; to Schaeffle coupon-cutting appears an economic profession, his only criticism of which is that its "services" are expensive; and Wagner calls stockholders "public functionaries for the formation and employment of the national fund for the means of production". Yet Boehm-Bawerk does these persons the honour of numbering them among the investigators of interest!

6. The Theories of Exploitation explain interest simply as a forcible deduction from the product of labour, which the owners of the means of production are able to exact because the workers must live by their work, and cannot work without instruments of production.

But does this particular theory deserve the ill-epithet of exploitation? Does not the abstemious man, in the abstinence theory, also exploit market conditions, when he makes use of the scarcity of capital in the market to exact interest?

According to this theory — its chief upholders are the socialists — the owner of the means of production measures the deduction from the product of labour, strangely enough, not by commercial principles of trade and exchange, but by historical and moral standards. Marx says: "A moral and historical factor enters into the determination of the value of labour, in contrast to other commodities." (Capital, Vol. I. VI).

But what has the maintenance of labour to do with history and morality, with certain countries and certain times? For the average amount of food required to maintain labour is determined by the labour itself! It may vary with the difficulty of the task, with race, with the strengthening or weakening of the digestive organs, but it can never vary because of moral and historical causes. If morality is allowed to be a factor in this, the central point of Marx's doctrine, he can no longer speak of the "labour" contained in a commodity. With such spongy terminology anything can be proved.

According to this theory the capitalist makes careful inquiries: how the workman's mother, grandmother and great-grandmother fed themselves, what these foodstuffs cost, and how much of them a workman consumes in bringing up his children; for the capitalist is greatly concerned that not only "his" workmen, but workmen in general shall remain strong and healthy. This minimum the employer leaves to the workers. The remainder he removes, unobtrusively, for himself.

This division of the product of labour between employer and workman which is Marx's easy method of evading the whole problem of interest (for in this manner the theory of wages includes the theory of interest and rent) is the weak point in the theory of exploitation. The preliminary assumption of this theory, that wages are determined by the cost of breeding, training and feeding workmen and their offspring, is unsound, as is the subterfuge that whenever wages go above or below this limit, the feeling of the community as to what a workman needs determines the amount of wages!

"During the last five years wages have risen to such an extent on East-German estates that they are hardly distinguishable from West-German rates, and the seasonal migration of labourers (Sachsengängerei) has greatly diminished". This was recorded in the newspapers in 1907. It is remarkable how suddenly the feeling of the community changes in respect to what a worker needs for living! The change of prices on the exchanges is, indeed. even still somewhat more sudden. Nevertheless a period of five years is not long enough to be called a "historical" development.

In Japan wages have risen 300 % within quite a short period — but surely not because the feeling of the community about hunger and repletion has so suddenly changed to this extent. This explanation of the contradictions with which the theory of exploitation bristles, bears every mark of an argument advanced, for want of a better, by someone driven into a corner.

One would be equally justified in stating the theory of exploitation as follows: The capitalist takes from the product of the worker everything he requires for living up to the standard prescribed for his class by history and the feeling of the community, and for bequeathing suitable legacies to his children. The rest he throws, without taking the trouble to measure or count it, to the workers. This statement of the theory has, indeed, several advantages over the form chosen by Marx. It certainly sounds more plausible, for the capitalist would first, obviously, think of himself before inquiring whether the workers could manage upon what remained. The introduction of wheat-duties by the German agrarian party gave wide publicity to this obvious fact.

The explanation, put forward by this theory, of the origin of the proletariat essential for interest is also extremely arbitrary. That large enterprises have often advantages over small enterprises does not prove that these advantages must necessarily accrue to the owners of the large enterprises. This would first have to be established by a sound theory of wages. At the present day capital, whether in the form of a machine of 10 or of 10,000 horse-power, produces the same interest, namely, on the average, 4-5%. Even if large enterprises had always advantages over small enterprises this would still not prove that the owners of the small enterprises must be reduced to the ranks of the proletariat. Artisans and farmers need not always remain so dull-witted as to fold their arms and let themselves be supplanted by large enterprises - nor, as a matter of fact, have they done so. They defend themselves - they combine a number of their small enterprises into one large enterprise and in this way often succeed in uniting the advantages of a large enterprise with the thousand minor advantages of small enterprises (co-operative creameries and steam-threshers, village bulls, etc.). Nor is there any reason. founded on the advantages of a large enterprise, why its shares must be held by capitalists rather than by the workers themselves.

It is not, in short, so easy to explain the origin of the proletariat. One may invoke the laws of rent or forcible expropriation by the sword. But this does not explain why a proletariat is evolved in the colonies. The sword is there unknown, and freeland lies before the gates of the cities.

In the German colonies in Brazil (Blumenau, Brusque) many industries, especially weaving factories, have been founded, and in these factories the daughters of the German colonists work under wretched conditions for low wages. Yet the fathers, brothers and husbands of these proletarian women have unlimited quantities of the finest land at their disposal. Hundreds of daughters of German colonists also work as domestic servants in Sao Paulo.

It is not easy to explain the continued existence, still less the increase, of the proletariat at the present day, when movement is free, when the proletarian can emigrate to uninhabitated countries and there obtain land[6], when everyone can easily, by co-operation, enjoy the advantages of a large enterprise-especially as modern liberal legislation tends to protect the proletariat from economic brigandage.

But as well as the sword, as well as the advantages of large enterprises, as well as legislation devised to protect rent, there is another cause at work that can explain the existence of the proletarian masses — a cause that has hitherto been overlooked by the investigators of interest. Our traditional form of money is capable, unaided, of reducing the mass of the population to the condition of a proletariat; to do so it needs no allies. The proletariat is an inevitable regularly-appearing concomitant of our traditional form of money. The proletariat can be deduced directly, without subterfuges, without arbitrary reasoning, without ifs and buts, from the present form of money. Our present form of money must always be accompanied by mass-poverty. In former times the sword was an efficient weapon for separating the people from the means of production. The sword, however, cannot hold the booty won. But from money the booty can never be tom. Interest cleaves closer to money than blood or rent to the sword.

Many, in short, may share in the plundering of the workers, and may, for this purpose, make use of divers weapons. but all these weapons rust. Gold alone never rusts, gold alone can boast that neither the division of inheritances, nor legislation, nor any form of co-operative or communistic order, has power to deprive it of interest. Interest upon money is proof against legislation and against the anathema of the Church. The diversion by legislation of rent on land into the coffers of the State is possible and compatible with private ownership of the land. Here and there an attempt of this kind is being made. But no law can deprive our traditional money of even a fraction of the interest it exacts.

Our traditional form of money has produced the proletarian masses, the existence of which gives rise to the theory of exploitation; and it has successfully counteracted the natural forces tending to dissolve these impoverished masses. To be complete, the theory of exploitation must go back a step and seek interest, not in the factory, not in private ownership of the means of production, but in the exchange of the produce of labour for money. The separation of the people from their means of production is merely a result, not the cause, of interest.


  1. Sonnenfels, Handlungswissenschaft, Vienna, 1758.
  2. No reference.
  3. See Dr. Christen: Absolute Währung, Annalen d. Deutschen Reiches, 1917, p. 742.
  4. Again the machinery of value!
  5. Again intrinsic value!
  6. For the journey from Europe to Argentina the Norddeutscher Lloyd in 1912 charged 25 dollars, or only about a week's wages of a German harvest worker.